DFI Retail Group: Upgrade to Add with Higher Target Price

CGS International, March 12, 2025 – We upgrade DFI Retail Group (DFI) from Hold to Add with a higher target price of US\$2.71 (13.2x FY26F P/E) on improving profitability, stronger balance sheet and higher dividend yield.

Highlights:

• Portfolio optimization and strong cost controls led to +30bp underlying operating margin expansion in 2H24.
• DFI announced new FY25F guidance of +2% organic revenue growth and core net profit between US\$230m-270m (up 15-35% yoy).
• It guided for 60% dividend payout ratio to sustain in FY25F; we see potential for special dividend in FY25F from better profits and gearing improvement.

2H24: Solid Profit Growth Amid Cost Optimization

DFI Retail’s 2H24 underlying net profit of US\$125m (+3% yoy) was in line with our and Bloomberg consensus expectations. Underlying operating margin grew 30bp yoy in 2H24 to 3.9% as portfolio revamp in Food (grocery retail) and cost savings in Home Furnishings offset Health & Beauty’s mix shift towards lower-margin Southeast Asia.

Cautiously Optimistic on Topline, Raise Profit Estimates

DFI targets 2% organic revenue growth in FY25F, but we remain slightly more cautious with our +1.5% forecast. We expect underlying operating margins to expand by 40bp over FY24-27F as a recovery in Food and Home could offset operational deleverage in Convenience and mix shift in Health & Beauty. As such, we lift our FY25-26F EPS by 15-16%. We see FY25F underlying net profit of US\$263m (+31% yoy), at the higher-end of DFI’s US\$230m-270m guidance.

Efficient Capital Allocation is a Key Driver

DFI’s plan to repay debt using most of the c.US\$620m from its Yonghui stake sale should drive c.US\$40m in annual interest savings, in our view. We forecast FY25 net gearing to improve to -6.7% vs. 78.6% at end-FY24. DFI also guided for 60% payout ratio to sustain in FY25F, translating a 5.5% dividend yield. We see potential for a special dividend in FY25F, from better profits and stronger balance sheet.

Upgrade to Add with a Higher Target Price

We upgrade our call to Add from Hold as we see multiple re-rating catalysts for the stock, including faster recovery of its Hong Kong supermarket sales, growth in Southeast Asia and stronger-than-expected margin uplift from cost efficiencies. Our TP rises to US\$2.71, now based on 13.2x 2026F P/E (c.1 s.d. below its five-year historical 12M forward P/E average).

Global Peer Comparison

DFI Retail Group is currently trading at 10.7x 2025F P/E and 10.2x 2026F P/E, cheaper than the regional peer average of 15.6x 2025F P/E and 13.7x 2026F P/E.