Date of Report: September 24, 2024
Broker Name: CGS International
Overview of DFI Retail Group
DFI Retail Group (Bloomberg: DFI SP, Reuters: DFIR.SI) is a major player in the retail sector, with a focus on grocery, convenience, and health and beauty stores, as well as furniture outlets. As of the report’s date, the company has a market capitalization of US$2,515 million, with an average daily turnover of US$1.38 million. Its key shareholders include Jardine Matheson Holdings, holding a 77.6% stake.
Recent Divestment of Yonghui Stake
On September 23, 2024, DFI Retail Group announced the sale of its entire 21.1% stake in Yonghui Superstores (601933 CH) to Miniso Group (9896 HK) for a cash consideration of Rmb4.5 billion (US$637 million). This move marks a continuation of DFI’s strategy of scaling back its grocery retail footprint, having previously exited markets in Indonesia and Malaysia.
The Yonghui stake sale is expected to result in a US$128 million loss for DFI, as the carrying value of the stake stood at US$765 million by the end of June 2024. The transaction reduces DFI’s exposure to Mainland China’s struggling offline retail sector, where Yonghui has been grappling with significant losses since FY21.
Impact on Financials and Balance Sheet
The divestment is projected to reduce DFI’s book value per share to 61 US cents, though the cash injection from the deal will move the company to a net cash position of US$88 million, excluding lease liabilities. Despite the financial hit, DFI views this sale as an opportunity to refocus its resources on more profitable subsidiaries.
The report highlights that, while the exit from the loss-making venture in China is a positive step, it also signals DFI’s ongoing struggle to maintain a strong presence in the grocery sector. This sale is part of a broader trend of retreat, as evidenced by its exits from Malaysia and Indonesia over the past three years.
Ongoing Structural Challenges
DFI’s core business continues to face significant structural challenges, particularly in Hong Kong, where evolving consumer shopping habits are putting pressure on its retail operations. The company is struggling to adapt to new retailing concepts and shifting consumer preferences, which have impacted its revenue and profit margins.
Despite attempts to optimize its operations by closing unprofitable stores and refining its product offerings, DFI’s overall recovery remains uncertain. The report reiterates a “Hold” recommendation for DFI, citing concerns about the company’s ability to quickly return to profitable growth.
Key Financial Forecasts
- Net Revenues (US$):
2023: 9,241 million
2024F: 8,944 million
2025F: 8,912 million
2026F: 9,011 million
- Net Profit (US$):
2023: 216.5 million
2024F: 226.5 million
2025F: 240.0 million
- Core EPS (US$):
2023: 0.15
2024F: 0.17
2025F: 0.18
The report forecasts a moderate recovery in profitability, driven by margin improvements and potential divestment of other loss-making businesses. However, DFI’s revenue growth is projected to remain stagnant, with a 0.36% decline forecast for 2025.
Risks and Outlook
The report outlines several risks to DFI’s outlook:
- Upside Risks: Improvement in profit margins and further divestments of loss-making segments.
- Downside Risks: Continued weak sales performance, particularly in Hong Kong, and a prolonged drag from Yonghui’s losses.
The report concludes with a neutral view on the divestment of the Yonghui stake, recognizing it as a necessary step in strengthening the company’s balance sheet, but also acknowledging the ongoing contraction of DFI’s grocery retail footprint. The company is likely to face continued challenges in its core markets, particularly in Hong Kong, as it navigates a difficult retail environment.
Conclusion
DFI Retail Group remains in a transformative phase as it reduces its exposure to struggling markets and focuses on optimizing its core operations. The company’s ability to navigate these structural challenges will determine its long-term success in the retail sector. The report maintains a “Hold” rating, with a target price of US$1.85, reflecting a cautious outlook on the company’s recovery trajectory.
