Farm workers harvest fruit of harsh pruning
About 10 years ago, when I was working as a stockbroker, there was a time we had United States clients calling in wanting Dairy Farm on the grounds that it was the Asian Wal-Mart.
It looked right at the time. Here was a fast-growing retail chain, founded in Hong Kong and spreading throughout Asia, in a period when consumers were moving from wet markets to supermarkets.
It was run on Western management principles, and management said all the right things to give a warm feeling to institutional investors.
It did not work out so well in the end.
The core Hong Kong operations soldiered along, but conditions in the rest of Asia proved more difficult than expected.
Then management decided that Europe provided better opportunities. It was an unfortunate decision.
A British purchase, Kwik Save, sputtered along for a while but eventually proved to have too low a return, while a Spanish chain, Simago, sank almost from the moment it was purchased.
The share price tells the story. If you take it relative to the Hang Seng Index, with a starting base of 100 in January 1991, then in May last year Dairy Farm showed a value of only 11.1.
In other words, you would have done nine times as well buying the Hang Seng Index as buying Dairy Farm over that period.
Of course, it is a Singapore listed stock now and trades in US dollars, but most of its operating profits still come from Hong Kong and so I would ignore the fact that the parent, Jardines, took a fright about Hong Kong.
And now for the good news. In June last year, a new chief executive was appointed, Ronald Floto, who has 25 years in the retailing industry.
He and his team quickly set about pulling the company out of Europe, disposing of losers and putting their time into the core retailing business in Asia.
Dairy Farm was at last concentrating on returns to shareholders, and the change immediately showed up in the share price. For the past year, the stock has been an out-performer of the Hang Seng Index, despite having its business in a sector heavily affected by the economic slump.
There are two things I like about all this. The first is that it is a classic turnaround story, the sort of thing investors dream of finding. This is always a delight in the investment business.
The second is that it gives investment analysts a textbook lesson in how their jobs are changing.
The old emphasis on earnings growth, price-earnings ratios and reams of descriptive text has proven a failure. It provided no warning signals of the crash last year.
In the future, analysts will have to concentrate more on longer-term cash flows and the cost of doing business.
I have in front of me a company report on Dairy Farm by HSBC Securities, and on the front page ratios there is the notation ROCE/WACC(x).
This stands for the multiple of return on capital employed over the weighted average cost of capital.
It is forecast to be a rising figure for Dairy Farm, and inside the report there is a thorough analysis of why.
This is the way things are going in the future and rightly so. Dairy Farm is a good way for analysts to get their teeth into it.
I'm not touting the stock. The retailing business in Asia is in dire shape and Dairy Farm could still suffer from it.
But there is a case to be made now that it will do better than its peers.