Delfi - RHB Invest 2018-05-09: Anticipate A Recovery

Delfi - RHB Invest 2018-05-09: Anticipate A Recovery DELFI LIMITED SGX: P34

Delfi - Anticipate A Recovery

  • Delfi’s efforts to refocus on core brands and invest in its route-to-market capabilities are likely to bear fruit this year. Its 1Q18 PATMI of USD7.6m was slightly ahead of our estimate, driven by both revenue growth and margin expansion.
  • We remain optimistic on its full-year results, as consumer confidence continues to improve in Indonesia. However, we believe the market has already priced in the anticipated recovery.
  • The stock is trading at 30x FY18F P/E, which we deem as fully valued.
  • Maintain NEUTRAL, with our unchanged Target Price of SGD1.54 offering a 6% upside.

Positive on Indonesia but do not expect the same rate of growth to continue.

  • Delfi started the year on a strong note, with 1Q18 revenue growing by 15% y-o-y to USD107m. This was mainly driven by the strong traction in its core brands in Indonesia. 
  • Its premium products did better than mass-market brands as a result of Valentine’s Day sales. However, we also note that a portion of the growth was due to sales deferred from Dec 2017, as well as the run-up to Lebaran festivities. 
  • Although we are still positive on Indonesia’s full-year GDP growth, we do not expect its rate of revenue growth to be maintained in the next three quarters, due to the depreciation of the IDR and the absence of deferred sales.

Expectation on margins.

  • We believe Delfi’s gross margin would remain at similar levels, as growth of its mass-market product sales and depreciation of the IDR would offset the growth in premium core brands over the next three quarters. 
  • We also expect it to maintain its advertising and promotional costs, as management completed the negotiation of trade terms with mini-mart players in 4Q17.

Acquisition of Van Houten license.

  • Delfi acquired the exclusive and perpetual license to the Van Houten chocolate brand in key Asia-Pacific markets for USD13m on 13 Apr. Van Houten was one of the agency brands that Delfi distributed. 
  • Management cited the growth potential of the brand in Indonesia and accessibility to new markets such as China and Australia as the main reasons for the purchase. As a result, we can expect the group to leverage on the Van Houten brand to enter new markets in the future.

Maintain NEUTRAL, with a DCF-derived Target Price of SGD1.54.

  • Although we expect consumer spending in Indonesia to pick up, and Delfi’s earnings to grow by strong double digits over the next couple of years, we think that its valuation is still not compelling, at this moment. 
  • The stock is trading at 30x FY18F P/E, and we believe the earnings recovery has been priced in. 
  • Since the group has a war chest of USD66m, it is likely to remain in a net cash position – even after the acquisition of the Van Houten license. However, we also do not expect its dividend payout ratio to differ significantly from last year, since it may continue to look out for future acquisitions or partnerships.

Juliana Cai CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-09
SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.540 Same 1.540