Brokers’ take: RHB upgrades DFI Retail Group to ‘buy’ on market recovery

RHB upgraded its call on DFI Retail Group to “buy” from “neutral” with an unchanged target price of US$2.92 on anticipated market recovery and the stock’s attractive valuation.

The buy call came as DFI’s share price fell to US$2.47 at midday break on Monday (Aug 28), representing a 6.8 per cent decline since Aug 1 – a price level that the research house deems “more attractive”.

At Friday’s market close, DFI’s shares were trading at US$2.40, about 14 times the brokerage’s estimates for FY2024 earnings, which is two standard deviations below the 10-year pre-pandemic historical average.

Its share price was also lower than that of its supermarket peer Sheng Siong, which was trading at 16 times its forecasted earnings.

RHB analyst Alfie Yeo said that given DFI’s exposure to China, the recent share price decline is due to market weaknesses in China and Hong Kong.

Disappointing macroeconomic data from China, including those for retail sales, industrial production and fixed asset investment, has greatly affected the investor sentiment, said Yeo.

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This is in addition to the quarter-on-quarter declines in visitor arrivals from Mainland China to Hong Kong, as well as in its domestic supermarket sales as reflected in the latest June data.

Yeo noted that DFI, which counts 7-Eleven, Guardian and Cold Storage within its brand portfolio, derived close to 70 per cent of its FY2022 revenue from its North Asia operations.

However, Yeo has maintained his earnings projections for DFI, as he believes that the earnings drivers that could lead to a recovery in FY2024 remain intact.

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“We see earnings driven by sturdy domestic consumption and a pick-up in tourism in Hong Kong, on top of continued post-pandemic reopening and a recovery in the Asean economies,” Yeo noted.

Despite cautious consumer sentiment, Yeo also expects the Chinese government’s 11-point domestic consumption plan to stimulate China’s economy.

This is in line with RHB’s estimates that China’s GDP is expected to rise from 3 per cent in 2022, to 4 per cent in 2023, and 4.5 per cent in 2024.

“We expect DFI’s China unit – along with Yonghui Superstores – to improve next year, on recovery in domestic demand.”