• Maintain BUY with lower USD2.61 TP from USD2.81, 48% upside and c.6% yield. We retain our call for DFI Retail Group on recovery expectations and attractive valuations. 1H24 has shown decent earnings recovery and despite lowering our earnings forecast, we continue to anticipate earnings recovery into FY25F. 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 10x FY25F P/E and c.6% dividend yield.

• 1H24 below expectations. DFI’s 1H24’s revenue was USD4,405m (-4% YoY), while underlying profit was USD76m (+127% YoY), below expectations. Revenue decline was affected by the Food (USD1,579m, -6% YoY) and Home Furnishing (USD349m, -13% YoY) divisions. The Food division’s revenue was dragged by Singapore’s performance due to challenging consumer sentiment, while Home Furnishing sales were impacted by Hong Kong and Indonesia’s weak property market and temporal disruption of operations in Taiwan due to April’s Hualien earthquake. Operating profit outperformed at USD168m (+81% YoY), led by margin recovery and cost controls in the Food and Health & Beauty divisions. Underlying associate income missed expectations as well, at USD3m, improving from losses last year. Maxim’s contribution was affected by weak consumption, while Yonghui continued to register smaller losses – offset by Robinsons Retail’s increased contribution. An interim DPS of 3.5 US cents was declared, amounting to a payout ratio of c.62% of underlying earnings, in line with expectations.

• Lower FY24-26F earnings by 6-7%. While 1H24’s results saw weaker-than- expected sales and JV and associates’ contribution, margin recovery of the Food division was encouraging. According to Hong Kong’s Census and Statistics department, March to June’s retail sales saw consecutive monthly YoY decline in retail sales on subdued consumer sentiment. Following 1H24’s revenue miss, and milder outlook on Hong Kong’s retail sales, we lower our revenue estimates by 5-10%. However, we have imputed higher operating margins and leverage on operating cost efficiencies, which results in our FY25-26F operating profit remaining largely unchanged. We have also reduced our estimates for JV and associates’ income, following 1H24’s disappointment. These have resulted in a FY24-26F recurring net profit cut of 6-7%. Our SOTP-based TP is likewise trimmed c.7% to SGD2.61.

• Downside risks to our recommendation include a slower-than-expected recovery in consumer spending and higher-than-expected costs, which could ultimately lead to lower margins and earnings. As DFI’s ESG score is below the country median of 3.1, we apply a 2% ESG discount to its intrinsic value to derive our TP.

Source: RHB Research - 13 Aug 2024