DFI Retail Group Holdings Ltd: Significant firepower for both special dividends and M&A
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- Post RRHI and Giant SG sale, DFI has significant cash reserves for reinvestment, special dividends, and M&A
- Potential M&A targets remain expensive with high write-off risk; reinvestment and special dividends are better use of capital while waiting for the right opportunities
- Adjusted FY25F/26F core earnings by +4%/+3% to reflect divestments and strong 1Q25 performance
- Hike TP to USD3.60, largely on higher PE peg of 16.7x in line with peer median, supported by special dividend payouts
What has happened in the last 3 months?
On 24 Mar 2025, DFI announced the divestment of its Singapore Food business to Macrovalue – the same party that acquired its Malaysia Food operations in 2023. The transaction is valued at SGD125mn (~USD93mn) and is expected to be completed by 4Q25.
Shortly after, on 30 May 2025, DFI disclosed the sale of its 22.2% minority stake in Robinsons Retail (RRHI) for PHP15.8bn (~USD283mn), executed as part of RRHI’s share buyback programme. The deal was completed at a 36% premium to the last closing price, reflecting strong negotiation by management, in our view.
Including the ~USD617mn received from the earlier sale of its Yonghui stake, DFI has now generated approximately USD1bn in total divestment proceeds. Of this, USD617mn has already been used to repay debt, placing the company in a significantly stronger net cash position.
What are the implications of the asset divestments and earlier-than-expected debt pare down?
We believe the implications can be broken down into operational and financial aspects.
Operations
Associate contribution from RRHI – Based on equity accounting of RRHI’s earnings from 4Q24 to May 2025, we estimate a contribution of ~USD14mn, lower than our earlier forecast of USD17mn. However, this shortfall is expected to be more than offset by our revised forecast for Maxim’s.
Previously, we had conservatively projected Maxim’s contribution at USD61mn for FY25F, implying a 5% y/y decline. Following 1Q25 commentaries indicating a strong recovery in profit contribution, we now forecast Maxim’s operating profit at USD67mn, representing a 5% y/y increase.
Lower net interest expenses – This improvement arises from three components: Interest income, debt interest expenses, and lease interest costs.
- Interest income: We assume a conservative ~2% yield on average cash reserves, leading to a projected uplift of SGD4.6mn in FY25F interest income. Whereas FY26F interest income is expected to remain stable for reasons elaborated later.
- Interest expense: With debt reduction occurring earlier and more aggressively than anticipated, we estimate savings of USD6mn and USD11mn in interest costs for FY25F and FY26F, respectively, versus our initial estimates.
- Lease interest costs: The disposal of DFI’s SG Food business, expected to be completed in 4Q25, will reduce associated lease liabilities. As such, we estimate FY26F lease interest costs could be ~USD9mn lower than prior forecasts.
Overall, supported by strong 1Q25 performance, we believe DFI is well positioned to deliver robust core earnings growth of 34% y/y in FY25F and 8% y/y in FY26F.
After accounting for the final dividend payout on 14 May 25, and projected operational cash flow, we estimate that DFI should close the year with ~USD580mn in net cash.
How will DFI use this surplus cash?
Management has signalled to the market that its cash could be deployed on three fronts: (i) M&As, (ii) dividends, and (iii) reinvestment into existing business,.
What are the potential strategic targets?
DFI’s future acquisitions are likely to focus on resilient formats within the SEA region. We believe any potential acquisition will most likely be in the convenience store (CVS) or health & beauty (H&B) segments, given their more resilient operations and healthier operating margins. Within SEA, we narrow the focus to Vietnam, Indonesia, and Malaysia, where DFI already has an established presence and operational familiarity.
The company has financial capacity to support a sizeable acquisition. Based on our net cash projections and assuming a prudent 30% debt-to-equity ratio, we estimate that DFI could allocate up to ~USD500mn towards acquiring a majority stake (≥50%) in a target. Among listed or recently delisted players with publicly available financials, Big Pharmacy in Malaysia and Long Châu in Vietnam emerge as strong strategic fits with DFI’s existing portfolio (see Table 1).
High valuations and structural limitations present significant risks to any potential acquisition. Despite strategic alignment, current valuations for potential targets remain elevated, typically in the 25-30x P/E range. As is common with retail formats, most store locations are leased, resulting in relatively low net asset bases, increasing the risk of overpaying relative to book value. While our analysis is based on a limited set of companies identified from Euromonitor’s market research, we expect similar valuation premiums for comparable targets across the region.
Patience and internal reinvestment remain prudent. Given the potential for significant goodwill and the risk of future write-downs – echoing prior experiences with Yonghui and RRHI – we believe DFI may be better served by waiting for more favourable valuations. In the meantime, reinvesting in core operations and distributing a portion of excess cash via special dividends offers a more balanced and shareholder-friendly approach.
Why is a patient approach to M&As advisable for the company?
No earnings gap from RRHI divestment. As highlighted above, a combination of organic growth and net interest savings could more than offset the loss of RRHI’s earnings from FY26F onwards. With earnings still growing at a healthy high single digit in FY26F, the company may be in no rush to acquire for growth.
While revenue growth may be constrained, there is substantial upside in earnings through operational efficiency gains. With the bulk of DFI’s revenue coming from the relatively mature Hong Kong market, top-line growth is expected to remain limited. However, we see potential of >USD100mn in earnings growth driven by improvements in operational efficiency. This upside can be unlocked through disciplined execution and reinvestment into the existing business, although some gains will depend on a more supportive macroeconomic environment.
What is an appropriate amount to distribute as special dividend?
Dividend yield >7% could reinforce management’s commitment to TSR. With local banks and REITs offering 6%-7% yields in FY25F, a yield of >7% based on a SGD2.70 share price could highlight DFI’s focus on enhancing shareholder value. In our view, it could also help address investor concerns about the potential misallocation of excess cash reserves. This payout level would correspond to a special dividend of ~7UScts per share.
Payout range of 7–10 UScts balances shareholder returns with financial flexibility. While rewarding shareholders is important, maintaining a healthy equity base is equally critical. As debt-to-equity remains a key investor metric, an overly aggressive dividend could shrink the equity base and reduce future debt headroom. Based on our estimates, a special dividend within the 7–10 UScts range, on top of normal dividends from ongoing operations, should keep the equity base stable while preserving ample cash reserves for future M&A opportunities.
Assumed a 10UScts payout, implying an 8% yield and reinforcing capital discipline. Our forecast assumes a 10UScts special dividend, at the high end of the potential range. This, together with normal dividends of c.12 UScts, would deliver an attractive 8% yield based on a SGD2.70 share price. In our view, such a payout would provide meaningful value to shareholders and demonstrate management’s prudent capital allocation strategy.
How do we value the company?
Lift TP to USD3.60 on higher earnings and higher PE peg of 16.7x in line with peer median. Our analysis shows a moderate correlation (R = 0.55) between forward P/E ratios (FY26) and operating margins (see Chart 1), supporting our use of the peer median as a reasonable benchmark (see Table 3). This valuation is further supported from a yield perspective – if the company issues a 10UScts special dividend, the total dividend for FY25F would be 22UScts, translating to a 6.1% yield on our USD3.60 TP, which is broadly comparable to local REIT and bank yields.
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