Delfi Ltd - RHB Invest 2017-11-15: First Signs Of Recovery

Delfi Ltd - RHB Invest 2017-11-15: First Signs Of Recovery DELFI LIMITED P34.SI

Delfi Ltd - First Signs Of Recovery

  • Delfi's 3Q17 results have shown the first signs of recovery in terms of revenue growth in local currencies. 
  • Moving forward, we believe the improved Indonesian consumer sentiment should help to offset revenue-dampening effects from the product rationalisation exercise, which started at the end of 2015. 
  • Maintain BUY with a lower TP of SGD1.65 (from SGD1.86, 14% upside) as consumption recovery came in slower than expected.

3Q17 revenue registered positive YoY growth of 1.5%. 

  • We note that sales were higher in local currency terms with Indonesia and regional markets posting 4% and 5% growth respectively. 
  • Delfi’s core brands in particular demonstrated double-digit growth. This came after two quarters of negative YoY growth, mainly attributable to the product rationalisation exercise and weaker consumption in the region.Management cited improved consumption trends and growth in new chocolate categories as the key drivers. 
  • Moving into the fourth quarter, we expect stronger topline growth and a decent gross margin as a result of improved sentiment during the festive season.

Gross margin should continue to hold up. 

  • Although raw materials (cocoa, sugar and palm oil) prices crept upwards in recent months, overall prices were still lower when compared to 4Q16. As such, we believe its gross margin should continue to stay within management’s “comfortable range” of above 30% in the near term.

Selling and distribution expenses should stabilise. 

  • As highlighted in our previous notes, the changing retail landscape in Indonesia has resulted in higher distribution cost. According to management, the group has concluded its negotiations with key retailers. Henceforth, we would expect selling and distribution expenses to normalise from hereon.
  • Nonetheless, we note that recovery was slower than expected. Any positive swing in 4Q17F is unlikely to make up for the weak 1H17. We reduce our 2017- 2019 forecasts by 13-14%.

Maintain BUY with a lower DCF-derived TP of SGD1.65. 

  • We believe the ongoing product rationalisation exercise initiatives would improve Delfi’s competitive standing in the long run. The strong double-digit growth posted by its core brands and accelerated growth in Indonesia are positive signs, if sustained. 
  • Moving forward, we believe earnings would show a stronger recovery as topline grows and operating leverage improves.
  • Key risks include a slow recovery in consumer spending and increased competition from foreign brands.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-15
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.65 Down 1.860