Delfi Ltd - CIMB Research 2016-08-11: Positive underlying Indonesia performance

Delfi Ltd  - CIMB Research 2016-08-11: Positive underlying Indonesia performance DELFI LIMITED P34.SI

Delfi Ltd - Positive underlying Indonesia performance

  • 2Q16 results were broadly in line with our estimate but above Bloomberg consensus. 
  • We deem 1H16 core net profit as in line, at 46% of our FY16 forecast.
  • Indonesia continued to show signs of improvement, with higher GPM a big positive.
  • No change to our EPS forecasts and target price. Maintain Hold.

2Q16 group net profit driven by Indonesia and higher margins

  • Trading environment in 1H16 was definitely better than in FY15 (double-digit sales decline) but the positive sales growth in 1Q (+6.5% yoy in constant currency) was not sustained in 2Q. 2Q sales fell 7.5% yoy (smaller decline of 4.4% in constant currency), but was partially impacted by a high 2Q15 base due to timing difference of Lebaran and regulatory changes. Hence, investors should pay more attention to 1H16 and view the +0.9% constant currency sales growth as encouraging.
  • The big positive surprise in this set of 2Q16 results was the higher gross margin of 33.3% (2Q15: 29.3%). This drove core net profit growth of 3.0% yoy and kept 2Q16 earnings within our expectations.

Signs of recovery in Indonesian consumption

  • Indonesian sales fell 1.4% yoy in constant currency in 2Q16, which we view as a relatively strong performance, given the timing difference of the Lebaran festivities and changes in regulatory standards that disrupted the importing of products and hampered agency sales. 
  • Indonesia’s own-brand sales did well though. Furthermore, management sounded positive on the outlook for Indonesia, citing signs of increased consumer spending. Delfi’s Indonesia market share remained 50% at end-2Q16.

Regional markets still slow

  • Of Delfi’s segments, regional markets fared poorer, as Malaysian consumers struggled and the Philippines underwent product streamlining. Regional markets sales in 2Q16 declined 11.4% yoy in constant currency terms (including effects of cessation of the Singapore distribution business in 3Q15). On a pro forma basis, 2Q sales would only have dipped 0.7% yoy (constant currency).
  • Management shared that in the Philippines, it is still in the process of discontinuing slow-moving SKUs to focus on its core products “Goya” and “Knick Knacks”. The big positive in 2Q16 is that Delfi made market share gains.

Continued improvement in gross margin

  • Delfi’s gross margin uptrend continued and 2Q gross margin is at record-high levels at 33.3% (1Q16: 31.9%, 2Q15: 29.3%). The improvement came from: 
    1. prior price hikes and product resizing, 
    2. rationalisation of underperforming products, and 
    3. higher sales of premium own-brand products.

Maintain Hold

  • Interim DPS of 1.36 UScts was declared, which translates into 50% dividend payout.
  • Keep Hold rating, FY16-18F EPS and TP of S$2.69, based on 25x CY17 P/E (historical average). Downside risks include Rupiah weakness.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-08-11
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.690 Same 2.690