DFI Retail Group

Price targets: Citi Research ‘buy’ US$3.13 DBS Group Research ‘buy’ US$2.70 RHB Bank Singapore ‘buy’ US$2.80

End of recovery story not in sight

DIF Retail Group has reversed back into the black for FY2023 ended Dec 31, 2023, but analysts, citing ongoing uncertainties at some key portions of its businesses, have cut their target prices. Citi Research now rates the company US$3.13 ($4.17) from US$3.28, DBS Group Research has trimmed its target price from US$3.13 to US$2.70 and RHB Bank Singapore’s new target price is US$2.80, from US$2.92.

For the full year, DFI reported earnings of US$32 million, compared to a loss of US$115 million in FY2022. The analysts from both brokerage houses have therefore kept their “buy” call on DFI on the back of cheap valuation and continued strong recovery momentum going into 2024.

Citi’s Bryan Cho, Tiffany Feng and Wei Xiaopo note that DFI’s core net profit soared by 437% y-o-y due to margin improvement, improvement in restaurant joint ventures and narrowing loss from its subsidiary Yonghui.

The analysts broke down the performance of DFI’s segments: Sales for food declined 15%, while operating profit dropped 50% due to lack of pantry-stocking demand during the fifth wave of Covid-19 in Hong Kong in 2023, divestment of the Malaysia business, and weak consumer sentiment due to cost inflation in Southeast Asia.

The second half of the year improved as compared to the first half, on strong margin and cost control on Wellcome.

DFI’s convenience store saw sales growth of 8% while operating profit climbed 74% driven by strong like-for-like (LFL) sales growth in all markets, strong ready-to-eat offerings and operating profit margin (OPM) improvement from a favourable sales mix shift. Second-half sales were “flattish in Hong Kong”, affected by outbound travel during weekends.

DFI’s health and beauty sales and operating profit grew 21%/127% driven by strong sales in Hong Kong and underpinned by an outperforming healthcare category. However, the momentum slowed down in the second half due to a weaker Southeast Asia market.

The group’s home furnishings segment saw sales decline by 5% while operating profit dropped 59% due to changing consumer behaviour. Finally, its restaurant joint venture Maxim saw sales/operating profit grow 23%/49%. Yonghui’s losses narrowed despite weaker sales underpinned by gross profit margin expansion and cost optimisation.

Citi analysts say that the “flattish revenue” was in line with their expectations, with the better-than-expected convenience store segment offsetting weaker-than-expected food and home furnishings segments in 2HFY2023.

Meanwhile, DFI’s OPM expansion of 0.9 percentage points (ppts) y-o-y to 3.2% was better than the analysts’ expectation, driven by the health and beauty segment. Cho, Feng and Wei highlight that DFI’s management expects flat sales growth in 2024 and a core net profit of US$180 million–US$220 million (or +16%-42% y-o-y).

The analysts cut their FY2024/FY2025 core net profit estimates by 2%–3% to reflect lower-than-expected associate results partly offset by improved OPM.

“We lowered our sum of the parts-based target price to US$3.13 from US$3.28, including US$2.66 for business exclusion,” they add.

DBS analysts Chee Zheng Feng and Andy Sim like DFI for its strong recovery and how it is giving guidance for the first time, projecting a core net profit of between US$180 to US$220 million for the current FY2024. However, citing expectations of continued weakness at Yonghui, they are assuming this unit will suffer losses of another US$36 million in the current FY2024. Their target price of US$2.70 is pegged to –1.5 s.d. (standard deviations) of its 10-year historical P/E valuation (pre-Covid) of 17.4 times FY2024 earnings. —