Delfi Ltd - DBS Research 2017-02-24: Rationalisation continues

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DELFI LIMITED P34.SI

Delfi Ltd - Rationalisation continues

• 4Q16 below expectations on slower sales growth.
• Record gross margins negated by higher opex.
• Final DPS of 0.95 UScts proposed.
• Trimmed FY17F/18F earnings by 4%/2%; Maintain HOLD.

Maintain HOLD; TP revised to S$2.26. 

• We maintain our HOLD recommendation with a revised TP of S$2.26. 
• We project the group to continue to post relatively strong earnings growth of 23%/17% to US$34.6m/ US$40.3m in FY17F/18F, but this is from a low base in FY16, which in turn was up from a severe decline in 2015. 
• The counter is trading at 29.4x/25.2x FY17F/18F PE which suggests the current share price may have factored in the earnings turnaround.

4Q16 results below expectations. 

• While 4Q16 core net profit posted a strong recovery to US$3.7m from just US$0.8m in 4Q15, this was behind our expectations of US$7m. For FY16, we were expecting net profit of US$30m. 
• While gross margins were at a record high of 38.4% in 4Q16, the weaker than expected earnings came about from slower-than-expected revenue growth in 4Q16, coupled with higher selling and distribution expenses (+13%). This was attributed to investments in brand building and strengthening its distribution channels, such as hiring/ training of merchandising/ sales staff to ride on the growing modern retail channels. 
• We believe the slower sales growth could be attributed to the rationalisation efforts by management on non-performing product lines/ stock-keeping units (SKUs) in FY16.

Trimmed forecasts by 4%/2%. 

• We adjust our forecasts down by 4%/ 2% for FY17F/18F, as we lowered our revenue growth assumption marginally down coupled with higher SG&A, offset partially by higher gross margins. 
• We project gross margins will moderate marginally to 34% in FY17F, from 34.8% in FY16. Note that this is higher than the Delfi’s 5-year historical average of c.32%.

Valuation

• Our TP revised to S$2.26 as we roll our valuations to FY17F/18F earnings, but still based on 26x PE, in line with regional peers.

Key Risks to Our View

• Earlier-than-expected earnings recovery. An earlier-than-expected earnings recovery will give rise to upside earnings risk.

Andy Sim CFA DBS Vickers | Alfie YEO DBS Vickers | http://www.dbsvickers.com/ 2017-02-24

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.260 Up 2.160