Delfi Ltd - RHB Invest 2018-02-28: Fully Valued At This Point

Delfi Ltd - RHB Invest 2018-02-28: Fully Valued At This Point DELFI LIMITED P34.SI

Delfi Ltd - Fully Valued At This Point

  • Delfi’s FY17 core earnings of SGD17.7m fell below our expectation. This was mainly driven by the culling of its SKUs, lower agency sales, and narrower-than-expected margins. 
  • The group has completed the bulk of its product rationalisation programme and terminated unprofitable agency brands. As such, we expect it to deliver stronger earnings growth this year, on the back of improving margins and a low base effect of FY17. 
  • However, as the stock is trading at 31x FY18F P/E, we believe the market has priced in the company’s anticipated recovery already. Downgrade to NEUTRAL (from Buy), with a Target Price of SGD1.54 (from SGD1.65, 2% upside).

FY17 revenue declined 5.3% y-o-y

  • FY17 revenue declined 5.3% y-o-y to USD381m as the group cut one-third of its stock-keeping units (SKUs) and trimmed down unprofitable agency brands. We believe revenue growth should resume this year, as the bulk of the rationalisation programme has been completed.
  • According to Delfi’s CEO, Mr John Chuang, sales volumes of the core brands were still growing by double digits in 4Q17. As such, we believe the group could deliver at least a high single-digit growth in revenue in 2018, even after accounting for some slower-moving SKUs.

Margins declined more than expected in 4Q17. 

  • Its gross margin narrowed by 2.9ppts. Management attributed 4Q16’s high gross margin to one-off low raw material costs which stemmed from the timing of the contract. As a result, we pare down our gross margins for FY18-20F to more normalised levels of around 34-35%.
  • Proliferation of mini-markets in Indonesia has led to higher selling and distribution fees in FY17. We think the rise of mini-markets has given this channel higher bargaining power against brand owners. 
  • While management cited that the negotiation of trade terms involves many other factors other than just margins, we believe that the increase in services provided, higher inventories held, and the manpower required to deal with many independent mini-marts all translate to higher cost structures for food suppliers like Delfi.

Fully valued. 

  • Still, we expect Delfi to chart stronger earnings growth in FY18- 20, and regard its FY17 core earnings as below our expectation. As such, we lower our FY18-19F earnings by 11% and 7% respectively. 
  • We now believe the stock is fully valued, and revise our call to NEUTRAL (from Buy. Our DCF-based Target Price also dips to SGD1.54.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-28
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 1.54 Down 1.650