Dairy Farm Review

20% correction from 52 week of ~$US 9.2 to ~$US 7.5. The all time high is $S9.75.

Weak SEA hypermart and supermart business (Mainly Giant) is suffering and not performing well compared to the other business. Groceries comprises of highest percentage of sales but deliver the lowest profit margin compared to its Beauty & Care, Convenience store, Home furnishing and Restaurant business which average a margin of 7-10% compare to groceries of ~1-3%.
While there are growth in almost all sectors except for the groceries business, Beauty & Care register the faster growth and contribute to 50% of profit despite sales contribution of 10-20%.
Company has installed a new CEO with a new transformation plan with 5 key initiatives that is focus on China expansion, maintain HK business, Strengthen and revitalize SEA business and better adoption of digital technology. Company acknowledge that they have been slow on adopting digital technology and install a CTO and CIO to address this issue. Goodwill impairment has been done on the SEA food business to give it a fresh start.

Going forward, expect more CAPEX on digital technology investment. Profitability and cash flow maybe reduced. Current payout ratio is still low dividend of 21 cents vs underlying EPS of 31cents.
Company has been prudent in dividend payout.
Currently in net debt position due to investment in Chinese business Yonghui which is growing well.
Current borrowing is 1B vs long term borrowing of 14.5MM and cash of 300MM. Company need to ensure liquidity availability to refinance its current debt of 1B. This appears to be always the case to maintain current debt level high vs long term debt. Company should have some liquidity arrrangement with their bankers based on certain caveats of interest coverage and debt/equity ratio which is still appearing to be fairly reasonable where debt/equity < 1 and interest coverage is >10x on net proft basis and 15x on operating cash flow basis (interest expense is ~$40MM)

Operating cash flow is 600M vs  dividend of 284M. Payout ratio is less than 50%. CAPEX investrment is ~ 220M per year. In that sense, the cash flow can sustain cAPEX and dividend payout and paydown of long term debt if any. The current revolving credit of 1B  appears to be working capital financing.

Detail analysis to be performed to look into its historical valuation trend and current valuation metrics in next posting.

Analysis indicated fair value range of $US 6.6-10 versus current price of $7.1 (07th Aug 19). There is no steep discount to make this a compelling investment case. We will wait for more price correction before entry price of $6 which is near its 2014 lows.

2019-08-21: Historical fair value margin is 16% versus current margin of  13%. Price is not discounted enough. Further correction required.