Delfi Limited - CIMB Research 2016-05-13: Indonesia turns around, margins recover

DELFI LIMITED P34.SI

Delfi Ltd - Indonesia turns around, margins recover

The former Petra Foods changed its name to Delfi Ltd. It started 1Q16 on a good note, with bottom line and Indo sales (local currency terms) both returning to growth.
1Q net profit of US$8.4m was above our and Street expectations, making up 29%/32% of our and Bloomberg consensus forecasts.
A return to growth in Indonesia and improved gross margins were the positives.
Together with results, Delfi also announced a JV with Orion Corp in Indonesia.

Group 1Q revenue was -2.5% yoy in US$ terms, only because of translation effects.
In constant currency terms, Group 1Q revenue was +6.5%, driven by Indonesia (69% of sales) returning back to growth (+11.7% yoy). The return to growth was encouraging.
Also, gross margins continued on the uptrend, as 3Q’s price hikes and a stable Rp environment helped. We believe the results show that the worst is over.

Indonesia’s return to sales growth (local currency terms) was a positive sign, vs. double-digit declines in 2015.
Management guided that trade customers started replenishing their supply chain from early 2016.
Seasonal sales in the run up to the Lebaran festivities also helped. Lebaran is in July, so we do expect 2Q sales to show similar momentum.
We view the price hikes in 3Q and a stable Rp as other helpful factors.

Regional markets revenue was -5% yoy in constant currency terms, but this was due to the effect of the cessation of the Singapore distribution business.
On a pro forma basis, regional markets sales were +6.5% yoy.
In the Philippines, Delfi implemented a program to discontinue slow-moving SKUs and streamline its product portfolio.

Operating cash flow for the quarter was a decent US$14.2m, as profitability improved and the group reined back capital spending.
Net cash on the balance sheet rose 11% to US$50m. The proposed US$60m capital reduction is still on, and is now subject to approval of the High Court of Singapore.
Special dividend this year is expected to be S$0.135, when the capital reduction is done.

Management will work closely with trade customers on business-as-usual plans, in light of the uncertainty on how prolonged the present economic volatility will be.
It will also focus on driving cost efficiency.
Outside of core markets, plans to go into new markets and extend to new product categories remains valid. Delfi announced a JV with South Korea’s Orion Corp to distribute branded confectionary products in soft biscuits and cakes category.

Kenneth NG CFA CIMB Securities | Jonathan SEOW CIMB Securities | http://research.itradecimb.com/ 2016-05-13

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