DFI Retail Group (DFI) has returned to profitability with earnings for the 1HFY2023 ended June 30 of US$8 million ($10.66 million), but analysts at DBS Group Research, CGS-CIMB Research, RHB Bank Singapore and Citi Research remained mixed on the retail giant.
DBS analysts Chee Zheng Feng and Andy Sim have maintained their “buy” call with an unchanged target price of US$3.80, while CGS-CIMB’s Ong Khang Chuen and Kenneth Tan have maintained their “hold” call at a lowered target price of US$2.90 from US3.40 previously.
Likewise, RHB’s analyst Alfie Yeo has maintained his “neutral” call at a lower target price of US$2.92 from US$3.09 previously. However, Citi’s analyst Brian Cho has upgraded his call to “buy” with a target price of US$3.28.
Chee and Sim from DBS say that DFI’s 1HFY2023 revenue of US$4.6 billion are in-line with their expectations, but its underlying profit of US$33 million was below their expectations on weaker than expected contributions from the grocery retail and home furnishing segments.
However, the health and beauty (H&B) segment of the group was “the star of the show”. With a 22.9% y-o-y revenue increase and operating profit margin of 8.3%, which is substantially higher than the 4% margin in 1HFY2022, Chee and Sim say the top-line profitability improvement were predominantly due to the return of Chinese tourists to its Mannings stores in Hong Kong.
The analysts believe that there remains substantial profitability upside given total Chinese visitor arrivals to Hong Kong (January to May) is at 40% of 2018 level with May’s visitor arrival levels at 60% of 2018 level. They expect 2HFY2023 to see even higher H&B sales and operating profit contribution.
“We were pleasantly surprised by 1HFY2023's strong top-line and margin expansion, which came in much higher than expected.” the analysts say.
Sim and Chee expected the impairment loss for Giant Malaysia to come in at US$60 million, but the final loss was lower at US$53 million. The company also reported certain one-off gains from sale of properties and change in fair value of Robinson Retail’s equity investment, amounting to US$16.8 million.
The analysts believe that there could be further one-off gains from the properties held for sale and expected to be sold by year-end.
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“Also recall that DFI has put up its Jelita Shopping Centre for sale at a guided price of $85 million in June. We believe this sale could materialize in 2HFY2024, as shopping center sales typically take around one year to finalize. Given the buoyant property market, we believe the company will record a considerable profit upon sale and cash proceeds will likely go towards paring down its debt.” they say.
As such, they have raised their FY2023/FY2024 revenue forecast from US$2.2 billion/US$2.6 billion to US$2.5 billion/US$2.9 billion, and the FY2023/FY2024 operating profit estimates from US$156.7 million/US$206.8 million to US$215.7 million/US$263.7 million, representing 8.5%/9.0% operating profit margin.
“We rolled forward our valuation, assigning a 17.4 times P/E ratio, which represents -1.5 standard deviation (s.d.) of its 10-year pre-Covid-19 historical P/E ratio, on revised FY2024 earnings,” say DBS’s Chee and Sim.
Likewise, Ong and Tan from CGS-CIMB have noted that DFI’s H&B segment was its “star performer”, but concerns over its grocery retail segments remain top of mind.
They note that Guardian in Southeast Asia recorded strong sales growth on the back of recovering customer traffic, led largely by Malaysia and Indonesia. Its 1HFY20223 segment EBIT surged to US$100 million (+85% h-o-h, +155% y-o-y) as effective in-store execution drove y-o-y margins.
Meanwhile, the analysts note that DFI’s grocery retail EBIT margin of 0.8% in 1HFY2023 (-1.6% pts y-o-y) was lower than its pre-Covid-19 levels (1HFY2019: 1.0%), despite having disposed of loss-making Malaysian and Indonesian operations over the past two years.
“1HFY2023 segment sales fell to US$1.7 billion (-10% h-o-h, -16% y-oy) on divestment of its grocery retail business in Malaysia, lower pantry-stocking behavior, and cautious customer sentiment driven by rising costs.” the analysts say.
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With the exclusion of the impact from the divestment of its grocery retail business in Malaysia, the segment’s sales were down 7% y-o-y, while 1HFY2023 segment ebit plummeted to US$14 million (-69% h-o-h, -72% y-o-y) due to operating deleverage from weaker sales volumes.
The analysts note that DFI has highlighted that outlet sales were impacted by rising cost of living and reopening trends.
Similarly, Ong and Tan note that associate Yonghui remains in the red in 1HFY2023 as it continues to adjust its product structure and store format to cater to changing customer shopping habits in China.
“1HFY2023 underlying associates’ contribution recorded narrower y-o-y losses of US$6.7 million (1HFY2022: US$59.6 million), driven by lower Yonghui losses, and turnaround in profitability for Maxim’s. However, 1HFY2023 underlying contribution was weaker when compared to h-o-h (2HFY2022: US$24.7 million profit), likely due to 2HFY2022 seasonal strength (increased mooncake sales).” they say.
“We think this reflects the significant challenges in turning around the grocery business. DFI plans to continue growing its sales mix of fresh and own brand products, and further invest in e-commerce to strengthen its value proposition.” says Ong and Tan. “We lower our FY2023-FY2025 earnings per share by 5%-27% on lower margin assumptions.”
As such, CGS-CIMB’s Ong and Tan have lowered their target price to US$2.90, now based on 15.6 times CY2024 P/E (1.5 s.d. below five-year historical mean), from 17.2 times previously.
Similarly, Yeo from RHB says that “Yonghui disappoints”, but notes that DFI’s core earnings were still within his expectations. He says that the retail giant’s recovery is still on the cards, albeit at a slower pace, led by outlet expansions, new products, and investments in backend efficiency systems.
“Improvement in Hong Kong’s tourist arrivals, and pick-up in Hong Kong and Singapore’s supermarket sales will also support earnings recovery,” he adds.
For this reason, the analyst has left the core revenue and operating profit estimates unchanged, but lowered forecasts for Yonghui, resulting in trimmed estimates for FY2023-FY2025 earnings by 5%-7% each. Our sum-of-the-parts valuation for DFI now has a lower fair value for Yonghui, while the TP is accordingly lowered by 6% to US$2.92, says Yeo.
Finally, only Citi has upgraded its call from “neutral” to “buy”, citing better near-term recovery outlook and undemanding valuation, as reasons to be more constructive on the stock.
Citi’s Cho says that the near term recovery outlook is trending better than expected while the transformation plan from the new management team may be able to help DFI revitalise its Southeast Asia’s business and build sustainable growth in the longer term.
“We value DFI’s retail business, excluding Yonghui, by applying a forward P/E multiple of 17 times, based on FY2023’s core net profit for a contribution of US$2.64 per share. We include the 20% stake in Yonghui based on market value, which contributes 64 US cents per share. This sums to our target price of US$3.28.” says Cho.
As at 12.24pm, shares in DFI Retail Group are trading 2 US cents lower, or 0.78% down at US$2.56.
