This undervalued blue-chip company deserves your attention

The market crash has left many quality blue-chip companies with battered valuations.

Investors who rummage through the wreckage for unsullied companies often come out nought, as hardly any company is unaffected by the carnage.

There are, however, several undervalued blue-chip companies that may be hiding in plain sight.

With all the noise and din generated by the constant flurry of news reports on the pandemic's evolution, it's easy to get distracted and lose focus.

One such company is Dairy Farm International Holdings Ltd (SGX: D01), or DFI.

Providing an essential service

The Singapore Government announced a set of "circuit breaker" measures to curb the spread of the coronavirus.

These include the shutdown of all schools and non-essential services, as well as restricting food and beverage outlets to delivery and take-aways (i.e. no dine-in allowed).

DFI's network of stores provides essential services such as health and beauty (pharmacies) and basic goods and necessities (supermarkets).

Luckily, the Government has mandated that businesses providing essential services can continue to operate, thus the circuit breaker will have minimal impact on DFI's Singapore operations.

There is a chance, though, that DFI's operations in other Asian countries may be impacted.

But as the group's core business is in the provision of food and basic goods, it is unlikely that it will have to completely shut the vast majority of its stores.

Transformation plan bearing fruit

At the results briefing for the fiscal year 2018 (FY 2018), the group announced a huge impairment to its books and unveiled an ambitious Transformation Plan.

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The plan was centred on five main pillars - build capability, grow in China, revitalise South-east Asia, maintain Hong Kong strength and drive digital innovation.

Although FY 2019's financial performance was impacted by social unrest in Hong Kong and higher costs associated with the Transformation, there were a few bright spots worth mentioning.

The Grocery Retail division saw improved profitability due to space optimisation initiatives, with operating profit nearly tripling from US$22 million (S$31 million) in FY 2018 to US$63 million in FY 2019.

New store formats (such as CS Fresh launched in Singapore and revamped Giant stores) generated higher efficiencies and delivered progressive results for FY 2019.

Finally, IT systems in Singapore were consolidated with the introduction of SAP, and the group invested in e-commerce across its Home Furnishing and Health and Beauty businesses.

Strong FCF, no decline in dividends

The group has continued its long track record of free cash flow (FCF) generation.

FY 2018 and FY 2019 both saw US$1.2 billion and US$1 billion of FCF generated, respectively.

Despite the significant impairment made in FY 2018 and the weaker net profits for FY 2019, the group still maintained its full-year dividend at US$0.21 per share.

At DFI's last traded price of US$4.48, the shares offer a trailing 12-month dividend yield of 4.7 per cent.

Get Smart: Valuation is cheapest in years

A final point to get investors excited about DFI - it's trading at its lowest valuation in years.

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The usual price-earnings ratio (PER) range for the group is around 20x to 25x.

Right now, the group sports a PER of just 15x.

DFI has a long track record of running retail stores in Asia, along with an excellent management team that's candid and forthcoming.

The group's business is essentially recession-proof while its transformation plan is also starting to bear fruit.

It may be worth your time to dig deeper into this blue-chip company.

Who knows? It may make a worthy addition to your investment portfolio.

For the latest updates on the coronavirus, visit here.

This article was first published in The Smart Investor. All content is displayed for general information purposes only and does not constitute professional financial advice. Disclaimer: Royston Yang does not own shares in any of the companies mentioned.