1H22: A Messy Set Of Results
DFI reported a much weaker-than expected 1H22 with a loss of US$58m driven largely by its associates Yonghui and Maxim’s as well as poor profit contribution from its grocery business. Maintain HOLD as the company’s fortunes remain intimately tied to China’s COVID-19 policies. Target price: US$2.96 (previously US$2.87).
RESULTS
• Persistent weakness. While DFI Retail Group (DFI) reported a 1% yoy decline in revenue to US$4.5b in 1H22, the company witnessed a loss of US$58m due largely to its associates: a) the recognition in arrears of Yonghui’s 4Q21 loss amounting to US$64m, and b) the negative impact of COVID-19-related lockdowns in Hong Kong which pushed Maxim’s into a loss of US$26m. Apart from the poor numbers from its associates, DFI’s grocery business performed poorly on a yoy basis with operating profit falling 44% yoy to US$47m, while its convenience stores broke even vs an operating profit of US$19m in 1H21. Despite the 1H22 loss, the company declared an interim dividend of US$0.01 (1H21: US$0.03).
• Highlights of the results were health & beauty and home furnishings. The health & beauty business saw a 91% yoy increase in operating profit to US$39m while the IKEA business witnessed a 32% yoy increase to US$15m for 1H22.
STOCK IMPACT
• Drivers of the better performance within the health & beauty and IKEA business were the strong 11% and 6% yoy revenue growths respectively (see chart on RHS). For the former, both its Mannings and Guardian stores experienced robust demand for COVID-19- related products while both businesses saw good cost control. Overall, it appears that DFI has tried to remain price competitive and as economic conditions improve, it expects a more balanced mix of spending in the health & beauty segment. The IKEA business should see volume growth in the medium term as more stores are opened in the Asian region, with double-digit e-commerce growth bolstering its numbers.
• Grocery saw a mixed performance in the region with North Asia experiencing good like for-like (LFL) sales due to pantry-stocking while Southeast Asia was hurt by the easing of COVID-19 restrictions and thus a reduction of home meals in favour of dining out. DFI also noted that Southeast Asia faced, and will continue to face, higher operating cost pressures, in particular labour and utilities costs. On a brighter note, Yonghui in China may be turning a corner: it is expected to be profitable this year with consensus earnings estimates for 2022/23 having been revised up by 14%/29% respectively since Jan 22.
• Convenience saw a marked deceleration in sales with Hong Kong and South China business impacted by COVID-19 restrictions, although this was somewhat offset by strong LFL sales in Singapore as it re-opened. With >100 new stores opened in the region in 1H22 (75 in South China), DFI should be well positioned for a post-pandemic recovery in sales.
EARNINGS REVISION/RISK
• We have lowered our earnings estimates for 2022-24 by 1-30% with the majority of the impact coming in 2022 due largely to the negative impact from China’s zero-COVID strategy. Key changes that we have made for 2022 are: a) no growth for grocery revenue vs 4% previously, and b) 1.5% sales growth for convenience segment vs 5% previously. The net effect has been a lowering of our operating margin assumptions from 3.8% to 3.0% for 2022.
VALUATION/RECOMMENDATION
• We maintain our HOLD rating with a fair value of US$2.96 (+3% from previous fair value of US$2.87). We have rolled forward our valuation year to 2023 and thus peg our 2023 EPS estimate to a target multiple of 23x which is 1SD below its five-year average PE of 30.4x (excluding 2020/21). We believe that the discount to its five-year average PE is fair and reasonable given the continued challenges DFI is facing as a result of China’s continued strict imposition of its zero-COVID strategy. EPS revision momentum for DFI continues to be negative and has yet to trough, in our view. Its North Asia earnings are likely to remain highly subjective to the vagaries of government policy in the near to medium term.
SHARE PRICE CATALYST
• Change in the Chinese government’s COVID-19 strategy