DBS Group Research is keeping a &ldquo buy&rdquo call on DFI Retail Groupwith a higher target price of US$3.60 from US$3.00 previously.

 

In a June 9 report, analysts Chee Zheng Feng and Andy Sim say: &ldquo Our revised target price reflects a higher 16.7x PE peg on higher FY2026 earnings, in line with the peer median given DFI&rsquo s margin profile. We believe this is also justified by the potential for special dividends over the next few years.&rdquo

 

Assuming a 10 US cents payout for FY2025/FY2026, the duo expects total yield to reach an attractive 8% at $2.70 and represent about 6% yield at the revised target price.

 

To recap, DFI has been been actively reshaping its business portfolio to focus on operating control and improving return on capital employed (ROCE) and total shareholder return (TSR). Over the past few years, it has streamlined operations by divesting low-margin, low-advantage businesses, particularly the food segments in SEA.

 

&ldquo The exit from associate stakes in Yonghui and Robinson Retail Holdings Inc (RRHI) means that operations are now largely within management&rsquo s control. Looking ahead, we see ample scope to drive earnings growth by improving operational efficiencies of over US$100 milion, in line with the dual targets of ROCE and TSR uplift,&rdquo say Chee and Sim, expecting every 0.1 percentage point (ppt) improvement in operating margins to result in about 2.2% upside to FY2026 Patmi.

 

The analysts have estimated FY2025 earnings to be at US$269 million, near the high end of management&rsquo s guidance, supported by higher contribution from Maxim&rsquo s and lower net interest expenses. For FY2026, they anticipate further margin expansion for the remaining businesses and continued interest savings, driven by a full-year impact from lower debt levels and reduced lease liabilities following the sale of DFI&rsquo s food business in Singapore.

 

&ldquo These factors are expected to more than offset the US$14million FY2025 earnings contribution lost from the RRHI disposal,&rdquo say the analysts.

 

Post the RRHI and Giant Singapore sale, DFI is sitting on significant cash reserves and are expected to spend them on reinvestments, special dividends and potential mergers and acquisitions (M& A).

 

&ldquo Our screen of potential M& A targets that are a good strategic fit remain expensive, with elevated PE multiples and book value premiums. If consummated at premium valuations, risk of goodwill write-offs is elevated,&rdquo say the analysts, as they believe a more prudent and value-accretive approach is to reinvest in existing operations to enhance efficiency, while maintaining a manageable special dividend payout of 10 US cents over the next few years as the company awaits better opportunities.