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%.
- 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.