• Still NEUTRAL, new USD2.92 TP from USD3.09, 9% upside and 6% yield. We keep our call, as we see an expected recovery in 1H23 earnings offset by a weaker Yonghui Superstores (Yonghui) bottomline. Our investment thesis stays unchanged – await a better outlook from China tourist arrivals to Hong Kong, and more-improved grocery consumption environment in Singapore, China, and Hong Kong. We stay cautious for now over a more aggressive recovery till Dairy Farm’s key markets’ local supermarket consumption and China outbound tourist numbers pick up.

• Core earnings within expectations; Yonghui disappoints. 1H23’s operating earnings of USD93m (+22.8% YoY) were in line with our estimates. Revenue was flat at USD4.5bn (+0.2% YoY) with a 16% YoY decline in grocery retail sales to USD1.7bn – partly due to the sale of its Malaysian grocery retail business along with lacklustre consumer sentiment and 2022’s high base. This was offset by 9% and 23% YoY improvements (to USD1.2bn each) in the convenience store (7-Eleven’s recoveries in Singapore and China) and health & beauty (recovery and growth in Malaysia, Indonesia, and Hong Kong) segments. Core operating margins improved 1.2ppts to 3.4% (improvements in the convenience store and health & beauty divisions were mitigated by margins pressure for the grocery retail segment). However, associates and JV contributions of USD5m were weaker than expected despite seeing a turnaround, largely due to disappointments in Yonghui’s recovery. Maxim’s Caterers’ (Maxim’s) 1H23 numbers lagged our recovery expectations too. An interim dividend of 3 USD cents was declared, in line with expectations.

• Earnings recovery still on the cards. We continue to anticipate an earnings recovery, albeit at a slower pace – this will be led by outlet expansion, new products, and investments in backend efficiency systems. Improvements in Hong Kong’s tourist arrivals, and pick-up in Hong Kong and Singapore’s supermarket sales, will also support earnings recovery, in our view.

• Trim FY23F-25F earnings by 5-7% each; reducing Yonghui expectations. While core earnings were within estimates, the bottomline disappointment came from associates and JV contributions – led by the grocery retail segment, particularly Yonghui. Hence, we have left our core revenue and operating profit estimates unchanged, but lower our forecasts for Yonghui. This results in 5-7% lower FY23F-25F earnings. Our SOP valuation for DFI now has a lower fair value for Yonghui, while the TP is accordingly lowered by 6% to USD2.92.

• Risks to our recommendation include slower-than-expected recoveries in consumption spending and higher-than-expected costs, which should ultimately lead to lower margins and earnings. There will be upside earnings risks should the opposite of the above scenarios play out. As DFI’s ESG score is 3.0 out of 4 – in line with our country median – we have a 0% ESG premium/discount to its intrinsic value in deriving our final TP.

Source: RHB Research - 1 Aug 2023