Delfi Limited - DBS Research 2016-05-13: 1Q recovery as expected

DELFI LIMITED P34.SI

Delfi Limited - 1Q recovery as expected

1Q16 net profit slightly ahead on better gross margins and lower admin expenses
Top line indicates no signs of worsening from 4Q though sentiment is still cautious
Entered into a JV with Orion
Maintain HOLD, new TP at S$2.56 based on FY17F

We maintain our HOLD recommendation, but raised our TP to S$2.56 as we roll our valuations over to FY17F, from average of FY16F/17F.
While we expect the Group to post earnings growth of 103%/34% to US$31m/US$41m in FY16F/17F, this is due to a low base in FY15 (-70% y-o-y from FY14).
Current valuations look high at 37x/27x FY16F/17F PE, and could imply that the current share price have factored in the earnings turnaround.

Delfi's 1Q16 net profit was slightly ahead at 30% of our original full-year estimates, largely due to higher gross margins and lower admin expenses.
Revenue however dipped by 2.5% y-o-y due to effects of weaker regional currencies and cessation of its Singapore distribution business.
In local currency terms, revenue grew by 11.7%, of which about 7% is estimated to be from price increase/ product right-sizing initiatives put in place last year.
We estimate a relatively subdued volume growth of < 5%, indicating that sentiment, while not worsening, have yet to turn up significantly.

We raised our FY16F estimates by 11% as we adjust up our gross margin assumption to 31% (from 30.5%) and lowered admin costs to 4.1% of sales.
The Group also announced the formation of a 50:50 JV with Orion Corporation to develop, market and sell a range of joint branded confectionery products. The partnership will help Delfi to expand its product portfolio, while Orion will leverage on Delfi’s distribution strength in Indonesia.

Our TP is adjusted to S$2.56 as we roll our valuations over to FY17F earnings, coupled with the expected capital reduction amounting to 13.7 Scts/share.

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

Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-13

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.56 Up 2.21