DFI Retail Group (formerly Dairy Farm International Holdings) can expect weaker margins in FY2022 and perhaps a profit decline, say CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan.
“While we think that the worst is likely over for Hong Kong retail sales with easing Covid-related restrictions since late-April, and rollout of the HK$10,000 ($1.765.33) consumption voucher scheme, we continue to see a bumpy path to recovery for DFI,” note Ong and Tan.
“Given HK and Mainland China’s current divergence in Covid strategy, we see significant challenges to borders reopening in the near-term,” they add.
In a June 24 note, Ong and Tan are maintaining “hold” on DFI Retail Group with a lower target price of US$2.70 from US$2.90 previously. The new target price represents a 7.8% downside.
Ong and Tan “further delay” their recovery expectations for DFI’s Health and Beauty segment, its biggest earnings contributor pre-Covid-19, as they think the group is unlikely to see a meaningful return of Chinese tourists in FY2022.
DFI’s margins will be hurt by macro challenges and e-commerce investments, note the CGS-CIMB analysts. “DFI’s other operating segments are impacted by various macro challenges, including higher pandemic-related costs, supply chain constraints, and higher utility expenses.”
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Such elevated costs have offset revenue gains from segments including Grocery Retail and Home Furnishing in 1QFY2022. Ong and Tan expect this to further weigh on margins in the remainder of FY2022.
DFI also intends to further invest in e-commerce capabilities (yuu-to-me in Hong Kong, Cart in Singapore) as part of its transformation roadmap, they note. “We expect sales and marketing expenses to be elevated in the medium term to drive such initiatives. We now forecast DFI’s operating margin to see further compression of 1.1% points y-o-y in FY2022, lowering operating profit by 32% y-o-y.”
DFI’s stronger associates’ contribution will not be enough to turn the tide, say Ong and Tan.
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A bright spot is the potential turnaround in Chinese associate Yonghui in FY2022, given reduced subsidy levels for community group purchase platforms, which has improved the competitive environment, say the analysts.
“Our China consumer analyst forecasts Yonghui to return to profitability in FY2022 (RMB251 million net profit, compared to FY2021’s RMB3.9 billion net loss). However, DFI accounts for Yonghui’s contributions with a quarter lag. It will be recognising its share in Yonghui’s 4QFY2021 net loss of RMB1.8 billion in its FY2022 financials. We hence forecast DFI’s net profit to fall 17% y-o-y in FY2022,” write Ong and Tan.
About DFI Retail Group
DFI Retail Group is a member of the Jardine Matheson Group. As at end-2021, DFI Retail Group operated over 10,200 outlets and employed some 230,000 people. The group had total annual sales in 2021 exceeding US$27 billion.
The group’s principal brands are: grocery stores Wellcome in Hong Kong and Yonghui in the Chinese mainland; Cold Storage in Malaysia and Singapore; Giant in Malaysia and Singapore; Hero in Indonesia; and Robinsons in the Philippines.
In convenience stores, the group runs 7-Eleven in Hong Kong, Macau, Singapore and Southern China.
In beauty stores, the group runs Mannings in the Chinese mainland, Hong Kong and Macau; and Guardian in Brunei, Cambodia, Indonesia, Malaysia, Singapore and Vietnam.
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The group also runs IKEA in Hong Kong, Macau, Indonesia and Taiwan; and also runs restaurants: Hong Kong Maxim's group in the Chinese mainland, Hong Kong, Macau, Cambodia, Malaysia, Singapore, Thailand and Vietnam.
The group's parent company, DFI Retail Group Holdings Limited, is incorporated in Bermuda and has a primary listing on the London Stock Exchange, with secondary listings in Bermuda and Singapore. The group's businesses are managed from Hong Kong by DFI Retail Group Management Services Limited through its regional offices.
As at 9.52am, shares in DFI Retail are trading 5 US cents lower, or 1.68% down, at US$2.92.
