Brokers’ take: CGS-CIMB lowers target price of DFI Retail Group with ‘bumpy’ recovery ahead

CGS-CIMB on Monday (Jun 27) lowered its target price for DFI Retail Group (DFI) to US$2.70 from US$2.93 amid a continued challenging operating environment, though it still maintains a “hold” position on the counter.

The new target price implies a price-to-earnings ratio (P/E) of 16 times for FY2023, following a cut in earnings per share (EPS) estimates from FY2022 to FY2024 by 1.1 per cent to 52.6 per cent to account for lower revenue and margin assumptions.  

While CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan are of the view that “the worst is likely over” for Hong Kong retail sales with the easing of pandemic restrictions and the rolling out of the Hong Kong’s Consumption Voucher Scheme, they believe a “bumpy path to recovery” still lies ahead for DFI. 

The analysts foresee “significant” challenges to a near-term border reopening between Hong Kong and China with the divergence in their Covid strategies. 

“We further delay our recovery expectations for DFI’s Health and Beauty segment (which were) the biggest earnings contributor for DFI pre-Covid, as we think it is unlikely to see a meaningful return of Chinese tourists in FY2022,” they add. 

Additionally, the research team predicts weaker margins for DFI in FY2022 due to various macro challenges including higher pandemic-related costs, supply chain constraints and higher utility expenses.

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Also noting DFI’s intent to further invest in e-commerce, the analysts expect “elevated” expenses in the medium term and forecast DFI’s operating margin to see further compression of 1.1 percentage points year on year in FY2022 and operating profit to fall by 32 per cent year on year. 

While the research team sees upside in the potential turnaround in DFI’s associate Yonghui with a forecasted return to profitability in FY2022, they believe it is “not enough to turn the tide”, and expect DFI’s net profit to fall 17 per cent year-on-year in FY2022. 

Shares of DFI closed flat at US$2.97 on Monday.