Delfi - RHB Invest 2018-08-03: Great Chocolatey Taste

Delfi - RHB Securities Research 2018-08-03: Great Chocolatey Taste DELFI LIMITED SGX:P34

Delfi - Great Chocolatey Taste

  • Maintain BUY and SGD1.47 Target Price, 27% upside.
  • Delfi’s 2Q18 results announced last evening were above our expectation. 1H18’s results met 57% of our estimates, while 2Q18 recurring PATMI grew 21% on strong revenue growth and margin expansion.
  • With healthy economic growth in Indonesia, we expect confectionery demand to be sustained over the next 12 months. In addition, sales from regional markets should also rebound next year – this is when the negative impact from the discontinuation of agency brands normalises.
  • Following the two years of culling less-productive SKUs, the growing traction of Delfi’s core brands should help the group maintain stability in margins moving forward, in our view.

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Key highlights of Delfi’s 2Q18 results:

  1. Revenue grew 8.5% on strong demand in Indonesia. In local currency terms, Indonesian sales were up 13.9%. While sales from regional markets were also up marginally, currency appreciation propped revenue growth to 5.8%;
  2. Gross margins remain strong at 34.5%, up 1.4ppts from 2Q17’s numbers. Following the culling of non-productive stock keeping units (SKUs) and discontinuation of agency brands, the growth of own brands – especially those in the premium segment such as SilverQueen – has helped raise Delfi’s gross margins;
  3. Administrative expense grew 33.8%, offsetting part of the gross margin gain. The sudden growth in administrative expenses was beyond our expectation. However, management cited the rise in expenses as due to staff relocation. We do not expect such expenses to continue rising q-o-q moving into 2H18.

Maintain BUY with an unchanged DCF-derived SGD1.47 Target Price, 27% upside.

  • We expect sales to remain strong over the next 12 months, led by continued momentum in Indonesia. Sales from regional markets should also pick-up next year with the absence of one- off negative impacts from the discontinuation of agency brands. 
  • Although regional currencies have weakened against the USD, our FX team expects IDR and MYR to remain relatively stable over the next 12 months. Cocoa prices have also come off from their peak in May. 
  • These factors – together with rising traction of the premium segment – should also help Delfi main stable margins, moving ahead.
  • We expect EPS to grow at a CAGR of 16% over the next three years.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-03
SGX Stock Analyst Report BUY Maintain BUY 1.470 Same 1.470