Delfi Ltd - RHB Invest 2016-08-12: Getting Tasty

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DELFI LIMITED P34.SI

Delfi Ltd - Getting Tasty

• We upgrade Delfi to NEUTRAL (from Sell) with a SGD2.55 TP (from SGD2.00, 2% downside) on the group’s improved outlook. 
• On the macroeconomic side, we believe that easing inflation and a potential reduction in individual income tax will bode well for Indonesia’s consumer sentiment in the near term. 
• Rationalisation of non-performing products and price hikes in 3Q15 and 2Q16 are also likely to boost margins for FY16.

Improvement in the macroeconomic outlook. 

• Indonesia’s Consumer Confidence Index has steadily increased to 114.2 at end-July since its low of 97.5 in Sep 2015. We believe this positive momentum will continue into 2H16, with easing inflationary pressures. 
• Finance Minister Ms Sri Mulyani Indrawati has also announced plans to cut personal income tax. While there is no concrete timeline to this, we think this move bodes well for consumer spending.

Expect to see higher gross margins. 

• Delfi began shelving less profitable agency brands in Indonesia and Singapore in 2015. Currently, it is rationalising its own brands’ product ranges and looking to expand into other chocolate product categories. 
• Coupled with price adjustments in 3Q15 and 2Q16, we expect to see its gross margin to grow at least 2ppts in FY16.

Upgrade to NEUTRAL (from Sell). 

• We raise our FY16F-18F earnings by 37%, 15% and 11% respectively in view of the brighter outlook for Indonesia and the group. 
• We also upgrade our recommendation to NEUTRAL. Our DCF-derived TP of SGD2.55 also reflects 35x FY17F P/E. Key risk to our call includes fluctuations in raw material costs.

Key risks Raw material costs. 

• While cocoa prices have come down from its high, CPO and sugar prices have risen since the beginning of 2016. 
• Management cited that it has made forward purchases to lock in its raw material supply. This provides better visibility, but higher costs will eventually hit the group’s margins if: 
  1. Commodity prices continue to rise; 
  2. It fails to pass on the cost to consumers.
• Delfi’s raw materials are mostly denominated in USD. However, this should be less of a concern as we expect the depreciation of IDR against USD to be moderate in FY16.

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-12

RHB Invest SGX Stock Analyst Report NEUTRAL Upgrade SELL 2.55 Up 2.00