Delfi - RHB Invest 2018-06-20: Sweeter By The Day

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DELFI LIMITED SGX: P34

Delfi - Sweeter By The Day

• Upgrade to BUY from Neutral, with a new SGD1.47 Target Price from SGD1.54, 11% upside, as we see value emerging from the retracement in Delfi's share price.
• We remain optimistic for the full-year result, as consumer confidence in Indonesia picks up.
• Meanwhile, Delfi’s efforts to focus on core brands have shown positive results in sales since 1Q18. We believe the uptick in volume could more than offset the negatives from IDR depreciation.

Remain confident for 2018.

• Key reasons being:
  1. Positive consumer sentiment. Indonesia saw two consecutive monthly improvements in consumer confidence in April and May. We believe the improved sentiment and tapered inflation would help to encourage consumption of consumer discretionary goods like confectionery.
  2. Y-o-y growth could be propped up from low base effect in 2017. Retail environment was difficult for Delfi in 2017. Consumer spending was negatively affected by the withdrawal of electricity subsidies while products were not readily available in minimarts. It has since re-organised supply chain to cater to the rise of minimarts. Moreover, it has completed the rationalisation of stock-keeping units (SKUs), which should reverse the negative trend in sales growth.
  3. Strong traction in core brands. According to management, core brands including SilverQueen, Cha Cha, Ceres and Delfi premium products have been growing at above 20% y-o-y. We believe it still can generate a high single-digit growth in sales even after we account for slower-moving SKUs and IDR depreciation.
  4. Currency appreciation outside Indonesia. We expect sales to grow at 3% y-o-y. However, appreciation of the MYR and PHP should further support topline numbers.

Value emerging

• Upgrade to BUY. We think valuation is attractive, as it has come down to 27x FY18F P/E. Historically, it traded at an average of 35x historical P/E.
• Valuation is also undemanding compared to other consumer companies in Indonesia and Philippines (average: 34x P/E). Delfi is trading close to a 5-year low of SGD1.28.

Key risks include rising raw material prices and depreciation of IDR

• Further depreciation of IDR could also result in cost running up. Our RHB forex team forecasts USD/IDR to average at 14,100 for 2018. Cocoa prices have also been on the rise. 
• We lower gross margin forecasts, resulting in 4% and 2% reduction to FY19F-20F EPS. This lowers our DCF-based Target Price to SGD1.47.
• Nonetheless, we think cocoa prices are still manageable due to Delfi’s forward purchase programme. We note that current prices are still below 2016 levels and it was able to generate a decent gross margin of > 30% in 2016. The rise in cocoa prices could also be partially offset by lower sugar and palm oil prices.

Juliana Cai CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-06-20

SGX Stock Analyst Report BUY Upgrade NEUTRAL 1.47 Down 1.540