Delfi Ltd - CIMB Research 2017-02-22: 4Q16 Recovering sales, record-high gross margins

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DELFI LIMITED P34.SI

Delfi Ltd - 4Q16 Recovering sales, record-high gross margins

• 4Q16 core net profit came in below expectations, mostly from higher A&P expenses.
• FY16 formed 97% of our and 95% of Bloomberg consensus FY16F.
• Underlying sales seem to be recovering in both its Indo and regional markets, although masked by some weakness from agency brands.
• Initiatives to improve gross margins have been impressive. 4Q16 GPM came in at a record high of 38.4% (vs. historical 28-31% range).
• However, the stock is still trading at lofty valuations. Maintain Hold with a TP of S$2.30 (based on 25x CY18F P/E).

4Q core net profit a miss, but shows signs of recovering 

• 4Q16 core net profit (US$5.7m, +577% yoy, -5% qoq) missed our expectation, forming only 85% of our forecasts. 
• FY16 core net profit came in at only 97%/95% of our/Bloomberg consensus FY16F. That said, even as 4Q results were a miss, we are seeing 
  1. positive signs hinting at an improved consumption environment, and 
  2. company initiatives to improve margins flowing through.

Better consumer spending helped drive own brand sales in Indo 

• 4Q sales in Indonesia rose 4.5% yoy (-1.8% yoy in constant currency). However, we do not think the constant currency sales decline necessarily paints an accurate picture of Indo’s consumer environment. 
• Delfi actually saw improved own brand sales in Indo and greater demand for its premium products. Mitigating these positives were lower agency brand sales due to an increase in customs duties for imported products and changes in regulatory standards (e.g. more stringent labeling).

Regional markets continue to recover 

• Sales in the group’s regional markets now look more stable and continue to recover (4Q sales +9.5% in constant currency). If we further exclude the cessation of the Singapore distribution business, 4Q sales growth would have been a higher 17.5% yoy. 
• We think the group’s efforts earlier in the year to rationalise underperforming products in the Philippines are now bearing fruit.

Record high gross margins 

• Since the company’s struggles in 2015, management had committed to these initiatives to try to improve margins: 
  1. product premiumisation and pushing sales of premium products, 
  2. price increases and product rightsizing, and 
  3. cost containment strategies surrounding raw material procurement. 
• Gross margins, therefore, continued to improve sequentially throughout FY16 and hit a high of 38.4% in 4Q16 (vs. the 28-31% range in 2015).

Downside risk from A&P, though a potential longer term positive 

• We think downside risk could come from higher selling and distribution (S&D) costs as the company’s focus is now on investing in its brand building initiatives (consistent with its premiumisation strategy). 
• It is also trying to grow shelf space presence across all its retail channels and invest in more in-store promotions. Hence, S&D expenses/sales of 24% in 4Q were on the high side (vs. 15-20% range historically).

Maintain Hold, valuations not compelling 

• We cut our FY17-18F EPS by 4-8%, mostly on the back of lower sales assumptions.
• Accordingly, our TP falls to S$2.30 (still based on 25x CY18F P/E, historical average).
• Currently trading at 32x forward P/E, the stock is fully valued, in our view. 
• Maintain Hold.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-02-22

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.30 Down 2.310