Visible green shoots
- FY21 core PATMI down 62.7% y-o-y to US$102.9m
- Grocery retail strategy showing green shoots as market share decline is slowing
- Rumours on China potentially ‘co-existing’ with COVID-19 is positive
- Maintain HOLD with lower TP of US$3.01
Investment Thesis
Grocery retail faces demand normalisation and intense competition. We think the grocery retail business may face challenges ahead in the form of normalizing demand in the regions where the pandemic situation has stabilised. Competition is also fierce in both the online channel (impacting Yonghui) and offline channel (Indonesia).
Transformation of DFI will not happen overnight. We think the pandemic may have changed consumption patterns in favour of value. In our view, DFI’s price investment strategy may lead to a period of lower margins and will need time to bear fruit as cost structure changes are implemented.
Key catalyst – Watch for return of Hong Kong-China travel. Health & Beauty segment revenue dropped c.US$1bn in FY20 as the flow of visitors from Mainland China dried up. However, recent rumours that China may be looking to ‘co-exist’ with COVID-19 may catalyse the stock especially if it leads to a resumption of two-way travel.
Valuation:
TP of US$3.01 based on SOTP valuation. Our target price of US$3.01 is derived from a sum-of-parts valuation methodology. We value DFI’s core business at US$2.01 based on DCF and its 20% and 18% stakes in Yonghui and RRHI at US$0.78 and US$0.22 respectively based on market prices.
Where we differ:
We are more conservative on margins as we believe DFI’s multi-year transformation programme will need time to take shape.
Key Risks to Our View:
A better-than-expected improvement in operating margins or earnings performance could provide upside to our TP.