DFI Retail Group (“DFI”) (SGX:D01) today announced that it has entered into an agreement with leading Southeast Asian retail group Macrovalue with respect to the divestment of its Singapore Food business, which includes the Cold Storage, CS Fresh, Jason’s Deli and Giant brands in a deal that is worth S$125 million.
The acquisition includes 48 Cold Storage stores under its CS Fresh, CS Gold, Cold Storage and Jasons Deli brands, as well as 41 Giant stores and two distribution centres in Singapore.
Rationale for sale
The sale may come as a surprise to some investors. After several years of losses, DFI Retail Group’s supermarket operations in Singapore became profitable in 2024, owing in part to a strategy of shutting some Giant and Cold Storage stores in estates where the brands are no longer relevant, and reopening them in locations with greater sales potential.
Despite returning to the black, DFI expects its supermarket revenue in Singapore to remain stable at best amid heavy competition, and it sees better growth and margins from its 7-Eleven convenience business moving forward.
Therefore, DFI will pivot its focus and resources in Singapore towards the Guardian and 7-Eleven businesses to drive further growth, improved customer experience and enhanced returns. This transaction aligns with DFI’s strategic focus on delivering long-term value to shareholders.
In today’s environment of rising food costs and inflation, it is essential to leverage scale and operational efficiencies to protect customers from price volatility while maintaining quality and service standard.
In summary, DFI does not believe it is able to provide the required levels of service to consumers as well as secure the required returns on equity for its investors in the Singapore grocery market.
Therefore, we think this is a red flag as selling a business at a fairly low price after putting efforts to turnaround the business just comes across as odd. We would have thought that DFI would take the opportunity to push for further improvements. If DFI is not able to manage the grocery retail business in Singapore, a city-state with a stable macro environment and strong consumer spending, albeit with rising cost pressures, we are unsure if DFI can deliver on its other businesses, especially the Health & Beauty segment which includes the Guardian stores.
In addition, while not a meaningful and fair comparison, as a reference point, we note that Sheng Siong has a market cap of nearly S$2.5 billion with 77 outlets while DFI has just sold 89 outlets at S$125 million.
Who is the buyer Macrovalue?
Macrovalue was set up in 2022 by businessmen Andrew Lim Tatt Keong and Gary Yap Keng Fatt.
A former lawyer, Mr Lim entered the retail business in 2000 when he bought into Malaysia’s GAMA Group, which operates a departmental store in Penang. In 2002, he became known for buying the iconic Sogo department store in Kuala Lumpur from its Japanese owners.
This is not the first transaction between DFI & Macrovalue.
DFI entered the Malaysian market 24 years ago through the acquisition of Giant. In Feb 2023, it exited the Malaysia market by selling its grocery retail assets to Macrovalue—a then newly setup group—as the grocery retail industry landscape became increasingly competitive.
In Malaysia, DFI had a total of 40 Giants, eight Mercatos, two Cold Storages, one TMC and 40 Giant Mini stores. At that time, the transaction value was not disclosed but from subsequent review of the financials, we knew that DFI incurred a loss on sale of subsidiaries amounting to US$49.1 million, including a cumulative exchange translation loss of US$48.7 million.
DFI essentially disposed of its interest at a nominal amount as the Malaysian retail grocery business was loss-making and deep in the red. Macrovalue had to assume liabilities that the DFI Malaysian retail business grocery had.
As Macrovalue already operates Cold Storage and Giant in Malaysia, the Singapore acquisition will allow it to consolidate operations across both countries, improving supply chain efficiencies and enhancing customer experience.
Mr Lim added that Macrovalue’s operations in Malaysia will support Cold Storage’s Singapore business through supply chain and procurement enhancements.
What will the supermarket landscape be like?
While there is no precise data due to the different type of retail formats, it is estimated that Singapore has nearly 600 supermarkets, with the market dominated by NTUC FairPrice with about 50% market share. We know that DFI has nearly 90 outlets while Sheng Siong has around 80 outlets. The remaining outlets would belong to smaller players like Prime as well as boutique players like Little Farm.
