Deal entails long leaseback of ground level to ensure DFI&rsquo s continued supermarket operations

 

The transacted price for the two-storey Jelita Shopping Centre is higher than the S$85 million guide price stated when an expression of interest exercise for the property was launched in June. 

DFI RETAIL Group (DFI) has sold Jelita Shopping Centre for S$91.68 million to a low-profile property investor, Peter Koh Pang An, and his wife. The couple are Singapore citizens.

 

A rags-to-riches entrepreneur who used to be active in the Singapore precision engineering scene, Koh owns Platinum 28, a freehold industrial building at 28 Genting Lane, which he acquired from Ho Bee in 2011. He also owns suburban malls in Australia and New Zealand.

 

The transacted price for the 999-year leasehold Jelita Shopping Centre, at the corner of Holland Road and Jalan Jelita, is higher than the S$85 million guide price JLL went to the market with in June.

 

The exclusive marketing agent for the two-storey mall conducted an expression of interest exercise, which is said to have garnered more than 20 offers when it closed on Jul 18. This was followed by two rounds of shortlisting, one later in the same month and the other in August.

 

Jelita Shopping Centre&rsquo s price reflects about S$2,727 per square foot (sq ft) on the existing net lettable area of 33,621 sq ft.

 

Seller DFI has entered into a long leaseback arrangement with the buyer for the ground level of the mall, which is fully occupied by DFI&rsquo s Cold Storage supermarket brand. The outlet spans about 20,000 sq ft.

 

DFI will lease back this space for an initial 10-year term, with options to renew the lease for four subsequent terms of five years each, resulting in a maximum of up to 30 years.

 

Tenants on the second floor include Starbucks, Delifrance, Guardian and Times Bookstore.

 

Koh plans to refurbish Jelita Shopping Centre in tandem with DFI&rsquo s plans to upgrade and rebrand the current Cold Storage supermarket in the mall as a CS Fresh outlet next year.

 

Jelita Shopping Centre has 57 car parking spaces in its basement.

 

The mall, which opened in January 1981, sits on 46,616 sq ft of land. The site is zoned for commercial and residential use under the Urban Redevelopment Authority&rsquo s latest Master Plan.

 

The building&rsquo s existing gross floor area (GFA) of 46,427 sq ft is less than half the 102,555 sq ft maximum GFA allowed for the site, based on the 2.2 plot ratio for the site in the latest Master Plan. This points to significant redevelopment potential for the property.

 

JLL Singapore&rsquo s senior director of capital markets Terry Wong, who brokered the sale of Jelita Shopping Centre, noted, &ldquo Amid the elevated interest rate environment, we received overwhelming interest for the asset and the outcome was very encouraging.

 

&ldquo In a sale-and-leaseback arrangement, finding the right partner is vital. For Jelita Shopping Centre, we are pleased to be able to match a buyer experienced in the operations of this asset-type overseas and with a long-term rejuvenation vision for the property, with a vendor that wishes to continue serving its loyal customer base in the locale.&rdquo

 

Kampong boy made good

Koh, who is in his late-60s, resides in Singapore. He grew up on a farm in Bukit Timah and had to stop schooling when he was 12 as his parents were financially stretched raising 10 children.

 

The youngster soon found his calling. Koh began his career as an apprentice in a machining workshop. In 1982, when he was in his mid-20s, Koh set up his own business with his entire savings of S$6,000, he said in an interview with The Sunday Times in 2001.

 

He decided to name his enterprise Norelco as it sounded like an American name to him he soon achieved his vision of building up a clientele of multinational companies. In 1999, under an Economic Development Board initiative, Koh&rsquo s company Norelco Precision Engineering merged with Centrelines Engineering and became Norelco Centreline.

 

In 2001, Norelco Centreline Holdings was incorporated and listed on Sesdaq. The company was upgraded to the mainboard of the Singapore Exchange (SGX) in 2003. In the following year, it acquired privately held UMS Semiconductor, a front-end semicon equipment maker, in an all-share deal worth S$271 million. Based on earlier media reports, by late-2004, Koh had sold most of his stake in the merged group, which is now known as UMS Holdings.

 

DFI Retail Group was formerly known as Dairy Farm International until its name change last year. The company, a member of the Jardine Matheson Group, has a secondary listing on the SGX.

 

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

 

The buy call came as DFI&rsquo 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 &ndash a price level that the research house deems &ldquo more attractive&rdquo .

 

At Friday&rsquo s market close, DFI&rsquo s shares were trading at US$2.40, about 14 times the brokerage&rsquo 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&rsquo 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.

 

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.

 

&ldquo 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,&rdquo Yeo noted.

