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

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. 
  • We hike our EPS estimates 9-20% and our TP to S$2.69. Upgrade to Hold. 

Positive data points; worst is over 

  • 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 helped by pre-Lebaran buying, price hikes and stable Rp 

  • 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 

  • 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. 

Balance sheet position is solid 

  • 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. 

JV with South Korea’s Orion Corp 

  • 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
CIMB Securities SGX Stock Analyst Report HOLD Upgrade REDUCE 2.69 Up 1.77