Delfi Ltd - CIMB Research 2016-11-10: Unexciting sales, stellar gross margins

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DELFI LIMITED P34.SI

Delfi Ltd - Unexciting sales, stellar gross margins

• 3Q16 core net profit (US$5.9m) was a big yoy improvement (3Q15: -US$1.2m), but still only formed 17% of our FY16F. 9M formed 63% of our full year.
• It seems we had been overly optimistic about the consumption recovery in Indonesia and thus slash our sales assumptions accordingly.
• Still, Delfi’s fortunes are better than a year ago. 3Q’s sales grew 2.4% yoy, but the star performer was the big gross margin improvement to 35.5% (3Q15: 28.4%).
• We cut our FY16-18F EPS predominantly on lower sales. This lowers our TP to S$2.31 (25x CY18 P/E) even as we roll forward. Maintain Hold.

Retail environment better, but not great 

• The trading environment in 3Q16 was definitely better than in FY15 (19% sales decline) but the positive sales growth was still marginal (+2.4% yoy). It was even worse (-0.7% yoy) in constant currency terms. 
• By country, Indonesia did much better (+5.6% yoy), while regional markets suffered (-4.4% yoy).

Indonesia growth driven by Own Brands sales 

• Indonesia’s sales growth was mostly due to higher sales of premium Own Brands products. The higher margins that comes with Own Brands products is a plus.
• Notwithstanding, 9M16’s 3.6% constant currency sales growth in Indonesia really spells a retail environment that is not entirely out of the woods. Management further added that macro and currency volatility continue to weigh on consumer sentiment. We agree.

Regional markets hurt by a number of one-offs 

• Under regional markets (3Q sales -4.4% yoy), management explained that there were a number of one-offs: 
  1. the group had undertaken a rationalisation programme to remove underperforming products in Philippines, and 
  2. cessation of the Singapore distribution business in Aug 15. 
• Excluding which, 3Q’s regional market sales would have been a better +1.3% yoy. We look forward to a better FY17.

Stellar gross margins 

• The star performer was rightfully the group’s continued gross margin improvement. We were already impressed with 2Q16’s record GPM levels of 33.3% and were positively surprised with 3Q’s 35.5% GPM. 
• Key drivers for the improved showing include: 
  1. higher Own Brands sales, 
  2. prior price hikes and product resizing, 
  3. rationalisation of underperforming products.

Brand building for the long term 

• Going forward, the strategy appears to be to control input costs by continuing to be proactive about price adjustments and product right-sizing while also launching higher margin new products. That said, management reaffirmed the importance of investing in the brand. 
• Selling and distribution costs/sales therefore remain elevated (3Q16: 21%, FY15: 17.9%).

Maintain Hold 

• Overall, we cut our FY16-18F EPS by 18-28% on the back of lower sales. Our TP falls as a result, even as we roll forward (still based on 25x CY18 P/E, historical average).
• Maintain Hold.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-11-10

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.31 Down 2.690