Dairy Farm

[pantoo]

price of DairyFarm has taken a hit for the past few weeks.

Can I assume that it is largely due to the devaluation of the Ringgit and Yuan (against the USD), which contributes to a significant part of their profits (i.e. Malaysia and China markets)?

[CityFarmer]

price of DairyFarm has taken a hit for the past few weeks.

Can I assume that it is largely due to the devaluation of the Ringgit and Yuan (against the USD), which contributes to a significant part of their profits (i.e. Malaysia and China markets)?

The down-trend of market price, happened way before the RMB and MYR events. The main reason is the biz performance of two key segments, hyper/super-market, and convenience store. The margins have gone down since FY2013. Hyper/supermarket segment margin has gone down from 3.8% in FY2013, to 1.8% in recent 1H report. The convenience store margin also has gone down from 4% to 2.8% in recent 1H report.

(not vested, but monitoring it as competitor of vested Sheng Siong)

[pantoo]

price of DairyFarm has taken a hit for the past few weeks.

Can I assume that it is largely due to the devaluation of the Ringgit and Yuan (against the USD), which contributes to a significant part of their profits (i.e. Malaysia and China markets)?

The down-trend of market price, happened way before the RMB and MYR events. The main reason is the biz performance of two key segments, hyper/super-market, and convenience store. The margins have gone down since FY2013. Hyper/supermarket segment margin has gone down from 3.8% in FY2013, to 1.8% in recent 1H report. The convenience store margin also has gone down from 4% to 2.8% in recent 1H report.

(not vested, but monitoring it as competitor of vested Sheng Siong)

thanks cityfarmer for your inputs.

[butcher]

Around 52 weeks low. Good value buying now?

[smalkmus]

Around 52 weeks low.  Good value buying now?

Hi, I would like to be cynical about Dairy Farm on this. They used to be one of my customers, and I would like to share with the valuebuddies here on some of my observation.

Positive

• Strong brand name
  
• Wide distribution network
  
• A diversified asia play
  
• Prices have drop drastically
  
• Possible room to cut cost (from my personal experience, they are mid heavy)
  
• They have grow rapidly over the decade and might be able to pull it off again
  

Negative

Now for my cynical viewpoint

• Labour cost is creeping up in Singapore and other markets
  
• Landscape changing with online grocery shopping
  
• They might have reached the saturated point considering their change in strategy.
  
• Suppliers are fighting back
  

The above points were gathered in my interaction with them. Dairy Farm is relooking at their market approach and they have recently closed down a lot of their outlets in the developed market. Their new direction is profitability rather than expansion and revenue.

 Look around you in Singapore market, their 7-11s are closing down on a rate of 4 stores per month. They have also decline in their sales for other kind of retail formats (Giant and Cold Storage). Coupled with the possible increase in labour cost across the region, and a lack of catalyst of sales. I am not sure whether will they be able to grow as fast as before.

With regards to their expected growth in the emerging markets, my view is that retailing is a very tough business to expand overseas because of the different nuances you need to be aware of. Look at Walmart, Carrefour, and the likes of it in China, the business is not exactly an easily scalable model.

Now, so what will happen with their new focus on profitability, as you can see, won't it be good for the shareholders etc. Ironically, in a retail environment, a lot of profits come from the suppliers (P&G, Unilever etc) in an invisible manner. The low margin on groceries has been subsidised by these companies who provides back end margin (eg, extra money for more space in the shelf, providing promotional fees etc). If the company is deemed as declining or not worth it to invest, these suppliers will be very careful as to part with these additional funds. More so now that the growth story is no longer with Asia.

From what I see, Dairy Farm still has quite a fair bit to drop before they are deemed as investible. No doubt it's a good business helmed by a strong and good management. They are very long term in their view in my experience with them, but the price has run up quite a fair bit over the past few years. It's time gravity does it's work.

Just my 2 cents worth.

[Ivan Lu]

Hi sorry,

Just a qn, how does Dairy Farm compare with Sheng Siong? I can't quite understand why SS is doing better than DF. Is it because they are cater to a lower-end more affordable & necessities customer base?

