"This move, while surprising, highlights that management will not shy away from disposing business that it deems to be not contributing to shareholder value," says DBS, which is keeping its "buy" call and US$3 price target on this stock.
DBS notes that in FY2024, DFI's "food" businesses, in which these supermarkets fall under, reported operating margins of 1.8%. In contrast, its so-called "health & beauty" and "convenience stores" reported margins of 8.6% and 4.3%, respectively.
According to DFI on March 24, it is now focusing on the Guardian pharmacy chain and 7-Eleven network of convenience stores here in Singapore.
Among others, the company is focusing on new growth areas such as its network of 7-Eleven convenience stores in Guangdong, where it is banking on the growing popularity of "food bars" within these stores to offer value meals for consumers.
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Overall, with the divestment, notwithstanding potential one-offs, if any, DBS believes that DFI should still be able to achieve its above-consensus FY2025 core operating earnings estimate of US$259 million. The management has guided US$230 million to US$270 million.
For Adrian Loh of UOB Kay Hian, the timing of the sale was faster than expected, but not a surprise, given that the food segment, while seen to improve its profitability somewhat, is still less so versus other segments.
Loh believes that DFI Retail will use the proceeds from the sale to further pay down debt.
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As at end of FY2024, the company had already lowered its net debt by 25% to US$468 million, resulting in a net debt/equity of 0.79x.
With the completion of the sale of Yonghui at the end of Feb, DFI is now a net cash company, and be in a better position to deliver higher-than-expected dividends to shareholders.
For now, Loh is keeping his estimated FY2025 payout of 10.3 US cents per share, based on a payout ratio of 60%, which implies a yield of 4.9% based on March 24's closing price of US$2.34.
Loh notes that with this sale, DFI will become more north-Asia focused and prioritise the expansion of its network of convenience stores in Guangdong and also the health and beauty retail businesses.
While DFI is on the lookout for potential acquisitions, CEO Scott Price said he is looking for control and not just taking minority stakes. He did not mention Yonghui specifically but DFI's stake was just over 20%.
"I don’t see minority shareholding as an important part of our proposition moving forward. In general, you don’t put your TSR (total shareholder returns) in someone else’s hands,” said Price at the results briefing.
For now, Loh has kept his "buy" call and PE-based target price of US$2.80, which is based on 16.3x earnings, which is 1 standard deviation below DFI’s average PE multiple over 2019 to present, excluding the Covid-19 years of FY2021-23.
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Loh points out that DFI, trading at 12.6x FY2025 earnings, is at a discount of 37% to its regional peers while offering a higher prospective yield of 4.9% vs its peers’ average yield of 3.0%.
In their March 24 note, CGS International analysts Meghana Kande and Lim Siew Khee estimate that DFI Retail, with this sale, can make operational cost savings of some US$230 million.
DFI's Singapore businesses, including 7-Eleven, recorded revenue of some US$2.1 billion in FY2023 and roughly broke even at the ebit level, the analysts say, citing audited financial statements.
The savings will help increase the company's underlying FY2024 ebit margin by 0.4 percentage points to 3.9%, they estimate.
Upon completion of the sale, slated by the end of this year, DFI might pay out a special dividend of at least 4 US cents, implying a yield of around 6.6% for FY2025.
Kande and Lim are keeping their "add" call and US$2.71 target price on this counter, based on 13.2x P/E, which is 1 s.d. below its five-year historical 12-month forward P/E average.
For them, key re-rating catalysts for DFI would include faster recovery of its Hong Kong supermarket sales, announcement of the special dividend, and higher-than-expected growth in Southeast Asia.
On the other hand, downside risks include slow economic recovery in Hong Kong affecting its sales growth, and cost pressures impacting margin uplift.
DFI shares changed hands at US$2.37 as at 2.55 pm, up 1.8%.
