CGS International is upgrading its call on DFI Retail Group to “add” from “hold” previously with a higher target price of US$2.71 from US$1.85.
Analysts Meghana Kande and Lim Siew Khee say: “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.”
This has translated to a stronger balance sheet for the group and its ability to offer a higher dividend yield.
To recap, DFI released its FY2024 ended Dec 31, 2024 results on Mar 10, which saw the group report an overall loss of US$244.5 million ($325.6 million). This is a reversal from the US$32.2 million in earnings reported in the same period a year ago.
In addition, revenue was down 6% y-o-y to US$24.9 billion.
DFI’s reported results were impacted by non-trading losses attributable to shareholders of US$445 million. This was due to a loss of US$114 million, which is associated with the divestment of Chinese supermarket chain Yonghui, a US$231 million impairment of interest in Robinsons Retail and a US$133 million goodwill impairment of Macau and Cambodia Food businesses.
See also: DFI Retail reports overall loss of US$244.5 mil for FY2024 from divestments and impairments
“We are cautiously optimistic on its topline but raise profit estimates,” say Kande and Lim. DFI targets 2% organic revenue growth in FY2025, but the analysts remain slightly more cautious with their 1.5% growth forecast.
While Hong Kong’s macro environment is stabilising, they think that comparatively lower-valued basket sizes in Southeast Asia could moderate topline sales.
“We expect underlying operating margins to expand by 40 basis points over FY2024-FY2027 as a recovery in Food and Home could offset operational deleverage in Convenience and mix shift in Health & Beauty. As such, we lift our FY2025-FY2026 EPS by 15-16%. We see FY2025 underlying net profit of US$263 million (+31% yoy), at the higher-end of DFI’s US$230 million – US$270m million guidance,” say the analysts.
See also: UOB Kay Hian keeps Sheng Siong at 'buy' but trims target price to $1.92 on higher staff costs
Meanwhile, DFI has plans to repay debt using most of the approximately US$620 million from its Yonghui stake sale. The analyst views this move as being able to drive about US$40 million in annual interest savings.
“We forecast FY2025 net gearing to improve to -6.7%, compared to 78.6% at end-FY2024. 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 FY2025, from better profits and stronger balance sheet. M&As are medium-term catalysts,” say Kande and Lim.
As at 2.20pm, shares in DFI are trading at US$2.26.
