RHB Bank Singapore analyst Alfie Yeo has upgraded his call on DFI Retail Group (DFI) to “buy” from “neutral”, in anticipation of an earnings recovery at a palatable valuation.
Yeo target price remains unchanged at US$2.92 ($3.96), but expects a pick-up in demand in the various markets DFI operates in following an improvement in domestic consumption.
The analyst notes that since Aug 1, DFI’s share price has dropped by about 11% to US$2.40 due to the less-than impressive macroeconomic data from China and Hong Kong, in line with the recent weakness of China’s market indices and in view of DFI’s exposure to China.
As such, its valuation is now at more attractive levels,” Yeo says. “While we anticipate a recovery in FY2024 [ending Dec 31, 2024] – driven by an expected pick-up in demand in the various markets, and improving domestic consumption.”
In July, China recorded “disappointing macroeconomic data” including that for retail sales, industrial production and fixed asset investment. Both visitor arrivals from Mainland China to Hong Kong and domestic supermarket sales also declined q-o-q in the latest June data, according to Yeo.
“We believe these factors have affected investor sentiment on DFI in recent months, since close to 70% of DFI’s FY2022 revenue came from its North Asia operations,” Yeo adds.
However, Yeo highlights that China has implemented an 11-point plan to boost the domestic consumption of goods and services and stimulate the economy even while consumer confidence is cautious at present.
While China’s gross domestic product (GDP) is currently trending below RHB’s expectations, their economics desk expects China’s GDP (post reopening) to accelerate from 3% in 2022, to 4% and 4.5% in 2023 and 2024.
As such, the analyst’s investment thesis is based on an earnings recovery (18% earnings compound annual growth rate (CAGR) growth from FY2023-FY2025) at compelling valuations. He sees earnings driven by sturdy domestic consumption and a pick-up in tourism in Hong Kong, on top of the continued post-pandemic reopening and recovery of Asean economies.
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Yeo notes that DFI’s 1HFY2023 results ended in June numbers indicate that its core revenue and margins have already improved, led by the recovery in its convenience store and health & beauty segments in key Asean and North Asia markets.
“Together with China’s accelerating economic growth and consumption stimulus measures in place, we expect its China unit – along with Yonghui superstores – to improve next year, on the domestic demand recovery,” he adds.
In addition, the analyst expects outlet expansion, new products, and investment in back-end efficiency systems to supplement overall growth and margins, along with the recovery in Hong Kong tourist arrivals and pick-up in its Hong Kong and Singapore supermarket sales ahead.
Yeo maintains his earnings projections, with DFI is now trading at a cheaper 14x FY2024 P/E, as compared to its closest SGX-listed peer Sheng Siong’s 16x FY2024 P/E, and at -2 standard deviation (s.d.) from its 10-year pre-pandemic historical mean.
The analysts conclude that as DFI’s environmental, social and governance (ESG) score is on par with the country median, he has applied a parity ESG premium/discount to its intrinsic value to derive his target price.
As at 10.08am, shares in DFI are trading 7 cents higher, or 2.92% up at US$2.47.
