• Maintain BUY with lower USD2.80 TP from USD2.92, 30% upside and c.4% FY24F yield. DFI Retail Group remains our recovery play as FY23 earnings continue to show core profit and margin improvement, with key operations beating our operating profit forecast. We anticipate continued earnings recovery in FY24F as new CEO Scott Price re-strategises DFI for further growth, on the back of improving consumer demand. Dividend yield is decent due to parent company Jardine Matheson Holdings’ (JM SP, NR) practice of uplifting dividends back to the group level. The stock currently trades at an attractive 14x FY24F P/E vs our implied target P/E of 17x.

• FY23 core earnings of ex-JV/associate above estimates. DFI’s FY23 operations delivered core operating profit of USD293m, which exceeded our forecast. However, core net profit (USD155m) and headline earnings (USD31m), including JV/associates income disappointed our expectations, due to weak performance of Yonghui. While revenue (USD9.2bn, 0% YoY) and gross profit were in line with our forecast, operating profit and its margins outperformed, largely contributed by sales, traffic recovery, operating leverage at the convenience stores, and health and beauty segments. Food’s profit declined YoY due to COVID-19’s higher base last year and competition in South-East Asia, although North Asia improved. IKEA saw SSSG and profit decline on a weak market environment. DFI declared a final DPS of 5 US cents, bringing total DPS for the year to 8 US cents, reflecting a dividend payout ratio of c.70%.

• New CEO strategises to drive growth. Following DFI’s new CEO Scott Price taking the helm in Aug 2023, we expect new growth strategies to be implemented. These include improving assortment, pricing and promotion decisions across formats using data, optimisation of own brands across formats, expanding retail primary health care service, innovating and driving ready-to-eat products at 7-Eleven, going omnichannel during a high interest rate environment, and driving share through digital sales across markets.

• Cut FY24-25F earnings by 9%. Following lower-than-expected core earnings dragged by associates and JV, we lower our FY24-25 earnings forecast by 9%. We impute a slower revenue growth rate on the back of a flat FY23 revenue, but expect better EBIT margins as core segments continue to recover. There is no change to our JV/associate income as lower Yonghui earnings is offset by higher contribution from restaurant associate Maxims. Our TP is consequently reduced by in line with the earnings cut.

• Downside risks to our recommendation include a slower-than-expected recovery in consumer spending and higher-than-expected costs, which should ultimately lead to lower margins and earnings. As DFI’s ESG score is on par with the country median, we apply a 2% ESG discount to its intrinsic value to derive our TP.

Source: RHB Research - 13 Mar 2024