Dairy Farm International Holdings Ltd (SGX: D01) is a leading pan-Asian retailer. It owns a slew of household retail brands such as Cold Storage, Giant, 7-Eleven, Guardians and IKEA stores.

DFI comprises five business divisions:

  • Food – grocery retail and convenience stores. This is where most of DFI well-known brands such as Cold Storage, Giant, and 7-Eleven
  • Health and Beauty – Guardian in South East Asia and Mannings in greater China
  • Home Furnishings – IKEA in Hong Kong, Indonesia, Macau, and Taiwan
  • Restaurants – Maxim’s, a major Hong Kong restaurant chain that owns Starbucks franchise in Hong Kong, Macau, and Thailand
  • Other Retailing – Robinsons Retail in the Philippines operating department stores, speciality and DIY stores

As of end-2019, DFI operates more than 10,000 outlets, a growth from 9,700 outlets one year ago.

Challenging Business Past Few Years

The company faced a challenging business environment due to increased competition. This resulted in a US$453 million restructuring charge from its food business last year.

Looking at its financials, while DFI sales increased from US$17.9 billion to US$27.6 billion in the past five years. However, its profit decreased. As a result, earnings per share has been falling.

Net earnings margin had been trending down in the past five years, reaching 2.89% in 2019. This is the lowest figure in five years. We excluded FY2018 which was affected by the one-off impairment charge. Considering that DFI used to achieve net earnings margin of around 4% in the past, this is not a good sign.

The company recognised its shortcomings. It is planning to revitalise its business, particularly the hypermarket segment in South East Asia.

Its business transformation plan has started one year ago, are we seeing any improvement?

2019 Results Highlights

Its revenue rose 26% to US$27.6 billion in 2019 compared to 2018. Adjusting for its one-off profit in FY2018, its net income has also improved close to 300%.

Results from associates and joint ventures, which include Maxim’s and Yonghui, a leading grocery retailer in China, saw a marginal 2% growth.

DFI grew its revenue in all business segments, expect food. Most impressively, Yonghui, which falls under the grocery retail segment saw its sales increased by 47%.

Grocery Retail

The divestment of Rustan Supercenters and the other restructuring plans reduce its Grocery Retail sales to US$5.2 billion in 2019.

Nevertheless, DFI still managed to maintain its profits by improving efficiency. DFI is trying to revitalise its Giant Hypermarket, by optimising food offering and changing underperforming stores. For example, a Giant outlet in Sentul, Indonesia, was converted into an IKEA store. As of end-2019, DFI had refreshed over 70 Giant stores.

These efforts are showing encouraging signs. While revenue decreased, operating profit for Grocery Retail grew significantly to US$63 million from US$22 million in 2018. Its Southeast Asian business saw the biggest improvement.

Refresh Giant outlets and conversion of Sentul Giant into IKEA store (left). Source: DFI 2019 Full Year Results Presentation

DFI is continuing its transformation plans for hypermarkets and supermarkets. The Group expects better results in the future.

Health and Beauty

Its Southeast Asia business grew strongly. This is based on a few factors like

  • Better range of beauty products,
  • refurbishment of outlets and
  • Guardian’s Singapore exclusive partnership with leading Korean health and beauty brand Olive Young

However, Manning’s Hong Kong was impacted by the protests and reduced the overall results.

Despite revenue inching up 1% to US$3.05 billion, its operating profit was down 11% to US$296 million.

Nevertheless, management is optimistic about its health and beauty business, which boasts more than 1,000 stores across the region. With Indonesia, Malaysia and Singapore each attaining double-digit sales growth, Guardian can grow its revenue by leveraging its strong brand and retail network.

Impact of Hong Kong Social Unrest

Social unrest and street protest went into full swing for most of the second half of the year 2019. The demonstrations caused a big fall in public consumption.

DFI’s Hong Kong businesses were adversely impacted. In particularly Manning’s, which depended heavily on tourist spending. Its associate, Maxim’s, saw its restaurants targeted during the protest due to some unpopular comments by the founder’s daughter.

This has caused Maxim’s share of operating profit to decline by 22% to US$82.1 million, despite a 4% increase in its revenue.

However, the strength of DFI’s diversified business shone through, supported by Wellcome, its supermarket chain in Hong Kong. This has buffered the lacklustre sales from other operating segments.

Strong Free Cash Flow

Despite weaker earnings in recent years, DFI’s is still generating cash flow from its core operating activities. In the past decade, the company churned out net cash flow from operation in the range of US$500 to US$750 million yearly. Noticeably, 2019 cash flow was the highest at US$1.28 billion.

This shows that DFI is still a cash cow business. 

Conclusion

While it is still early days, DFI’s transformation plans are showing good progress. Grocery retail in South East Asia, particularly Giant hypermarkets, is the biggest challenge. Management is committed in refreshing the brand. The significant improvement in operating profit is proof of early success.

Besides, management has been honest about DFI’s shortcomings. Management acknowledges that ‘Retail is rapidly changing, and Dairy Farm has historically been slow to respond to the pace of digital change’.

The company identified driving digital innovation as one of its strategic imperatives. Some efforts include consolidating Singapore operations’ legacy systems onto the new SAP platform. I More investments are made to support online sales of its Health and Beauty segment, and IKEA website enhancement.

There are bright spots in FY2019 results too. Its Guardian stores in Southeast Asia are doing great. Yonghui added more than 600 new stores. Maxim is growing through its acquisition of Thailand’s Starbucks franchise.

The transformation plan to reshape DFI is a long-term endeavour. Hence investors who buy DFI shares should not expect a quick turnaround This stock might only be worthwhile for those with patience.

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