 

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

 

This is in line with RHB&rsquo s estimates that China&rsquo 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.

 

&ldquo We expect DFI&rsquo s China unit &ndash along with Yonghui Superstores &ndash to improve next year, on recovery in domestic demand.&rdquo

A NUMBER of research houses have tweaked their target prices and earnings estimates for DFI Retail Group : D01 -1.86% after the retail company, which counts 7-Eleven, Guardian and Cold Storage among its brand portfolio, swung into the black for the half year ended Jun 30.

 

On Monday (Jul 31), Citi Research upgraded its call to &ldquo buy&rdquo from &ldquo neutral&rdquo while increasing its target price to US$3.28 from US$3.16, as it sees DFI&rsquo s return to profit as an indication of recovery. 

 

&ldquo The near-term recovery outlook is trending better than expected, while the transformation plan from the new management team may be able to help DFI to revitalise the South-east Asia business and build sustainable growth in the longer term,&rdquo said analyst Brian Cho. 

 

Highlighting the health and beauty segment as the main driver of better-than-expected operating margin for H1, Cho believes DFI&rsquo s valuations are currently undemanding amid a better near-term recovery outlook. 

 

The analyst therefore raised his core net profit estimates for the group by 16 per cent to 22 per cent for FY2023 to FY2025, to factor in improved revenue, operating margin assumptions and associate results. 

 

Similarly, DBS Group Research expects DFI to continue picking up in the second half of 2023. It maintained its &ldquo buy&rdquo call while keeping its target price at US$3.80. 

 

DBS analysts said they expect the group to report a &ldquo disproportionately stronger&rdquo H2 driven by the health and beauty, convenience store and restaurant segments. 

 

They see more growth coming from healthcare products compared to pre-Covid times, as such products now command a higher margin. 

 

On the contrary, UOB Kay Hian (UOBKH) and CGS-CIMB are more concerned about DFI&rsquo s under-performing grocery segment and see H1&rsquo s performance as an indication that the group&rsquo s earnings may recover slower than expected. 

 

UOBKH maintained its &ldquo buy&rdquo call on the stock while slashing its target price to US$3.49 from US$3.72, to account for lower FY2023 to FY2025 earnings estimates by up to 46 per cent. 

 

Its analysts now expect a prolonged pace of recovery in several of DFI&rsquo s business segments. 

 

They forecast no revenue growth for the grocery business as opposed to a previous forecast of 3 per cent growth. 

 

They also foresee a 100 to 150 basis-point reduction in FY2023 operating profit margin for the grocery, convenience and home furnishing businesses. 

 

UOBKH nonetheless remained optimistic on DFI&rsquo s health and beauty segment, noting that the group has opened 50 new stores in the first half of 2023 compared to a base of more than 1,200 stores. Its analysts expect more stores to open in Indonesia in the medium term. 

 

CGS-CIMB reiterated its &ldquo hold&rdquo call but lowered its target price to US$2.90 from US$3.40, to reflect a lower price-to-earnings ratio of 15.6 times based on 2024 estimates, compared with the previous 17.2 times multiple. 

 

Analyst Ong Khang Chuen lowered his margin assumptions to result in a 5 per cent to 27 per cent reduction in DFI&rsquo s earnings per share estimates for FY2023 to FY2025. 

 

Although Ong is positive on the prospects of the health and beauty segment, he believes more transformational changes are required in DFI&rsquo s grocery segment in order to sustain the group&rsquo s overall recovery. 

 

Given lower margins in the grocery retail segment versus Covid-19 levels, Ong sees significant challenges in DFI turning around its grocery business.  

 

Ong also highlighted DFI&rsquo s associate Yonghui as a concern. The Chinese supermarket chain continued to report losses as it adjusts its product structure and store format to cater to changing customer shopping habits in China, which adds to the uncertainty over DFI&rsquo s pace of recovery.

 

DFI Retail Group : D01 -0.72% returned to the black with a net profit of US$8 million for the first half of 2023, on contributions from its health and beauty division, as well as its convenience division.

 

The group had chalked up a net loss of US$58 million in the year-ago period. It said on Friday (Jul 28) that the recovery came amid improved trading conditions in Hong Kong and South-east Asia.

 

Earnings per share for the latest half-year came in at US$0.0061, compared to a loss per share of US$0.0425 in the corresponding period a year earlier.

 

The group&rsquo s total revenue, including that of its associates and joint ventures, fell 4 per cent to US$13.5 billion from US$14.1 billion previously. This came on the back of reduced sales at Yonghui, a grocery retailer it operates in mainland China. 

 

In Singapore, DFI Retail, formerly known as Dairy Farm International, is known for its Cold Storage, Giant and Guardian stores. 

