Delfi - RHB Invest 2018-11-13: On A Sugar Rush; Maintain BUY


Delfi - On A Sugar Rush; Maintain BUY

  • Maintain BUY, with new Target Price of SGD1.59 from SGD1.47, 34% upside.
  • Delfi's 3Q18 results beat. 3Q18 core PATMI came in at USD4.4m, +31% y-o-y, while 9M18 PATMI of USD17.6m met 79% of our full-year estimate.
  • We expect the strong sales momentum to continue in FY19 on better domestic consumer spending in Indonesia and Philippines. Growth in the premium product range should continue to hold up margins.

Good results.

  • Delfi's 3Q18 PATMI was a strong 31% y-o-y, largely driven 17% y-o-y growth in revenue and normalisation of SG&A.
  • We note that revenue growth was mainly from higher sales of its premium format category. Chocolate confectionery market also grew in its core markets – Indonesia and Philippines.

Upbeat consumer sentiment.

  • Indonesia’s Consumer Confidence Index remained in the optimistic zone in Oct 2018, buoyed by positive economic outlook and income expectation. As such, we expect discretionary spending to remain solid, which should help to maintain sales momentum of chocolate confectionery going into FY19.

Gross margin maintained.

  • Delfi’s gross margin dipped slightly to 33.9% in 3Q18. Nonetheless, this is still above management’s comfortable gross margin level of 30%. We expect gross margin to pick up in 4Q18 due to the festive season.
  • Moving into FY19F, we expect gross margin to be maintained, as the group has locked in the bulk of the raw material prices through forward purchases.
  • Our FX team also expects the IDR to appreciate vs the USD next year, which should help to support Delfi’s gross margin.

SG&A has also stabilised.

  • Delfi saw a sharp increase in distribution and selling fees last year due to the changing dynamics of the distribution channels in Indonesia.
  • We note that SG&A has stabilised this year, and Delfi typically spends approximately 12-13% of revenue on advertising. As such, we do not foresee big changes in SG&A next year, and expect the bulk of the sales growth to flow down to net profits.

Maintain BUY.

  • We raise FY19F-20F earnings by 5-6% on rising domestic consumption and higher sales expectations. We also roll over our valuation base year to FY19. This, together with higher earnings estimates, raises our DCF-derived Target Price to SGD1.59.
  • Currently the stock is trading at 20.8x FY19F P/E, which we think is undemanding when compared to its historical average of 34x.
  • It is also trading at a discount to peer, Mayora Indah (MYOR IJ, BUY, Target Price IDR3,300), which is trading at 26x FY19F P/E.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-11-13
SGX Stock Analyst Report BUY MAINTAIN BUY 1.59 UP 1.470