AS THE latest Covid-19 variant Omicron continues to spread through the key operating markets of Dairy Farm International (DFI) D01 : D01 0%, RHB Research has downgraded its rating on the mainboard-listed retail group to "neutral" from "buy".

The move comes after DFI posted a 62 per cent decline in net profit on the back of lower revenue amid the pandemic, which constrained the group's normal store operations and reduced traffic.

RHB's lower price target of US$2.88 compared to US$4.42 previously implies 18 times FY2022 price-to-earnings estimates, close to -1 standard deviation from the stock's 5-year mean.

This valuation is justified by a challenging and uncertain recovery outlook, said the research house in a report on Monday (Mar 7).

The research house has cut earnings estimates for FY2022 to FY2023 by 24 to 33 per cent to account for lower consensus estimates for DFI's associate Yonghui, which incurred a significant loss over FY2021.

It has also factored in "more realistic" assumptions for the group's North Asia markets, which accounted for 75 per cent of total sales in FY2021.

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"Following its sharp earnings decline in FY2021, Dairy Farm's outlook is now challenging and uncertain… Notwithstanding our expectation of a slow earnings recovery to the pre-pandemic base level, we believe its current valuation has priced in most of the weakness - which justifies our stock rating," stated RHB's research team.

RHB however remains positive on DFI's confidence in capitalising on a recovery in consumer spending once conditions normalise, as guided by its management.

It also believes the group's recent initiative to develop its own-brand products will allow the company to drive better value for its customers.

CGS-CIMB has also cut its price target on DFI to US$2.90 from US$3.50, while maintaining "hold" on the stock.

In view of current operating environment challenges, the brokerage's new target multiple was lowered from 18.5 times to 16 times 2023 earnings estimates, which is 2 standard deviation points below DFI's 5-year historical mean.

Its core earnings per share estimates for FY2022 to FY2023 have been cut by 24.2 to 27.5 per cent on the back of a slower pace of sales recovery for DFI's health and beauty segment, as well as lower margin assumptions and higher losses from Yonghui.

Commenting on Hong Kong's worsening Covid-19 situation, CGS-CIMB's analysts highlighted in a report last Friday that recovery expectations for DFI have been delayed as a result.

On the contrary, UOB Kay Hian (UOBKH) has raised its target price on DFI to US$3.65 from US$3.60 while keeping "buy" on the stock.

Its earnings projections for FY2022 and FY2023 have been raised by 7 per cent and 4 per cent, respectively, to account for better trading prospects post the Covid-19 peak.

While its FY2021 net profit came in weaker than expected, UOBKH analyst Adrian Loh said he remains cautiously optimistic on DFI's prospects on the belief that it is now past its trough earnings.

He also believes operating profit margin expectations are "reasonable" at present.

"In 2022, we believe that most of DFI's key geographic segments should continue their reopening and recovery trajectory as the region learns to live with Covid-19 as an endemic," said Loh in a report on Monday.

"While Hong Kong remains a key problem with zero visibility on its transition to normalcy, we expect panic buying to bolster some of its results, and expect the other parts of DFI's key segments to do better year on year in 2022, particularly associates and home furnishings," he added.

Shares of DFI were trading at US$2.54, down US$0.10 or 3.8 per cent, as at 11.15 am on Monday.

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