Delfi Ltd - RHB Invest 2017-08-09: A Surprisingly Bitter Outcome

Delfi Ltd - RHB Invest 2017-08-09: A Surprisingly Bitter Outcome DELFI LIMITED P34.SI

Delfi Ltd - A Surprisingly Bitter Outcome

  • Delfi’s 2Q17 results were below expectations. We think the street has underestimated the potential loss of revenue from the company’s ongoing product portfolio rationalisation exercise and the impact to its operating margin. 
  • During the briefing, management guided that full-year sales were expected to be lower compared to last year. The group is also likely to see higher expenditure from growing its distribution capabilities. 
  • As a result, we cut our recurring FY17-19 forecasts by 10-12%, which in turn lowers our TP to SGD2.00 (from SGD2.34, 6% downside). Maintain NEUTRAL.

2Q17 revenue was down 6% to USD100.2m. 

  • Delfi did not seem to have benefitted from the positive YoY growth on food sales as demonstrated by Indonesia’s retail sales survey. Sales in Indonesia fell 7% in local currency terms. We think this was mainly attributed to the product rationalisation exercise in 2H16. 
  • Regional markets recorded a 3% revenue growth in local currency terms due to increased sales of agency brands and a decent performance of own brands. However, revenue growth fell 5% in USD terms as a result of the weakening PHP and MYR.

Changing retail landscape and its impact on distribution costs. 

  • Recently, more modern trade retailers have begun setting up their respective distribution centres as they essentially try to eliminate the middleman to enhance gross margins. On this note, there could be some cost savings for Delfi from dealing directly with the chain operators’ distribution centres. 
  • However, with the proliferation of many independent mini-mart and convenience store players, we think that any potential cost savings would be offset by the hiring of more distributors to reach out to the independent players. 
  • Overall, we note that the company is expecting higher distribution costs in an absolute amount this year.

Retail sales in Indonesia continue to accelerate. 

  • We think a recovery may be underway. According to management, core products such as Delfi Cha Cha and SilverQueen Classic are still achieving growth in Indonesia and the regional markets. Hence, we think the drop in revenue in 1H17 could be mainly attributed to product rationalisation. 
  • However, given that the stock is trading at 32x FY18F P/E, we think the market may have already priced in any near-term growth.

Maintain NEUTRAL. 

  • Given the lower revenue and higher distribution costs, we think its near-term margins would be eroded. 
  • We therefore cut our forecasts by 10-12% for FY17-19, which in turn lowers our DCF-derived TP to SGD2.00. 

Juliana Cai CFA RHB Invest | 2017-08-09
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.00 Down 2.340