DFI Retail Group Holdings: Balancing value, growth, and strategic investments
- FY24 core net profit at USD201mn, in line with our estimates
- Guided for FY25 core earnings of USD230-270mn, supported by 2% organic growth
- Maintain our FY25F estimates, with exclusion of Yonghui’s losses post disposal as a key earnings
- Maintain BUY at unchanged TP of USD3.00
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On the lookout for M&A targets, but do not rule out special dividend
DFI Retail (DFI) reported FY24 core earnings of USD201mn, a 30% y/y increase. The growth was largely driven by margin expansion in its food and convenience business. The results came in line with our estimates and consensus.
DFI recorded an overall loss of USD245mn, primarily due to one-off impairments and divestment losses. This included a USD120mn impairment on San Mui (Macau), a USD231mn impairment on Robinson Retail, and a USD114mn loss from Yonghui’s divestment. Additionally, a USD130mn exchange translation loss is expected upon completion of the Yonghui sale on 26 Feb 25.
EBIT growth was strong, rising 17% y/y to USD349mn. EBIT exceeded both our estimate of USD323mn and the consensus forecast of USD318mn. The upside surprise was driven by better-than-expected performance in convenience stores and home furnishing, which outperformed expectations.
Proposed final dividend of 7UScts. Combined with the 3.5UScts interim dividend, it brings total FY24 dividends to 10.5UScts. This translates to ~60% payout ratio on core net earnings excluding Yonghui losses.
Guided for FY25 core earnings at USD230-270mn, supported by 2% organic revenue growth. We believe this range is reasonable, with our FY25F estimate at USD259mn, slightly above the midpoint but well within guidance. The significant USD40mn range reflects the current macroeconomic uncertainties.
Segmental analysis
Health & Beauty (H&B)
Stable performance in FY24 on high base in FY23 with FY24 EBIT at USD211mn, +2% y/y. Like-for-like sales in Hong Kong declined 2% y/y, reflecting the absence of last year’s boost from consumption vouchers. In Mainland China, the company shifted towards a digital-first model, aligning with evolving consumer shopping habits. Southeast Asia remained a bright spot, particularly Indonesia, where sales were strong.
Expect sustained growth and further margin expansion in FY25. Management highlighted that it plans to expand the store count for this segment in Southeast Asia markets. Coupled with initiatives in Hong Kong, like the health pod, to increase basket size, and the pharmacare programme, to improve traffic, this should more than offset the effect of store closures in Mainland China and deliver revenue growth. Meanwhile, management views an improved health product mix and growth of its own brands as key margin expansion drivers.
Soft macroeconomic headwind in North Asia to persist. We believe Chinese tourist numbers could remain subdued due to the prevailing macroeconomic conditions and act as headwind. Accordingly, we pencilled in 1% revenue growth in FY25F, below the 2% organic growth guidance of the overall business. We expect the margin to remain stable at 8.6%.
Convenience
Strong performance in FY24 on higher ready-to-eat (RTE) mix with FY24 EBIT at USD102mn, +17% y/y. Like-for-like sales declined 5% y/y, largely attributable to lower cigarette sales. Excluding cigarette sales, revenue rose 2% y/y, driven by 10% y/y growth in the higher margin RTE segment.
Further headroom to grow RTE mix in FY25F and drive margin expansion. Management is investing in store modifications in Singapore and Hong Kong to expand RTE offerings. In addition, it is expanding into Guangdong via a franchise model that requires no capex outlay. Given that RTE accounts for 16% of sales in Hong Kong and 23% in Singapore, there is significant room for further penetration.
Supported by downtrading tailwind. We are bullish on this segment and have pencilled in 2% revenue growth in FY25F and margin expansion from 4.3% to 4.5%, supported by an increasing RTE mix.
Food
Strong performance in FY24 on turnaround in Singapore business with FY24 EBIT at USD58mn, +88% y/y. Reported sales declined 5% y/y, but excluding the divestment of its Malaysia and Indonesia businesses, the decline was only 2% y/y. In Hong Kong, the business was impacted by northbound travel for most of FY24, though signs of stabilisation emerged in 4Q24. A key driver of profitability was a 20% y/y increase in e-commerce sales, supported by its partnership with Foodpanda. Singapore turned profitable in 4Q24, benefiting from store optimisation, cost control, and an improved sales mix.
Push for value proposition with own brands. Management is pushing its value proposition through its own brand products, as we observe consumers are purchasing the same number of items but trading down to lower priced items.
Optimistic on improved profitability with higher own brand mix supported by downtrading. We pencilled in a continued 2% decline in revenue due to ongoing downtrading, particularly in Hong Kong, but higher profitability driven by margin expansion from a higher own brand mix and continued profitability in Singapore.