 

The group&rsquo s health and beauty division reported over 20 per cent like-for-like sales growth in the first half compared with the year-ago period, it said. Guardian in particular reported strong underlying sales growth, especially in Malaysia and Indonesia. 

 

DFI Retail said: &ldquo While still below pre-pandemic levels, underlying profit more than doubled in the first half relative to the prior year, supported by a recovery in customer traffic, gross margin expansion and effective in-store execution despite pressure from labour shortages.&rdquo

 

Meanwhile, revenue for the group&rsquo s grocery retail division in H1 2023 was lower than the corresponding period a year earlier.

 

&ldquo In North Asia, sales in the prior year were supported by pantry-stocking during the fifth wave of Covid-19 in Hong Kong. South-east Asia grocery retail revenue was also lower, impacted by the divestment of the Malaysia grocery retail business and ongoing cautious customer sentiment driven by rising cost of living pressures,&rdquo the group said. 

 

An interim dividend of US$0.03 per share was declared, and will be paid out on Oct 11. 

 

Ben Keswick, chairman of DFI Retail, said the speed at which business performance returns to pre-pandemic levels will depend on the impact of economic conditions and the pace of recovery in consumer confidence. &ldquo We are confident that the group is well-positioned for growth in the remainder of the year and beyond,&rdquo he added.

 

DFI Retail will have a new group chief executive come Aug 1. Scott Price, who was formerly Asia chief executive officer of Walmart, will succeed incumbent Ian McLeod.

 

DFI Retail Group on Thursday (May 18) reported &ldquo significantly improved&rdquo year-on-year performance for the first quarter ended Mar 31, driven by the reopening of the Hong Kong border and the continued recovery in South-east Asia, the mainboard-listed company said on Thursday (May 18).

 

However, there remains &ldquo some way to go&rdquo before the business reaches the level of overall profitability achieved in 2019, DFI : D01 +0.36% said in an interim management statement. It provided no figures.

 

The group&rsquo s subsidiaries reported a &ldquo modest increase&rdquo in operating profit during the period, the company added, also without furnishing figures.

 

The &ldquo strong recovery&rdquo in the health and beauty and convenience divisions was mostly offset by &ldquo lower results&rdquo in the grocery retail division, the company said, as consumer buying patterns normalised following exceptional performance in the first quarter of 2022 and as digital investments continued.

 

DFI&rsquo s North Asia grocery retail sales were lower than in the equivalent period last year, when demand was boosted by the fifth wave of Covid-19 in Hong Kong. Retail sales in South-east Asia were, in the meantime, crimped by cautious customer shopping behaviour from rising cost-of-living pressures.

 

Overall, grocery retail profitability in Q1 was lower than in the year-ago period, but still higher than Q1 2019.

 

The convenience division reported &ldquo strong like-for-like sales growth&rdquo across all markets in Q1, including Hong Kong and China, DFI said. Overall profitability for the period &ldquo improved significantly&rdquo compared to Q1 last year, but was still below that in 2019.

 

DFI&rsquo s health and beauty division logged &ldquo substantial&rdquo sales and profit growth in Q1. In North Asia, Mannings in Hong Kong reported &ldquo double-digit like-for-like sales growth&rdquo , said the company, adding that &ldquo effective in-store execution led to a record market share&rdquo in the city.

 

Guardian in South-east Asia, particularly in Malaysia and Indonesia, also reported &ldquo strong sales growth&rdquo compared to last year.

 

&ldquo Overall profitability of the division more than doubled, leveraging sales recovery as well as ongoing promotional optimisation and robust cost control,&rdquo said DFI. It added that even if profitability remains below 2019 levels, &ldquo the early pace of recovery is encouraging&rdquo .

 

Sales revenue for home furnishings took a hit in Q1 and was &ldquo behind&rdquo that in the same period last year. &ldquo Sales were impacted by reduced demand for furniture, with border reopening likely driving short-term discretionary spending towards leisure activities, particularly in Hong Kong and Taiwan,&rdquo DFI said. &ldquo Profitability for the division has also fallen relative to the prior year due to these trading challenges, with the impact on profitability partially offset by robust cost control.&rdquo

 

It added that Ikea remains focused on delivering &ldquo increased accessibility through format innovation and new touchpoints&rdquo .

 

On the whole, DFI said it remains optimistic on the outlook for the rest of the year.

 

It noted that global headwinds remain, and that while inflationary pressures are easing, consumer confidence is uncertain.

 

&ldquo Recognising the sustained shift to online digital convenience, the group will continue its investment in digital platforms in order to compete,&rdquo DFI said.

 

DFI was formerly known as Dairy Farm International before its name change a year ago.