Delfi Ltd - CIMB Research 2017-05-09: 1Q17 Slow Start To FY17F As Indonesia Sales Falter

Delfi Ltd - CIMB Research 2017-05-09: 1Q17 Slow Start To FY17F As Indonesia Sales Falter DELFI LIMITED P34.SI

Delfi Ltd - 1Q17 Slow Start To FY17F As Indonesia Sales Falter

  • Delfi had a slow start to the year. 1Q17 net profit (US$5.6m, -33.4% yoy) came in below expectations, forming 18%/17% of our/consensus full-year forecasts.
  • The biggest drag came from weak sales in Indonesia (-14.7% yoy in 1Q17), while the still-elevated selling and distribution costs did not help.
  • FY17-19F EPS intact, as we foresee earnings recovery in 2H17F. 
  • Maintain Hold.

1Q17 results miss was more of a quarterly blip

  • Delfi’s 1Q17 results were not pretty but were more of a quarterly blip, than a structural change in our view. 
  • Group sales were down 10.1% yoy, reflecting the company’s own brand product rationalisation exercise in Indonesia. Regional markets sales were actually up by a modest 2.7% yoy. However, operating margins were down 2.3% pts yoy in 1Q17, as the group continues to invest in brand-building initiatives and route-to-market capabilities.
  • Higher taxes on dividends and royalty income exacerbated the bad quarter.
  • Accordingly, 1Q17 core net profit was down 33.4% yoy, forming only 18% of our FY17F.

What went wrong in Indonesia?

  • Sales decline in Indonesia (-14.7% yoy, -16.6% yoy in constant currency) was the main culprit behind 1Q’s weak earnings. We anticipated a better 1Q17 showing, as we expected Delfi to build on 2016 momentum (improvement in own brand and premium product sales). However, we underestimated the impact of its product rationalisation initiatives (culled c.30% of SKUs in Indonesia since it started in 2H16).
  • Indonesia yoy sales decline in 1Q17 was exacerbated by the added negative impact of timing issues: 1Q16 sales included higher-than-usual deliveries as trade customers replenished their supply pipelines that were at extraordinarily-low levels due to the weak consumption environment in 2015. However, Delfi’s Indonesia market share is largely unchanged at c.50%.
  • Going forward, we think the product rationalisation programme will continue to hinder near-term sales. However, we like the company’s strategy of focusing on its core brands and we think this will better position the business in the long term, as well as improve profitability as the company frees up resources on underperforming SKUs.

Gross margins (GPM) were still good in 1Q17, albeit lower qoq

  • Delfi’s biggest improvement in 2016 was its GPM, driven by: 
    1. product premiumisation, 
    2. price increases and product rightsizing, and 
    3. better raw material procurement strategies. 
  • Expectations were running high after the stellar 38.4% GPM in 4Q16. Hence, 1Q17 GPM of 33.0% will be seen as low, even though it was up yoy (1Q16: 31.9%).
  • We understand that the qoq gross margin contraction was mostly due to a change in sales mix of lower premium products in Indonesia, as well as higher discounts and rebates in regional markets. 
  • Management highlighted that a sustainable GPM range is 33-35%. This is in line with our expectations and we consider this a healthy range.

Maintain Hold as stock looks fully valued now

  • Although 1Q17 results were a miss, we keep our FY17-19F EPS forecasts as we foresee earnings recovery in 2H17F. 
  • Accordingly, there is no change to our target price of S$2.30, still based on 25x CY18 P/E (historical average). 
  • Maintain Hold as the stock looks fully valued at current 31x forward P/E. 
  • Risks: weak sales.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-05-09
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.300 Same 2.300