Home Furnishing
Besieged by competition and soft property market, with FY24 EBIT at USD16mn, -13% y/y. Like-for-like sales declined 11% y/y, largely due to softer sales in Hong Kong and Indonesia on intensified competition and weak property market activity. This was slightly offset by resilient performance in Taiwan. Despite weaker sales, management’s cost-control efforts helped margins rebound in 2H24 to 3.7% from 0.9% in 1H24.
Focus on value-driven omnichannel approach and food proposition. The company is shifting its strategy to focus on product quality and total cost competitiveness while leveraging food offerings under its Hero brands to attract more foot traffic. With potential tailwinds from lower interest rates driving property purchases, management is optimistic about a return to growth.
Continue to remain cautious on this segment. While the segment performed above our expectations in FY24, we remain wary of the slow property market. Accordingly, we pencilled in a 0% revenue growth forecast with stable margins at 2.3%.
Maxim’s
Hurt by soft China consumption, with underlying profit of USD66mn, down 16% y/y. Overall sales declined 1% y/y, with Hong Kong restaurant sales remaining resilient, supported by a diversified mix of cuisines. However, Chinese restaurant performance remained weak, partially offset by better results from Japanese and quick-service restaurant (QSR) concepts. Underlying profit saw a more significant decline due to lower mooncake sales, which is a major profit contributor.
Pivot to value offerings given the downtrading trend. To counter the impact of downtrading, Maxim’s is shifting towards value-focused offerings and expanding new store concepts such as bakeries with short payback periods.
Expect profitability pressure with further slowdown in mooncake sales on soft macroeconomics. We took a more cautious approach and forecast a 1% revenue decline in FY25, with margins declining from 4.3% in FY24 to 4% in FY25F.
Robinsons Retail
Strong profitability growth at USD17mn, +15% y/y. Like-for-like sales grew by a low single digit. Operating profit was driven by strength in the food and drugstore segments.
Sale of stake could be in the cards. While there was no clear communication from management, the CEO hinted at his preference of being an operator of businesses, which could suggest potential divestment of DFI’s minority stake in Robinsons Retail, which is valued at USD200mn based on its last traded price of PHP37.6/share.
Corporate Actions
On the lookout for M&As. With the conclusion of the Yonghui transaction on 26 Feb 25, the company is in a net cash position. While debt repayment will be prioritised, management has cited M&As as a potential use of capital. Management is considering M&A opportunities in existing formats and geographies, with a focus on earnings-accretive, controlling stakes. Based on our balance sheet analysis, we estimate that DFI could comfortably undertake an acquisition of up to SGD400mn without significant financial strain.
Dividend payout at 60%, but special dividend not out of the question. The conservative payout approach allows DFI to retain firepower for potential acquisitions, though we believe it will not hold excess cash for an extended period. If no attractive M&A targets emerge in the near term (one to two years), a special dividend remains a possibility to enhance shareholder returns.
Summary
We outline the key drivers of our 29% y/y earnings growth estimate in Chart 1. The strong FY25F growth is mainly one-off, driven by Yonghui’s disposal. However, DFI has room for margin expansion, which could sustain mid-to-high single-digit earnings growth in its core business over the medium term.
FY Dec | 2H2023 | 1H2024 | 2H2024 | % chg y/y | % chg h/h |
Revenue | 4,596 | 4,405 | 4,464 | (2.9) | 1.3 |
Cost of Goods Sold | (2,936) | (2,833) | (2,807) | (4.4) | (0.9) |
Gross Profit | 1,659 | 1,572 | 1,657 | (0.1) | 5.5 |
Other Oper. (Exp)/Inc | (1,493) | (1,404) | (1,483) | (0.7) | 5.6 |
Operating Profit | 166 | 168 | 175 | 5.2 | 4.0 |
Other Non Opg (Exp)/Inc | 0 | 0 | 0 | - | - |
Associates & JV Inc | 50 | 3 | 40 | (21.2) | 1,216.7 |
Net Interest (Exp)/Inc | (75) | (72) | (79) | (5.4) | (8.6) |
Exceptional Gain/(Loss) | (99) | 20 | (465) | (370.2) | nm |
Pre-tax Profit | 43 | 118 | (329) | nm | nm |
Tax | (18) | (24) | (6) | (68.2) | (76.1) |
Minority Interest | (1) | 1 | (5) | (372.7) | nm |
Net Profit | 24 | 95 | (340) | nm | nm |
Net profit bef Except. | 123 | 76 | 125 | 1.8 | 65.3 |
EBITDA | 216 | 171 | 214 | (0.9) | 25.2 |
Margins (%) |
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Gross Margins | 36.1 | 35.7 | 37.1 |
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Opg Profit Margins | 3.6 | 3.8 | 3.9 |
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Net Profit Margins | 0.5 | 2.2 | (7.6) |
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