DFI Retail Group - UOB Kay Hian 2022-05-24: Headwinds Stronger Than Expected – Downgrade To HOLD


DFI Retail Group - Headwinds Stronger Than Expected – Downgrade To HOLD

  • DFI Retail Group guided for negative earnings growth in 2022 in its 1Q22 interim management statement. Apart from cost pressures and supply chain issues, DFI Retail Group’s earnings are likely to remain highly subjective to the vagaries of government policy in the near to medium term.
  • We cut earnings by 14-48% for 2022-24 with the biggest impact in 2022 as the company accounts for its Yonghui associate’s 4Q21 losses. We lower our rating to HOLD from BUY.

A disappointing 1Q business update.

  • DFI Retail Group (SGX:D01) released a bearish 1Q business update that guided for “full year reported results (that) are expected to be lower than in 2021”, and highlighted that there is a “high level of uncertainty” for the remainder of the year. The bearish guidance is largely the result of headwinds from China’s strict lockdown measures as well as the inclusion of Yonghui Supermarket’s 4Q21 losses in its 2022 numbers.
  • A turn for the worse in the past few months. DFI Retail Group management’s commentary during its results briefing in early March did not presage China’s stringent lockdown in pursuit of eradicating COVID-19. The company had likely factored in some level of re-opening, although it appears that any recovery in its business is likely to be in 4Q22 at the earliest.
  • China supermarket exposure less than super. In mid-May 22, Yonghui Superstores reported its 1Q22 and 2022 results. Given the timing difference between DFI Retail Group and Yonghui’s reporting, the former will have to account for its 20% associate’s 4Q21 loss of RMB1.8b in its 2022 numbers. Thus, the net attributable impact for DFI Retail Group’s 20% stake is a loss of approximately US$54m. We note that while Yonghui’s 1Q22 attributable net profit was significantly stronger at RMB503m (1Q21: RMB23m), this could be due to COVID-19-related stockpiling activity which may taper off as 2022 progresses. We highlight that Bloomberg consensus’ net profit forecast for Yonghui is approximately RMB670m.

A relatively weaker quarter.

  • No revenue numbers were provided and only qualitative comments regarding the company’s business segments were given.
  • From the announcement, it appears that the only segment that displayed a y-o-y increase in revenue and profitability was the health & beauty segment (as well as Singapore’s convenience stores) with grocery and home furnishings both relatively stable vs the year-ago period. The segments that had weaker y-o-y performance were HK/China convenience stores and Maxims.

Inflationary pressures.

  • While food inflation has been a feature of inventory levels will adversely affect its financial performance in the near to medium term.

Downgrading earnings forecast for 2022-24.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-05-24
SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.87 DOWN 3.65