Still not a convenient time
Underwhelming 1H22; conditions still lacking for share price catalyst to materialise. DFI Retail Group’s (DFI) share price has underperformed and seems bombed out, but we believe conditions are lacking for a positive boost toto catalyse its share price. Firstly, lingering COVID-19 restrictions in North Asia continue to post headwinds for its operations. In addition, its investments in digital capabilities, while necessary for the Group’s longer-term value and growth, are creating a drag on headline operating profits in the near term. In our view, until tangible signals from both factors are clearer, DFI’s share price could still flirt around current levels even though PB valuations seem low based on historical trend.
TP trimmed to US$2.67; Maintain HOLD with share price near lows. We trim our TP to US$2.67, on the back of lower earnings forecasts post its underwhelming 1H22 results. We cut our FY22F/ 23F earnings by 77%/ 30% on the back of higher losses from its associates, coupled with higher operating expenses, mainly arising from investments in digital capabilities as well as cost inflation. With share price already severely underperforming and negative factors largely known, we maintain our HOLD recommendation. Upside/ downside risks to our recommendation comes from the earlier/ delayed occurrence of the catalysts we highlighted above.
1H22 Results Review
1H22 DFI Group headline loss of US$52m; below expectations largely on associates’ losses, restrictions and investments. DFI Retail Group (DFI) reported a headline net loss of US$52m, which includes US$60m loss from associates (largely Yonghui and Maxim). While its subsidiaries remained profitable, posting 1H22 sales of US$4.48bn (-1.2% y-oy) with an underlying operating profit of US$76m, this was 51% lower compared to the same period last year. The Group had, in its 1Q22 business update in earlier in May 22, guided for 2022 results to be lower compared to 2021, but the headline performance was still underwhelming for us in respect of the higher-than-expected operating expenses and operational challenges.
Heath and Beauty performance failed to mitigate weakness in Grocery Retail and Convenience Stores, and higher investments in digital. Among the performance of its subsidiaries, while Health and Beauty posted strong performance, this failed to mitigate the weakness in its Grocery Retail as well as Convenience Stores. In addition, the Group also increased its investments in digital capacity and capability, which is said to be necessary to meet customers’ needs and to drive long-term growth and value. In its results briefing, management guided that the level of investments in its digital capabilities are likely to continue into 2H22F, and possibly FY23 as well.
Overall performance dragged down by Yonghui and Maxim’s contribution. The underwhelming headline performance can be attributed to the Group’s share of Yonghui’s results amounting to US$64m (due to the latter’s performance in 4Q 2021) as well as losses from Maxim’s, which contributed an underlying loss of US$26m due to movement restrictions in Hong Kong.
An interim dividend of 1 USct was declared for 1H22, vs 3.0 US cts a year ago.
Segments commentary
Grocery Retail segment hard hit by reopening in Southeast Asia, inflation and investments. While Grocery Retail in North Asia saw decent like-for-like sales, this failed to negate the impact from Southeast Asia as Group operations were affected by easing restrictions, store renovations in Singapore and stock availability in Malaysia. Recall that in 1H21, COVID restrictions were still predominant, while in 2H22, easing restrictions towards 2Q22 saw a shift towards out-of-home consumption. Management also indicated that renovation for several stores had ramped up in 1H22 after these were delayed due to COVID restrictions in 2021. There are expectations for these to be completed by end of 2022.
As a result, 1H22 Grocery Retail saw sales drop by 8.5% y-o-y to US$2.0bn (from US$2.19bn). Along with higher costs of goods, operating costs from labour and electricity and e-commerce investment costs, operating profit for the segment plunged by 44.2% to US$47.4m, from US$84.9m a year ago.
Convenience Stores impacted by Hong Kong and China restrictions. While Singapore convenience stores saw strong sales and profit arising from easing of restrictions, the segment was impacted by restrictions in China and Hong Kong. In 1Q, due to restrictions, 50% of its stores were forced to close or had shortened operating hours. We noted that there was q-o-q sales recovery post lockdowns in 2Q22. As a result, sales for the segment in 1H22 was US$1.08bn, but profitability was impacted with an operating loss of US$0.1m, down from a profit of US$18.6m a year ago. Store expansion continues, nonetheless, with 100 new stores opened, of which 75 were in South China.
Health & Beauty the star; 1H22 sales +11%, operating profit +91% y-o-y. Health & Beauty was the star performer with 1H22 sales at US$984.5m, up by 11% y-o-y due to recovery across North Asia (Mannings) and Southeast Asia (Guardian). Mannings Hong Kong saw higher like-for-like sales due to surge in demand for COVID-19 related products and over-the-counter (OTC) medicines as well as double-digit sales growth for Own Brand. Guardian stores across Southeast Asia benefitted from easing of COVID restrictions and recovery in mall and tourist locations, with profit more than doubling for Guardian. Overall, operating profit for Health and Beauty almost doubled to US$39.3m (+90.8% y-o-y) in 1H22, compared to a year ago.
Home furnishing improved from new stores and e-commerce. Home furnishing saw 1H22 revenue improving by 6.4% y-o-y to US$409.6m, on the back of newly opened stores last year and e-commerce sales. However, like-for-like sales were impacted in 1Q22 due to COVID restrictions on store operating capacity as well as stock availability. It was noted that stock availability was at c.80-85%, down against more than 95% during pre-COVID. Notwithstanding the challenges, Home Furnishing segment posted an operating profit of US$15.2%, up by 32.2% y-o-y, with like-for-like sales improving in 2Q22. Ikea now has 40 touchpoints with c.4.3m sq ft of trading space. Its new upgraded Taiwan fulfillment centre is expected to be operational in 2H22.
Maxim also reeled from restrictions in Hong Kong, while Robinson Retail (RRH) benefited from Philippines’ easing of restrictions. Maxim was severely impacted by the restrictions from dining-in in Hong Kong, and the temporary lockdowns in China. The opposite was true for RRH where its drugstores, department stores and specialty segments saw strong performance on increase in economic activity following easing restrictions. For Hong Kong, it was noted that like-for-like sales recovered over the course of 2Q as restrictions eased.
Our views
Trim FY22F/ 23F earnings by 77%/ 30%. As a result of its underwhelming 1H22 and higher-than expected investment into its digital capabilities that is expected to last into 2H22 and possibly FY23, we cut our forecasts by 77%/ 30% for FY22F/ 23F. This is also contributed by the slower than expected lifting of restrictions in North Asia as well as sales impact from store renovations in Southeast Asia for Grocery Retail in which we have brought down our sales forecasts by 4.5%/3.5% for FY22F/23F.
Facing headwinds; firm easing of restrictions and concrete results from investments needed. While the Group had earlier guided for a weaker 2022 compared to 2021, its underwhelming 1H22 performance took us by surprise. The impact from Yonghui is well-flagged though the steep plunge in underlying performance of its subsidiaries, particularly its Grocery Retail segment – traditionally the main contributor -could be hard for the market to digest. There continues to be challenges faced by the Group and we understand the investments are needed to drive its longer-term growth. However, for confidence in the share price to return, we believe two key factors are needed: (i) firm easing of restrictions in North Asia; (ii) concrete positive results from investments made thus far.
TP revised down to US$2.67; HOLD. Accordingly, we revised down our TP to US$2.67, rolling our valuation to FY23F. With share price already severely underperforming and negative factors largely known, we maintain our HOLD recommendation. Upside/ downside risks to our recommendation comes from the earlier/ delayed occurrence of the catalysts we highlighted above.