Delfi Ltd - DBS Research 2016-11-11: Recovering a tad slower than expected

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DELFI LIMITED P34.SI

Delfi Ltd - Recovering a tad slower than expected

• 3Q16 posts turnaround but trails expectations.
• Revenue growth muted; net profit helped by robust gross margins.
• Trimmed forecasts by 4%/13%.
• Maintain HOLD, TP revised to S$2.16.

Maintain HOLD; TP revised to S$2.16. 

• We maintain our HOLD recommendation with a revised TP of S$2.16. 
• We project the group to post earnings growth of 95%/20% to US$30m/ US$36m in FY16F/ 17F, arising from a weak FY15. The counter is trading at 32x/ 27x FY16F/ 17F PE which could suggest the current share price has factored in the earnings turnaround.

3Q16 net profit trails expectations. 

• While core net profit posted a strong recovery to US$5.9m from a loss last year, this was still marginally behind our expectations. 9M16 profits stood at 72% of our original forecasts. The slip came about from a slower-than-expected revenue growth of 2.4% y-o-y to US$86.6m.
• With price increases put in place in 3Q15, estimated at c.7%, this could suggest volume growth was lacklustre and probably still in negative territory. In addition, with the destocking by distributors in 2H15, the weak volume in 3Q16 took us by surprise, suggesting that sentiment is still relatively cautious. 
• Net profit was, however, helped by a boost from its strong expansion in gross margins to 35.5%, from 28.4% a year ago.

Recovery slower than expected; trim forecasts by 4%/13%.

• While recovery is underway, we were looking out for a stronger top-line performance. It seems that sentiment is still relatively cautious and may take some a more gradual pace vis-à-vis our earlier expectations. We have dialled back our sales growth assumptions, partly mitigated by stronger gross margin projections. 
• Overall, we trimmed our forecasts by 4%/13% for FY16F/17F. We maintain our HOLD recommendation.

Valuation

• Our TP drops to S$2.16 as we revise down our FY17F forecasts, but still based on 26x PE, in line with regional peers.

Key Risks to Our View

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

Andy Sim CFA DBS Vickers | Alfie YEO DBS Vickers | http://www.dbsvickers.com/ 2016-11-11

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.16 Down 2.420