Delfi - DBS Research 2019-11-14: The Deal Sweetens


Delfi - The Deal Sweetens

  • Delfi's 3Q19 earnings above expectations due to better operating cost management.
  • Van Houten and premiumisation following through.
  • Higher EBIT margins on the back of higher MT sales channel mix and better cost management.
  • Raised FY19F/20F earnings by 8%/4%; maintain BUY with a slightly higher target price of S$1.51.

Van Houten and premiumisation continue to deliver.

  • In 3Q19 and 9M19, Van Houten contributed US$3.5m and US$11.5m to DELFI (SGX:P34)’s total sales respectively. SilverQueen, Delfi Premium, and Van Houten grew in excess of 20% y-o-y as Delfi continues to push ahead with its premiumisation strategy. Having previously revitalised its acquired brands Knick Knacks and Goya, we are positive on its initiatives with Van Houten. See Delfi Announcements.

Net profit increased 47.5% y-o-y mainly due to higher gross profit margins and lower operating costs as a percentage of revenue.

  • Gross profit margins improved by 0.8ppt to 34.7% in 3Q19, from 33.9% a year ago on the back of its premiumisation strategy. In addition, a shift in sales channel mix towards Modern Trade (MT) reduced selling and distribution expenses as a percentage of revenue, while other operating expenses declined.

Strong sales growth and margin improvement drive bottom line

3Q19 sales in line; earnings above expectations:

  • Delfi reported 3Q19 net profit of US$5.9m (+47.5% y-o-y; -3.8% q-o-q) due to higher sales, gross margins, and lower operating costs. 3Q19 revenue came in at US$112.2m (+9.2% y-o-y; -0.2% q-o-q). Revenue declined q-o-q due to seasonality. 9M19 revenue was in line with expectations. However, earnings were above expectations, mainly driven by lower operating costs. See Delfi Announcements.
  • 3Q19 gross profit margins improved 0.8ppt from 33.9% in 3Q18 to 34.7% on the back of its premiumisation strategy. In addition, selling and distribution expenses as a percentage of revenue decreased slightly by 4 basis points (bps) as its MT channel registered higher sales growth.
  • Other operating expenses declined from US$0.8m in 3Q18 to US$0.1m in 3Q19.

Revised revenue growth for FY20F/21F up slightly on the back of its Van Houten rejuvenation and premiumisation strategy.

  • 3Q19 revenue in Indonesia and its regional markets increased 8.4% and 11.1% y-o-y respectively. In its domestic market, SilverQueen, Delfi Premium, and Van Houten grew in excess of 20% y-o-y, as Delfi continues with its premiumisation strategy. Van Houten and Malaysia drove sales growth, while in the Philippines, Goya Mini Tubes, Goya Spread, and Delfi Premium continued to deliver double-digit growth.
  • To date, Delfi’s sales of Van Houten mainly stem from Singapore and Malaysia and consist mainly of dragees and cocoa powder. As Delfi innovates to rejuvenate the Van Houten brand through the introduction of new products such as chocolate bars and a redesign of its packaging, we remain positive on Van Houten’s potential.
  • We raised revenue growth in FY20F/21F from 6.5%/7.3% to 9.0% each year.

Reduced gross profit margins slightly for FY20F/21F due to higher sales growth in the value products.

  • Earlier this year, Delfi exited its non-profitable IDR500 value products targeted at the General Trade channel. As such, its margins were higher in 1H19. As sales of its IDR1,000 value products picked up to fill the void, its gross profit margins declined as these products command lower margins.
  • Moving forward, we are expecting the company’s premiumisation strategy to offset the increase in sales mix of these value products and have adjusted our gross profit margin assumptions from 35.7%/ 35.9% for FY20F/21F to 35.5% each year.

Revised EBIT margins upwards slightly for FY19F/20F/21F due to better cost management initiatives.

  • We revised our EBIT margins from 9.3%/ 9.8%/ 10.3% for FY19F/ 20F/ 21F to 10.1%/ 9.9%/ 9.9% due to lower selling and distribution expenses and lower administrative expenses as a percentage of revenue. Due to the faster-growing MT channels, we believe that the sales channel mix will continue to shift towards a higher MT channel sales mix, resulting in slightly lower selling and distribution expenses as a percentage of revenue.
  • In addition, investments in software (SAP) to reduce manpower hours will reduce administrative expenses as a percentage of revenue.

Decoupled relationship between TTM EPS and share price persists.

  • Even as Delfi reports higher TTM earnings, its share price continues to trend downwards. We expect this relationship to resume as Delfi’s EPS continues to improve as a result of its ongoing efforts on premiumisation and Van Houten rejuvenation.


  • Maintain BUY with a slightly higher Target Price of S$1.51. See Delfi Share Price; Delfi Target Price.
  • Our Target Price is pegged to the 2-year average FY20F forward PE of 23.1x.

Where we differ:

  • We believe the continued growth in EPS will lead to the resumption of the relationship between its trailing-12-months (TTM) EPS and share price.

Potential Catalysts:

  • Stronger growth arising from Indonesia’s consumption and regionalisation, and Van Houten.

Alfie YEO DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-11-14
SGX Stock Analyst Report BUY MAINTAIN BUY 1.51 UP 1.490