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| Historical stock prices for Dairy Farm |
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| Historical USD/SGD exchange rates for the past 5 years |
Assuming that at its peak of US$13, and an exchange rate of 1 USD=1.2 SGD, it briefly translated to S$15.60 to buy a unit of share.
Assuming a present day exchange rate of 1 USD = 1.4 SGD, it briefly translates to S$8.40 to buy a unit of share now. This simple calculation exercise shows that the exchange rate fluctuations are independent of the share price movements.
Dairy Farm has a Scottish beginning. The current management belongs to the 5th generation of the Keswick family that also manages the other conglomerates Jardine Cycle & Carriage, Jardine Matheson Holdings, Jardine Strategic Holdings.
Cash flow has been positive every year until Dairy Farm decided to plonk US$925M in a mega investment (20% stake) in Yonghui Superstores in Aug 2014. According to the bloomberg article's research, Yonghui is the 5th largest hypermarket with a 4.6% market share. The two largest chains have 14% market share each. A year later, in Aug 2015, Dairy Farm plonked another US$210M into Yonghui's rights issue.
There are many ways to enter a China market. They could have started small by launching their own international brand (difficult route), or they could have bought smaller stakes with a fraction of their free cash flow (easier route) which has been their typical investment appetite. Taking up a huge loan to finance a huge investment certainly seems a little desperate.
Based on the historical price charts, assuming that Dairy Farm bought shares at an average of of RMB7, dividend yield is estimated at 1.7% (assuming 12 cents dividend). Yonghui's share price peaked at RMB 16.96 this year.
For me, it is really a stretch to realise the gains of a US$1.135B investment at a 1.7% yield. Just for the sake of cost-benefit-analysis, I will assume that the investment is fully financed by a loan. Bank fixed-term loans rates are at an average of 2.7% which actually makes this investment seem like a -1% yield investment (-US$11.35M/year). There has to be some other benefits to this investment that I am not seeing.
At a price of US$5.81 (4 Dec), Dairy Farm has a never-seen-before attractive 5.5% yield. It is tempting, but the thought of Yonghui always eating into cash flow is worrying. There are currency exchange risks as well if we would like to buy a stake in Dairy Farm. Events that will cause Dairy Farm's prices to continue to slide:
- USD appreciating against the RMB and SGD. Continual appreciation of the USD may potentially reduce Yonghui's yield rate.
- Rising loan interest rates.
- Losing market share to digital commerce platforms and the only solution is to reduce profit margin.
- Lack of creative strategies to regain market share. (Of course they will not disclose their internal strategies, but I certainly have not seen any differences in the way the Dairy Farm-managed shops operate in Singapore.)
The writer does not own shares in the companies mentioned.
I believe this is a good move to further divest their retail business (away from Singapore, Malaysia and Indonesia). Hopefully this will also help the company to secure cheaper food supplies lines to its hypermarkets (other than Cold Storage, Marketplace, Mercato, Oliver, ThreeSixty).
ReplyDeleteThey also have performing brands like IKEA and Maxim.
I agree with you that they need to work harder to recover market shares in Singapore, especially Guardians. Other than the decision to scale down the stores, they should look up to Watson and learn its strength:
- start focusing on beauty products
- membership and member sales (foster closer relationship with your shoppers)
watsons ended up selling all the chocolates and snacks. guardian also sell chocolates and snacks, but not as much junk (probably because they are a pharmacy after all) so many shops sell shampoo, shower foam, toothpaste, toothbrush, including supermarkets... and these shops sometimes are within walking distance within the same mall too. NTUC still sells everything cheaper than guardian.
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