We think that, at the onset, competition would increase as a new player would put in new efforts to stabilise operations and gain market share.
The Cold Storage and Giant target markets are fundamentally different. We think that while the focus is on efficiency of operations, it is likely that Macrovalue would attempt to carve out a value proposition for Giant as Giant now competes very closely with Sheng Siong (SGX:OV8).
There will also likely be renewed competition between Cold Storage and the premium supermarket brands.
Macrovalue may also attempt to increase market share by launching a new reward program, as the current Yuu rewards program belongs to DFI.
What it means for DFI shareholders
DFI is a conglomerate with total revenue of US$25 billion across its group (with a share of US$9 billion). This is a small part of the overall business.
The DFI Group (including associates and joint ventures) operates a portfolio of well-known brands across six key divisions.
The principal brands and categories are:
Health and Beauty
• Mannings on the Chinese mainland, Hong Kong and Macau S.A.R.; Guardian in Brunei, Indonesia, Malaysia, Singapore and Vietnam.
Convenience
• 7-Eleven in Hong Kong and Macau S.A.R., Singapore and Southern China.
Food
• Wellcome and Market Place in Hong Kong S.A.R.; Cold Storage and Giant in Singapore; Lucky in Cambodia; and Robinsons in the Philippines.
Home Furnishings
• IKEA in Hong Kong and Macau S.A.R., Indonesia and Taiwan.
Restaurants
• Hong Kong Maxim’s group on the Chinese mainland, Hong Kong and Macau S.A.R., Cambodia, Laos, Malaysia, Singapore, Thailand and Vietnam.
Maxim’s is also the licensee of leading international brands including COVA, Genki Sushi, Shake Shack, Starbucks Coffee and The Cheesecake Factory.
Other Retailing
• Robinsons in the Philippines operating department stores, specialty and DIY stores.
What should investors look forward to?
Investors should note that the Singapore grocery business is just a small part of the overall business. While there are cross selling and efficiency opportunities between the Health and Beauty, Convenience and Food segments, unfortunately, DFI was not able to keep the Food retail segment in Singapore and Malaysia profitable enough to retain it within its portfolio.
As at 31 Dec 2024, DFI has nearly US$700m in borrowings and US$300m in cash. Therefore, a S$125 million (US$92 million) transaction is not likely to lead to a significant dividend. However, investors would also note that the disposal of Yonghui by DFI to Miniso has brought in another US$623 million in cash.
With these two disposals, DFI is now in a net cash position of US$400 million vs a net debt of US$400 million as at 31 Dec 2024.
DFI will continue to streamline their businesses and while DFI would likely distribute some excess capital, we believe this would be minimal and DFI would also reinvest a lot of the proceeds in various parts of their businesses which tends to be capital intensive.
Therefore, investors should look ahead to the future plans for the business and understand whether DFI would do to return a sustained profit and return on equity which would naturally translate to stable recurring dividends from operating profits.
DFI has also said that it was particularly optimistic about the growth prospects for its health and beauty business, which makes up some 55% of its total operating profit.
Initial share price reaction is positive
With any divestment of an underperforming business, the stock market tends to react positively at the onset.
DFI is focused on building a sustainable business, with a 5-year sustainability development timeline (2020-2025). Their strategic framework aims to improve shareholder returns through disciplined capital allocation and strategic M&A transactions.
We think the progress on this front is a little slow as DFI is still in the midst of disposing unperforming and non-core business before carrying out strategic transactions and efficiently allocating its new capital.
Therefore, for us, while DFI is indeed a potential turnaround play, with actions taken in the positive direction, it may only serve as a short-term play to capitalise on immediate positive news. It would not be a sustainable long-term play for us until we see strong sustained operating profits and stable dividends derived from these profits.