Citi, RHB maintain 'neutral' on DFI, increase TPs to US$3.16 and US$3.09

DBS has reiterated its ‘buy’ call with a lower TP of US$3.80 from US$3.90 previously.

Analysts from Citi Investment Research and RHB Group Research have maintained their “neutral”  position on DFI Retail Group Holdings D01 (formerly Dairy Farm International) with higher respective target prices of US$3.16 ($4.25) and US$3.09, from US$2.36 and US$2.71 previously.

In their report dated March 7, Citi’s Tiffany Feng, Wei Xiaopo and Brian Cho say that although DFI’s core net profits for FY2022 slumped by 72% y-o-y due to its investments in e-commerce and digital innovation as well as lower government grants and rent concessions, they believe DFI is still poised for recovery.

DFI’s results for the full year ended Dec 31, 2022, came in 51% below their estimates.

“Despite the weak results, we think the recovery outlook [for DFI] remains unchanged, which will be driven by the turnaround of convenience store units and restaurant joint ventures (JVs) as well as narrowing losses from Yonghui,” say the analysts.

They note that DFI’s management expects an improved overall performance in FY2023, with “encouraging performances” already shown in 2HFY2022 and 1QFY2023, while China’s reopening, market normalisation and continuous investment in both online and offline businesses should also boost the company’s earnings.

Still, DFI says it remains cautious amid inflationary pressure and uncertain consumer sentiment and has guided that its FY2023 results will depend largely on the recovery of Mannings and Maxim in Hong Kong and an improved performance by its associate Yonghui.

The Citi analysts have cut their FY2023 and FY2024 net profits by 12% and 24% mainly to reflect lower operating profit margin (OPM) assumptions, given continuous investment in digital and e-commerce spaces and inflationary pressure.

Their sum of the parts (SOTP)-based target price of US$3.16 comprises US$2.48 for DFI’s businesses excluding Yonghui, based on a 17x FY2023 price-to-earnings ratio (P/E), and 68 US cents for Yonghui based on its market value.

The team at RHB Group Research has similarly raised its TP to US$3.09 after adjusting its risk assumption to reflect the improved operating environment following China’s reopening. Their TP implies a 20x P/E, above DFI’s five-year mean of 18x.

According to the analysts, DFI’s current valuation, which is trading 1.5 standard deviations (s.d.) over its five-year mean, is “not attractive” and could have priced in most of the positives.

Following DFI’s FY2022 earnings results that came in below their expectations on weaker-than-expected margins, they expect recovery prospects to improve following the lifting of pandemic restrictions and China’s economy reopening.

“However, we remain cautious as headwinds, including inflationary pressure, rising interest rates and a potential global economic slowdown could pose earnings downside risks,” adds RHB.

Meanwhile, DBS Group Research analyst Andy Sim has reiterated his “buy” call on DFI with a lower TP of US$3.80 from US$3.90 previously.

He expects North Asia’s reopening to drive recovery in the health and beauty (H&B), convenience store and restaurant business segments, which were badly hit by Covid-19 restrictions with operating profits at 32%, 62% and 46% of pre-Covid levels as of FY2022. “With North Asia reopening, we believe we would see a multi-year recovery in these business segments with expectation of full recovery in FY2025,” says Sim.

The return of Chinese tourists, who are the largest consumers of H&B products in Hong Kong, will also drive DFI’s rerating. Sim estimates that they spend some US$3.5 billion on cosmetic products, which are of higher quality and cheaper in Hong Kong, and that DFI is well-positioned to benefit from Chinese tourist inflow given its dominant physical Mannings store network.

“We believe there is substantial profitability upside given the segment generated US$94 million operating profit in FY2022, a far cry from its peak of US$330 million pre-Covid and political unrest,” he says.

Sim believes investors are underestimating the strength of DFI’s recovery and that the stock will rerate upon the sequential delivery of earnings improvements. His TP of US$3.80 is pegged to 1 s.d. below DFI’s 10-year historical P/E valuation of 20.3x, based on expectations of continued digital investment costs in the near term, on a blended FY2023 and FY2024 earnings to account for China reopening tailwinds.

While he has applied a higher valuation to DFI given better visibility on earnings recovery, key risks to his valuation remain a lacklustre post-reopening recovery and continued significant losses at Yonghui.

As at 11.47am, shares in DFI were trading 10 US cents or $3.14% up at US$3.29.

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