Short notes on Diary Farm and RMG

Don't qualify as value investments yet, but interesting to watch out for:

Dairy Farm

A retailer, operating Shop-n-save, Guardian, Cold storage, 7-11 and F&B in Asia.

Growth: 07 EPS was 19.2c at 257m. 1H08 operating profits up a mssive 63% from 113m to 187m. Mostly to top line growth: revenue up 18%, gross margins unchanged at 30%, but operating margins up massively from 4 to 5.5%, as admin costs were unchanged.

Balance sheet: Expansion funded by borrowing: FY08 Long term borrowings up 12% to $449m to fund expansion. FY07 Balance sheet had 400m long term debt (approx 1.5 times earnings) with 395m cash (not sure how much of it needed for working capital). They were net cash in 2006.

Business model: Company in growth phase. Good story if they can keep opening stores, while keeping admin expenses low or fixed. Historically, they try opening stores in many formats in different countries, grow those that succeed, and shut down or sold those that fail (eg: Franklins in Aust 2002, recently ceased Guardian in Thailand).

Conclusion: Too expensive to buy as a value stock: even if FY08 earnings follow 1H08's 60% increase, their PE @$4 is still 12.5. Possible future growth stock, meeting many CANSLIM criteria, but don't buy in a falling market.

Wait for: See if the recession affects their sales first: mgt makes a monthly report in SGX announcements.


Raffles Medical Group

Owns/operates one hospital and largest chain of clinics in Singapore.

• (FY07) Hospital gave majority of revenue (58%) and profit (76%). Hospital business has much higher operating margin. This hospital business model is highly leveraged (due to high fixed costs).
• Clinics business is more stable.

Business model: Main costs are from staff, then from consumables, which both grow in line with revenue. Not broken down based on segment.

Cyclical: Cannot just fire all the specialised staff if there is a sudden slowdown in business, so this makes their model highly susceptible to any sudden slowdown in demand.

Growth (long term): NRA 31 Jul 08: "The current utilization at Raffles Hospital is maintained at circa 40%-60% at 200 operating beds. We expect capacity to peak in FY09 at 300 beds". The hospital has 380 beds. So adding another 1/3 to their revenue will increase profit by 1/3.

Balance sheet: Small amt net cash (4m)

Valuation: Earnings approx 5c a share. At a price of 60c, this gives a PE of 12. If we can factor in the expected 1/3 long term increase, gives PE of 8.They are paying abt 70% of their FCF as dividends (7.7 out of 10m) No capex.

Wait for: Everything depends on end demand for their services. Wait 1 Quarter (end Jan) and see if hospital is affected by the recession. If it is, earnings will drop, and at trough, I would expect it trade at a higher PE (like 12).

Or else, wait for a disease outbreak (like SARS), which would affect the both their businesses badly, and then buy.