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Dairy Farm’s (US$6.14, down 0.02) 2015 performance was impacted by the challenging retail environment, with both the Food Division and the Health and Beauty Division reporting lower profits, although most key businesses achieved positive like-for-like sales growth. The Home Furnishings and Restaurants Divisions reported good increases in both sales and profits.
Underlying profi t was US$428 million, 14% below 2014, while at constant rates of exchange it was down 13%(earnings per share were US¢31.66, down 14%). The profit attributable to shareholders in 2015 of US$424 million, including a net non-trading item of US$4 million arising mainly from a provision for closure of the Starmart chain in Indonesia, was 17% behind 2014.
In response to challenging trading conditions, the Board is recommending a reduced final dividend of US¢13.50 per share (US¢16.50 per share in 2014), giving a total dividend for 2015 of US¢20.00 per share, down 13% yoy.
Dividend yield is 3.26% at its last traded price of US$6.14.
Sales including 100% of associates and joint ventures increased by 37% to US$17.9 billion, including contributions from Yonghui Superstores and San Miu from the respective dates of acquisition. Sales for continuing businesses in US dollar terms were flat at US$13.1 billion, although at constant rates of exchange they were up 5%.
The Group’s operating cash flow remained strong with a net inflow of US$700 million, US$24 million higher than in 2014 largely due to tight inventory management. Lower capital expenditure resulted in the free cash fl ow before investments being US$396 million, a 19% improvement over 2014.
Net debt at the end of 2015 was US$482 million compared with net cash of US$475 million last year due to investment activities, including a US$912 million investment in Yonghui Superstores.
The Group, including associates and joint ventures, added a net 427 stores in 2015, including its interest in 382 Yonghui stores in mainland China and 15 San Miu supermarkets in Macau.
At 31st December 2015, the Group had 6,528 stores in operation in 11 countries and territories.
The operating environment for the Food Division was especially fragile in 2015. In the face of such headwinds, the performance in Greater China, including Hong Kong, was resilient.
Profits in Singapore and Malaysia were lower in challenging trading conditions. The results in the Philippines showed improvement.
Progress was made in developing the business in Indonesia, although margin investment, cost inflation and higher stock provisions continued to impact profi tability.
The convenience store operations in Hong Kong and mainland China performed well, but in Singapore regulatory restrictions dampened sales performance and profitability.
In the Health and Beauty Division, Hong Kong and Macau had a good year and reported further growth in sales and profits despite the well-publicized slowdown in Mainland tourist arrivals.
In Singapore, improved profits were achieved despite increased costs, but the overall results for the Division were held back by
a disappointing performance in Malaysia.
In Home Furnishings, the IKEA businesses had an outstanding year. Hong Kong and Taiwan traded well, while the first store in Indonesia performed ahead of expectations in its first full year following its opening in October 2014.
In the Restaurant Division, Maxim’s delivered another good performance. Satisfactory sales and profi ts growth were reported in most of its segments. The company continued to expand a number of formats across mainland China and to grow its Starbucks operations in Hong Kong and Vietnam.
The 15 store supermarket chain in Macau, San Miu, was acquired in March’15, reinforcing Dairy Farm’s well-established retail presence in the territory.
The integration of the business has been smooth and initial results have been promising. In April’15, the Group completed the purchase of a 19.99% interest in Yong hui Superstores in mainland China following receipt of the required regulatory approvals.
The Group is also soon to invest a further US$200 million in the company to maintain its interest following a proposed placement by Yonghui of a 10% shareholding to the Chinese internet retailer JD.com. In addition, the Group has established an on-line presence in Guardian Singapore, which is the first of several planned moves into e-commerce.
Consensus is expecting a 10% growth in net profi t in 2016 to US$466mln on the back of incremental contributions from Yonghui Superstores in China and San Miu in Macau and beer cost controls from lower commodity prices.
This translates to a forward PE of 17x which is almost 40% below its 15 year average of 28x and also below its current peer group average of between 20-30x. And with a yield of 3.26%, we maintain BUY on Dairy Farm.
Source: Lim & Tan