Delfi Ltd - RHB Invest 2017-05-09: No Sweet Treats

DELFI LIMITED P34.SI

Delfi Ltd - No Sweet Treats

Delfi’s 1Q17 results were below ours and consensus’ estimates. Net profit came in at USD5.6m (-33% YoY) mainly on lower revenue and higher depreciation cost.
While we are positive that the portfolio rationalisation would benefit the group in the medium term, we think that the current valuation of 29x FY17F P/E is expensive.

We maintain our NEUTRAL recommendation with a lower TP of SGD2.34 (from SGD2.55, 6% upside).

1Q17’s sales fell by 10% YoY to USD93m.
According to management, the group has eliminated around 170 underperforming stock keeping units (SKUs) since 2H16. They had accounted for close to USD20m worth of revenue pa. Hence, the portfolio rationalisation initiatives resulted in weaker 1Q17 sales.
Management thrives to bring up sales of the existing core products over the coming quarters.

Gross margin improved to 33% (+1.1ppts YoY) following the portfolio rationalisation in 2H16.
We note that this is a sharp drop from 38.4% in 4Q16 as trade retailers had replenished their stocks in 4Q16 ahead of the Chinese New Year and Valentine’s Day sales. These festive events typically drive the sales of premium products in Indonesia. As such, the sales contribution of higher-margin products fell to 51% in 1Q17 (4Q16: ~53.5%).
We note that cocoa prices have been on a downtrend since 2016. Thus, we are still expecting Delfi to show gross margin improvement in FY17F.

Rising competition for shelf space has led to higher costs over the years. Management believes that the culling of the underperforming SKUs would allow the group to better deploy resources to performing SKUs. It would thereby improve profitability and returns in the medium term.
The group has also entered into a JV with Japan’s Yuraku Confectionery Co Ltd. We believe the group would extend to other adjacent products such as chocolate wafers as a result of this JV.

The sale of 50% stake in PT Ceres Meiji Indotama is part of management’s strategy to focus on growing its core products. The group is expected to book in a pretax divestment gain of USD4.6m.
We think the company would distribute part of the gain as a special dividend but we have not factored this into our numbers.

We believe sales growth would be impacted in FY17F following the portfolio rationalisation in 2H16.
We maintained our FY17F net profit as the weakness in 1Q17 is likely to be offset by a divestment gain in 2Q17.
We trim FY18F-19F EPS by 9% and 6% to account for a higher shelf cost moving forward. This has reduced our DCF-derived TP to SGD2.34.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-09

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.34 Down 2.550