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Citi lowers TP for DFI Retail Group while DBS leaves TP 'under review' despite reversal into earnings for FY2023

Nicole Lim
Nicole Lim • 4 min read
Citi lowers TP for DFI Retail Group while DBS leaves TP 'under review' despite reversal into earnings for FY2023
Analysts from both brokerage houses have kept their buy calls on back of cheap valuation, and strong recovery momentum for 2024. Photo: Bloomberg
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Citi Research has lowered its target price for DFI Retail Group D01

to US$3.13 ($4.17), from US$3.28 previously, while DBS Group Research has left its target price “under review”, despite the group’s reversal into earnings for the FY2023 ended Dec 31, 2023. 

For the full year, DFI reported earnings of US$32 million, compared to the loss of US$115 million it made in FY2022.

The analysts from both brokerage houses have therefore kept their “buy” call on DFI, on the back of cheap valuation and a 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 break 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. 

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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 favourable sales mix shift. 

Its second-half sales were “flattish in Hong Kong”, affected by outbound travel during weekends. 

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

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The group’s home furnishings segment saw sales decline of 5%, while operating dropped 59% due to changing consumer behaviour and weak property market. 

Finally, its restaurant joint venture Maxim saw sales/operating profit growing 23%/49% underpinned by business recovery in Hong Kong and mainland China post full reopening, as well as decent performance in the Southeast Asia market. 

Yonghui losses narrowed despite weaker sales underpinned by gross profit margin expansion and cost optimization, it remained hampered by macro slowdown and intense competition.

Citi analysts say that the “flattish revenue” was in line with their expectations, with 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 & beauty segment. 

Cho, Feng and Wei highlight that DFI’s management expects sales growth of flat to LSD in 2024 and a core net profit of US$180 million - US$220 million (or +16%-42% y-o-y).

DFI’s management remains confident in short-to-long term prospects on new strategic framework and optimization of organisation structure, and it also expects capex at US$200 million - US$240 million (versus US$222 million in 2023), continued net debt reduction and growing dividend in absolute dollars.

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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. Yonghui based on 17x 2024 earnings per share, and 47 US cents for Yonghui, based on market value,” they add. 

Likewise, DBS analysts say that DFI’s results were largely in line with expectations at operating profit level. However, they note that headline profit was hit by a one-off US$110 million impairment in 2HFY2023, in light of the joining of a new CEO in Aug 2023. 

They say that the 2HFY23 saw “surprisingly strong margin recovery” for food and convenience segments which more than offset margin contraction in the home furnishings segment. 

On core underlying earnings, DBS expects the high interest expenses to come off in FY2024 with lower debt level of US$924 million (versus US$1.1 billion at start of FY2023) and expected rate cut in 2HFY2024. 

“To sum up, while we see challenges in terms of changing consumer behaviour post-Covid-19, we believe the company is adapting well to the changes and continue to see strong recovery momentum going into 2024,” they say. 

DBS analysts have therefore maintained their “buy” call with a target price under review.  

As at 12.44pm, shares in DFI Retail Group are trading 2 US cents up or 0.93% higher at $2.16.

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