Delfi Ltd - Margin Expansion After Repricing
- FY16 results met our expectation. Going into 2017, we expect to see continued gross margin expansion as a result of:
- Forward buying programme of raw materials;
- Effects of repricing and resizing in 3Q15 and 2Q16;
- Higher proportion of own brand sales compared to agency brands.
- At the current share price, we downgrade to NEUTRAL (from Buy), but keep our TP of SGD2.55 (8% upside).
Gross margin expansion to sustain at least in 2017.
- Currently, cocoa prices are still at multi-year lows. Delfi has now engaged on a forward buying programme, in which they secure more of its raw materials when the prices are favourable. This should help Delfi to lock in some of its COGS.
- Premium products gained more traction in 4Q16, and we think this trend would continue in1Q17, in view of the Lunar New Year festival and Valentine’s Day.
- In line with RHB forex team’s expectation, management foresees a more stable IDR moving into 2017. This should also help to maintain a stable margin.
Joint venture (JV) with Orion.
- Management is optimistic about the JV with Orion Corporation in the medium term. This would not be a large contributor in 2017, however, as they seek to obtain a foothold in a competitive market.
- In the medium term, management foresees further collaboration with Orion to leverage on the latter’s strong positions in Vietnam and China.
Downgrade to NEUTRAL.
- We see long-term potential with Delfi’s strong market share in the two emerging ASEAN countries. However, the stock is currently trading at 32x FY17F P/E and we do not see any strong catalyst for the stock to outperform in the short run.
- We maintain our DCF-derived TP of SGD2.55 (CoE: 6.3%, TG: 2%).