I’m usually more biased towards food and beverage companies because I see them as an extremely resilient industry. Think of it this way, during the circuit breaker period last year, the only businesses which could remain open were essential businesses such as supermarkets, convenience stalls, and restaurants (all of which Dairy Farm Group operates). As the situation got better, we saw companies such as Sheng Siong handing out massive bonuses to their employees, which is by and large an indication that they did well during that period.
I had expected that Covid-19 would be a positive catalyst for Dairy Farm International Holdings Limited (DFI) and for a very short period of time, the price action did see some bullish momentum. However this momentum was unable to gain traction as overtime, DFI’s share price was unable to break its bearish trend.
At the time of this writing, DFI is trading at an almost 10-year low of $3.50, which greatly puzzles me. The technical data couldn’t be any clearer, but let’s dig deeper into their fundamentals to better understand how the company is doing.
Understanding DFI’s Revenue Model – Territories at a Glance
In terms of the geographic territories of business operations, we need to understand that the Covid-19 situation drastically varies from country to country. In other words, one country can be in a season of panic buying while another country’s situation is back to normal.
While it is difficult for me to analyze DFI’s revenue per territory due to insufficient data, I was still able to get some figures from their Interim 1H2021 Results Presentation, which shows their revenue from respective business units.
Some of my general comments on the results:
“Combined sales for the Group, including 100% of associates and joint ventures, reduced by 4%
to US$14 billion. Underlying profit for the Group’s subsidiaries in the period was US$76 million, a
reduction of US$25 million on the same period last year.”
- Grocery retail revenue has lowered, as shopping patterns normalised after all that panic buying in mid 2020.
- Convenience stores’ revenue has increased, as countries resumed work from office arrangements. Thus, I beleive that as our lifestyles start to pick up pace, we will once again need the “convenience” provided by these stores.
- “The Health and Beauty Division continued to be significantly impacted by the ongoing pandemic and the prolonged closure of the border between Hong Kong and the Chinese mainland.”
“Ongoing restrictions related to the COVID-19 pandemic imposed by Governments across our markets have significantly affected trading in all markets, impacting the Group’s overall performance in the period.”
Highlights – HALF-YEARLY RESULTS
Dairy Farm’s Fundamentals – Valuations, PE
In terms of valuations, we have DFI sitting at a PE (price-earnings) of approximately 28, which I think makes the stock adequately valued. However, the PE ratio may not be the best indicator of the company’s real valuation due to the lack of other listed companies operating in the same area.
As much as possible, we want to compare apples to apples (for example, we compare the PE of Top Glove with Riverstone). But in the case of DFI, there just isn’t another similar company that operates across multiple business units and geographical areas.
Technical Analysis – Nothings goes up forever
DFI was a multibagger stock. For instance, if you bought $10,000 of their stock back in 2000, it would have been worth almost $200,000 or more during its highs in 2013.
At present, this trend has reversed – breaking crucial support levels, with no new highs forming anytime soon. Even catalysts, such as the panic buying season, were only able to provide temporary momentum to the stock. And there is no change on the long-term horizon.
With the stock price experiencing new lows once again even after the March 2020 sell-off, let’s take a look at what the charts are showing.
The key psychological level of $5 held up until early 2020 but soon found itself with a stock resistance by mid-2020. When the previous support level of a company now becomes its resistance, it is commonly a bearish sign or confirms that the stock is on a downward trend. Should we see prices break above and STAY ABOVE this key psychological level, then it is an indication that the stock may be moving upward.
With both the RSI and price action in sync, it is apparent that this stock is indeed declining. This is clear even when it hit extremely oversold levels early this month (testing a new low of $3.40). Buyers waiting in line were only able to push the stock prices up by less than 10%.
Business Updates – Revitalising SE Asia
The company has done its part to stay relevant by rebranding some of its local stores here in Singapore, as well as introduce a new line of homegrown products under the Meadows Brand. I’m sure most of you have seen more and more Meadows products appear on the store shelves over the year. Initially, Meadows only offered chips, but now they have expanded their products to include dairy and other snacks.
While it is encouraging to see DFI introduce a home brand where it can likely get higher gross margins, such an initiative may take time to reflect value on the company’s balance sheet.
Oversold means buy? hmmm…
While I do enjoy shopping at almost all of DFI’s business units here in Singapore, consumer preference in Singapore alone may not be enough to improve the company’s valuation. Hypothetically speaking, even if Dairy Farm buys all other supermarkets in Singapore and becomes a monopoly (just throwing around ideas here), success in Singapore alone may not equate to the company’s overall success.
Though we are at an oversold level at this point, a level which I normally like to take positions, I would probably give this stock a pass because I do not foresee any upcoming catalyst for the company (Bear in mind that the previous panic buying season did little to change the stocks’ trend).
Let’s put it this way: if a business can still operate when most businesses are forced to close (for instance during circuit breaker 2020) and that is still not enough to make investors interested in the company’s stock, then it is best not to get involved with the stock until circumstances change.
