Delfi Ltd - RHB Invest 2017-02-24: Margin Expansion After Repricing

Delfi Ltd - RHB Invest 2017-02-24: Margin Expansion After Repricing DELFI LIMITED P34.SI

Delfi Ltd - Margin Expansion After Repricing

  • FY16 results met our expectation. Going into 2017, we expect to see continued gross margin expansion as a result of: 
    1. Forward buying programme of raw materials; 
    2. Effects of repricing and resizing in 3Q15 and 2Q16; 
    3. Higher proportion of own brand sales compared to agency brands.
  • At the current share price, we downgrade to NEUTRAL (from Buy), but keep our TP of SGD2.55 (8% upside).

Gross margin expansion to sustain at least in 2017. 

  • Currently, cocoa prices are still at multi-year lows. Delfi has now engaged on a forward buying programme, in which they secure more of its raw materials when the prices are favourable. This should help Delfi to lock in some of its COGS. 
  • Premium products gained more traction in 4Q16, and we think this trend would continue in1Q17, in view of the Lunar New Year festival and Valentine’s Day.

Stable IDR. 

  • In line with RHB forex team’s expectation, management foresees a more stable IDR moving into 2017. This should also help to maintain a stable margin.

Joint venture (JV) with Orion. 

  • Management is optimistic about the JV with Orion Corporation in the medium term. This would not be a large contributor in 2017, however, as they seek to obtain a foothold in a competitive market. 
  • In the medium term, management foresees further collaboration with Orion to leverage on the latter’s strong positions in Vietnam and China.

Downgrade to NEUTRAL. 

  • We see long-term potential with Delfi’s strong market share in the two emerging ASEAN countries. However, the stock is currently trading at 32x FY17F P/E and we do not see any strong catalyst for the stock to outperform in the short run. 
  • We maintain our DCF-derived TP of SGD2.55 (CoE: 6.3%, TG: 2%).

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-02-24
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 2.550 Same 2.550