Analysts from RHB Group Research, CGS-CIMB Research Citi Research, UOB Kay Hian Research and DBS Group Research have all maintained their “hold” and “neutral” calls for DFI Retail Group Holdings (DFI) with lowered target prices (TPs) of US$2.71 ($3.74), US$2.60, US$2.83, US$2.80 and US$2.67 from US$2.88, US$2.70, US$2.90, US$2.96 and US$3.01 respectively.
The lower target prices comes after DFI’s “disappointing” 1HFY2022 results released on July 28.
RHB believes that DFI is “not out of the woods yet”, posting 1HFY2022 results with a net loss of US$52 million that was “below expectations”.
In its report dated July 29, RHB says that this “negative deviation” could be attributed to the imposition of movement restrictions and lockdowns in key North Asia markets including China and Hong Kong, following the surge in Covid-19 cases.
RHB has slashed its forecasted earnings for the FY2022, FY2023 and FY2024 by 78%, 24% and 20% respectively.
Its new TP, which implies an FY2023 P/E of 18x, close to -1 standard deviation (s.d.) of the stock’s five-year mean, includes a 2% ESG (environmental, social and governance) discount. According to the RHB team, the new TP is justified by the challenging and uncertain recovery outlook.
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That said, DFI’s current valuation may have priced in most of the negatives, according to the team’s view, hence its maintained “neutral” recommendation.
CGS-CIMB’s Ong Khang Chuen similarly notes that DFI’s 1HFY2022 results were “disappointing” despite his expectations that FY2022 would be “profitable” for the company.
“Underlying operating profit shrank 51% year-on-year (y-o-y) to US$76 million, as recovery from the health and beauty segment and increased contribution from IKEA were more than offset by weaker grocery retail and convenience segments”, writes Ong.
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He adds that key impact stemmed from cost inflation, elevated demand for groceries tapering off and higher investments in e-commerce. DFI was dragged into the red with a US$65 million share of associate losses from Yonghui, after a quarter-long delay in recognising its substantial 4QFY2021 losses, and from Maxim, due to Hong Kong’s movement restriction, he says.
Ong has also cut his earnings per share (EPS) estimates for the FY2022 to FY2024 by 2.6% to 45.6% to factor in margin assumptions.
Citi’s Tiffany Feng details that DFI’s grocery segment declined by 8% and 43% y-o-y for sales and operating profit (OP) respectively, due mainly to the easing of restrictions in Southeast Asia which led to a reduced the consumption of meals at home, store renovations in Singapore and supply chain issues in Malaysia. They were “partly offset” by pantry-stocking in North Asia, she notes.
For the health and beauty segment, its recovery entailed an 11% and 91% y-o-y increase for sales and OP due to strong demand in Covid-related products and off-the-counter (OTC) medicine in Hong Kong, as well as double digit like-for-like sales growth in Guardian driven by tourist traffic recovery, writes Feng, adding that the OP margin for this segment recovered to 4% on operating leverage.
Feng has, similarly, lowered her net profit estimates by 54%, 20% and 13% for the FY2022, FY2023 and FY2024 to reflect lower OP margin assumptions. She has kept its revenue largely unchanged.
RHB says that DFI “remains cautious” of the challenging business environment and uncertainties ahead, considering the stringent approach taken by the governments to contain Covid-19 in North Asia markets, which accounted for 76% of its total 1HFY2022 sales.
“On top of that, the supply chain disruptions and inflationary pressures would also be relevant headwinds that will pose downside risks to the recovery of DFI’s businesses going forward. That said, DFI’s investment to enhance its digital capabilities and continuous efforts to improve store operations should mitigate some of the impact, and place it in a good position to capture the spending recovery once the pandemic is broadly contained in its key markets,” writes the team at RHB.
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Meanwhile, CGS-CIMB’s Ong believes that the “worst is likely over” for DFI, but hurdles remain on its road to recovery. “While we think that the worst is likely over for Hong Kong retail sales with easing Covid-related restrictions and rollout of the consumption voucher scheme, we see a bumpy path to recovery,” he says.
“Given Hong Kong and Mainland China’s current divergence in Covid strategy, we see significant challenges to borders reopening in the near-term. We think a meaningful recovery for DFI’s health and beauty segment, its biggest earnings contributor pre-Covid, is only likely from 1HFY2023,” writes Ong.
He expects DFI's operating margin to remain compressed at -1.8 percentage points y-o-y in 2HFY2022, on the back of supply chain and inflationary pressures. DFI also launched its yuu-to-me e-commerce app in Hong Kong in May 2022, for which RHB expects sales and marketing expenses to be elevated in the medium term to drive these digital initiatives.
Citi’s Feng says that DFI management expects lower profitability in FY2022 compared to FY2021 due to continuous investment in online and offline businesses, the lingering impact of Covid fluctuations in North Asia, China’s border closure as well inflationary pressure in the short term. However, she notes that the management remains confident on medium-term profitability.
Ong also points out that a bright spot for DFI is the potential turnaround in associate Yonghui’s FY2022 earnings, given the reduced subsidy levels for community group purchase platforms, which has improved the competitive environment in China.
“Our China consumer analyst forecasts Yonghui to return to profitability in FY2022, with an expected RMB251 million ($51.4 million) net profit compared to FY2021’s net loss of RMB3.9 billion net loss. We also expect a turnaround of Maxim’s business with easing restrictions in Hong Kong to aid DFI’s return to the black in 2HFY2022,” he says.
“EPS revision momentum for DFI continues to be negative and has yet to trough, in our view. Its North Asia earnings are likely to remain highly subjective to the vagaries of government policy in the near to medium term,” says UOB Kay Hian’s Adrian Loh.
Like the rest of his peers, DBS's Andy Sim has cut his earnings estimates for the FY2022 and FY2023 by 77% and 30% respectively on the back of higher losses from DFI's associates. The lowered earnings also took higher operating expenses, mainly arising from investments in digital capabilities as well as cost inflation, into consideration.
To him, DFI's results for the 1HFY2022 were "underwhelming".
While its current share price has underperformed and seems "bombed out", Sim believes conditions for the counter are "lacking for a positive boost" to catalyse its share price.
"Firstly, lingering Covid-19 restrictions in North Asia continue to post headwinds for its operations," he says. 'In addition, its investments in digital capabilities, while necessary for the group’s longer-term value and growth, are creating a drag on headline operating profits in the near term."
"In our view, until tangible signals from both factors are clearer, DFI’s share price could still flirt around current levels even though P/B valuations seem low based on historical trends," he adds.
The way Sim sees it, DFI's transformation will not happen "overnight".
"The pandemic and current high price inflationary environment may have changed consumption patterns in favour of value. In our view, DFI’s investment in digital capabilities as well as price investment strategy may lead to a period of lower margins and will need time to bear fruit as cost structure changes are implemented," he says.
Noting the decline in DFI's grocery segment, Sim believes that the group's grocery retail business "may face challenges ahead in the form of normalising demand in regions where the pandemic situation has stabilised".
"Competition is also fierce in both the online channel (impacting Yonghui in China) and offline channel (Indonesia)," he says.
For RHB, key risks to its recommendations include better or worse-than-expected pandemic containment in key markets and the resulting easing or intensifying movement restriction enforcements in these regions.
As at 1.49pm, shares in DFI are trading 1 US cent or 0.36% down at US$2.79.
