DFI Retail Group

how did u get 10%

(03-12-2012, 11:10 PM)pianist Wrote: how did u get 10%

Assuming ROE of 55% for next 4 years, the yield on cost are

1st year yield : 3.6%
2nd year yield : 5.7%
3rd year yield : 8.8%
4th year yield : 13.6%

The risks are on sustainability of ROE and opportunity cost now IMO

(04-12-2012, 11:29 AM)CityFarmer Wrote:

(03-12-2012, 11:10 PM)pianist Wrote: how did u get 10%

Assuming ROE of 55% for next 4 years, the yield on cost are

1st year yield : 3.6%
2nd year yield : 5.7%
3rd year yield : 8.8%
4th year yield : 13.6%

The risks are on sustainability of ROE and opportunity cost now IMO

But since they pay out a significant portion of their earnings, why will the EPS rise in tandem to ROE ? I guess one needs to re-invest the dividends at 55% return to generate such gains ?

(04-12-2012, 11:31 AM)Nick Wrote:

(04-12-2012, 11:29 AM)CityFarmer Wrote:

(03-12-2012, 11:10 PM)pianist Wrote: how did u get 10%

Assuming ROE of 55% for next 4 years, the yield on cost are

1st year yield : 3.6%
2nd year yield : 5.7%
3rd year yield : 8.8%
4th year yield : 13.6%

The risks are on sustainability of ROE and opportunity cost now IMO

But since they pay out a significant portion of their earnings, why will the EPS rise in tandem to ROE ? I guess one needs to re-invest the dividends at 55% return to generate such gains ?

To simplify the argument, maximum return is assumed i.e. compounded return include dividend

It does not make a diff on the argument even re-investment of dividend is excluded. People invest in Dairy Farm at the current price is more on growth, rather on current yield.

(04-12-2012, 01:15 PM)CityFarmer Wrote:

(04-12-2012, 11:31 AM)Nick Wrote:

(04-12-2012, 11:29 AM)CityFarmer Wrote:

(03-12-2012, 11:10 PM)pianist Wrote: how did u get 10%

Assuming ROE of 55% for next 4 years, the yield on cost are

1st year yield : 3.6%
2nd year yield : 5.7%
3rd year yield : 8.8%
4th year yield : 13.6%

The risks are on sustainability of ROE and opportunity cost now IMO

But since they pay out a significant portion of their earnings, why will the EPS rise in tandem to ROE ? I guess one needs to re-invest the dividends at 55% return to generate such gains ?

To simplify the argument, maximum return is assumed i.e. compounded return include dividend

It does not make a diff on the argument even re-investment of dividend is excluded. People invest in Dairy Farm at the current price is more on growth, rather on current yield.

Retained earnings may compound theoretically at 55% based on ROE, reinvested dividends do not.

(04-12-2012, 01:44 PM)wee Wrote:

(04-12-2012, 01:15 PM)CityFarmer Wrote:

(04-12-2012, 11:31 AM)Nick Wrote:

(04-12-2012, 11:29 AM)CityFarmer Wrote:

(03-12-2012, 11:10 PM)pianist Wrote: how did u get 10%

Assuming ROE of 55% for next 4 years, the yield on cost are

1st year yield : 3.6%
2nd year yield : 5.7%
3rd year yield : 8.8%
4th year yield : 13.6%

The risks are on sustainability of ROE and opportunity cost now IMO

But since they pay out a significant portion of their earnings, why will the EPS rise in tandem to ROE ? I guess one needs to re-invest the dividends at 55% return to generate such gains ?

To simplify the argument, maximum return is assumed i.e. compounded return include dividend

It does not make a diff on the argument even re-investment of dividend is excluded. People invest in Dairy Farm at the current price is more on growth, rather on current yield.

Retained earnings may compound theoretically at 55% based on ROE, reinvested dividends do not.

Company A generates average ROE of 50% and pays NIL dividends -

Year 1
EPS: $0.50
NAV: $1.00

Year 2
EPS: $0.75
NAV: $1.50

Year 3
EPS: $1.125
NAV: $2.25

Year 4
EPS: $1.6875
NAV: $3.375

Ending NAV: $5.06

If the shareholder had 100% ownership, he would have received $4.0625 EPS in 4 years resulting in growth in NAV to over $5.

Company B generates average ROE of 50% and pays out 50% dividends -

Year 1
EPS: $0.50
NAV: $1.00
DPS: $0.25

Year 2
EPS: $0.625
NAV: $1.25
DPS: $0.3125

Year 3
EPS: $0.78125
NAV: $1.5625
DPS: $0.390625

Year 4
EPS: $0.9765625
NAV: $1.953125
DPS: $0.48828125

Ending NAV: $2.44

An owner with 100% stake would have collected $1.44 dividends but that is still insufficient to compare with the gains made in Company B ie growth in NAV to over $5.

I am not saying Dairy Farm is a bad company or over-valued. Just stating the growth in yield numbers you mentioned assumes that the Company is not distributing any dividend. If it does, the EPS that wasn't retained will not be compounded at 55% return so the following year EPS isn't gg to grow by 55%. The other extreme - 100% payout will see EPS stagnating despite reporting 55% ROE !

Please verify the maths / assumptions. I can be quite careless or if my concepts are wrong - please feel free to point it out. I am always eager to learn haha

for those interested, i did a what if you bought it then spreadsheet on dairy farm if u purchase it in 2001. ur yield then is 8%, your yield in 2012 is 29%

https://docs.google.com/spreadsheet/ccc?...Smc#gid=35

Then again, if Dairy Farm were to reinvest all its profit and not issue dividend, it might not be able to maintain its 55% ROE year after year. Supermarkets and convenience store are often able to turn their inventory over without paying a single cent due to high inventory turnover, high account payable and low receivables. In any case, it will be hard to invest the dividend at the rate of ROE of Dairy Farm personally

You can't simply use historical ROE as the only indicator to invest into such a company. If someone really invests 10 billion equity into Dairy Farm, can it continue to earn 55% ROE? unlikely. Otherwise, the Jardine group would pour all their money into Dairy Farm.

Besides ROE, there are other important factors for Dairy Farm, such as revenue and margin. Revenue and margin does not necessarily increase with more equity, that means ROE will be lower with more equity. So ROE is quite a variable here rather than a constant.

There is a good article on Dairy Farm on the latest issue of The Edge.

Base on the article, Dairy Farm is undergoing an overhauling, which includes brand campaigns, revamping store layout, loyalty cards, collecting data on customers' habit, tie-ups with certain brands on an exclusive basic and new store additions.

I already seeing changes, Shop & Save shops will change to Giants. I had seen some brands' promotion on Cold Storage, which can't find in NTUC fairprice.

But the valuation still expansive IMO. Historical PE of 36, versus Retail average of 20, even after the recent drop of approx -4%

No choice but continue to wait...

(not vested)