[piggo]

Hi sorry,

Just a qn, how does Dairy Farm compare with Sheng Siong? I can't quite understand why SS is doing better than DF. Is it because they are cater to a lower-end more affordable & necessities customer base?

One's a local player, and another's pretty much a regional (SEA + China) player. 

Dairy Farm also have other businesses in pharmacies, convenience stores, cafes, furnishings etc. and not just in fresh foods. 

Evidently with a much bigger footprint, a lot of things in the emerging markets will also have a bigger impact on Dairy Farm...

[smalkmus]

Hi sorry,

Just a qn, how does Dairy Farm compare with Sheng Siong? I can't quite understand why SS is doing better than DF. Is it because they are cater to a lower-end more affordable & necessities customer base?

I consider DFI as a more holistic retail player for the region, as such, they are under pressure from the pressure from macro events such as labour cost, shift in consumer behaviour, rental cost etc etc. Furthermore, Asia's economy isn't exactly flying and that has some pressure on them as well.

Sheng Siong on the other hand, is a different player altogether vs DFI. Sheng Siong is in a growing segment despite the overall business is stagnant, what I call the discounter format store. They buy in bulk, sell cheap. Operation wise, they are more flexible than DFI or Fairprice. If you ask me why Sheng Siong is growing, it is because they have been taking business away from the traditional retailers (provision shops, wet market) and some of the Fairprice shoppers who are more value conscious.

DFI is like the elephant with it's foot in many format and not able to latch on to this new trend in retail (the discounter format such as Sheng Siong of old, the Swanston at Chinatown, ABC Mart, Itec) because the DNA required to run this operation is different. Furthermore, they have a MNC behaviour which make it even worse for them. Nonetheless, I believe that they will turn around once they are able to navigate, they do have deep pockets.

I hope the explanation is clear.

[CityFarmer]

Let me share a view on the company.

The share price has adjusted to reflect the poor performance of 1HFY2015. In a nut shell, the top-lines remained, but the bottom-lines margin deteriorated in all biz segments. The worst was the Super/Hyper-market segment, which has contributed close to 40% of overall op profit.

What were the reasons for the poor performance?

The food supplier pressure, shouldn't be the key reason. Food retail sales is about 70% of overall sales. The overall GPM remains the same in the range of 29-30% including the recent 1H2015. The cash flow cycle is also healthy and stable for payable, receivable, and inventory. I didn't see any clue of supplier pressure.

One likely culprit is the poorer operational efficiency. The EBITDA margin has dropped y-o-y, to 3.6% in 1HFY2015, from 4.9% in FY2014. Selling and distribution expenses increased from 22.8% (FY2014) to 23.3% (1HFY2015) of sales. It seems negligible, but significant for a retailer, due to high asset turnover. I concur with smalkmus, the labor cost is likely the key contributor to the higher expense. Rental cost may be, is the other key contributor, IMO.

One important measure for retailer operational efficiency, is the asset turn-over. It means the amount of sales $ per $ of vested asset. I would like to use the asset-turn-over ex cash as the measurement. DairyFarm has good score of 3 or more previously, but the score dropped to 2.4 in 1H2015. What does it means in term of ROA? It means ROA has dropped from ~12% (FY2014)to ~8% (1HFY2015)

(not vested, but monitoring as a competitor of vested Sheng Siong)

[CityFarmer]

Hi sorry,

Just a qn, how does Dairy Farm compare with Sheng Siong? I can't quite understand why SS is doing better than DF. Is it because they are cater to a lower-end more affordable & necessities customer base?

There might be many, but let me highlight only few of them.

The Sheng Siong has found solutions to control its expenses. The rental expenses, is well-managed, by acquiring rather than renting retail stores. The labor cost also was managed well, with its unique human resource policies. The warehouse and distribution center has also helped to keep other expenses well.

Sheng Siong strategy is meeting the targeted customer segment needs, and posing a threat to DF's mid market share e.g. Giants. Sheng Siong still has much room to grow in Singapore, with only 38 stores as in 1H2015, while DF stores are more than hundred in Singapore alone.