Delfi Ltd - DBS Research 2020-02-27: Getting Sweeter


Delfi Ltd - Getting Sweeter

  • Delfi (SGX:P34)'s FY19 results in line, premiumisation strategy delivering sales growth and stronger margins.
  • Final DPS of 1.45 Scts declared.
  • Raised FY20/21F earnings by 3% in anticipation of better margins.
  • Maintain BUY with a slightly higher Target Price of S$1.55.

FY19 results in line

  • Earnings driven by own brands, higher product margins and cost control. Delfi's FY19 normalised PATMI of US$28.2m (+23.8% y-o-y), in line with our expectations. Growth was driven by higher sales, margin expansion, and a turnaround in its Regional Markets. Sales of US$471.6m (+10.5% y-o-y) hit a five-year high as Indonesia and Regional Markets grew by 10.4% and 10.7% y-o-y respectively, mainly driven by higher sales of its premium brands in Indonesia.
  • Gross profit margins expanded 1.6ppts from 34.6% to 36.2% on the back of its premiumisation strategy.
  • Regional Markets saw a turnaround from US$2.2m loss in FY18 to US$4.6m profit in FY19, due to increased sales of higher margin Own Brands products, strong performance of Agency Brands products, and better cost control.

4Q19 PATMI rose strongly to US$7.0m (+68.3% y-o-y, +17.9% q-o-q).

  • Sales was US$118.9m (+10.2% y-o-y, +6.0% q-o-q) while gross profit margins expanded to 38.0% (+2.3ppt) on the back of higher gross profit margins from its premiumisation strategy and better cost control measures.

Own Brands driving sales growth and gross profit margins.

  • Sales from Own Brands continues to be the main contributor (more than 60% of the Group’s revenue). Sales of premium brands (SilverQueen, Delfi Premium, Van Houten, and Selamat) in Indonesia grew in excess of 20%.
  • In the Philippines, Goya Bars, Goya Mini Tubes, Goya Choco Spread, and Delfi Premium continued to deliver double digit growth.

Proposed final dividend of 1.49Scts/share.

  • Including interim dividends of 1.27Scts/share, Delfi's total dividend declared in FY19 was 3.22Scts/share. This represents a dividend payout ratio of c.50%.

Outlook and Recommendation

No disruptions from COVID-19.

  • There is currently no disruption to Delfi's operations in the markets it operates in. However, a worsening of the situation and a prolonged outbreak could dampen consumer sentiment and spending. Delfi currently derives c.70% of its revenue from Indonesia and the remaining portion from its neighbouring countries.

Anticipate slight pressure on gross profit margins in 1Q/2Q20 due to higher cocoa prices.

  • We believe the impact from the changes in cocoa prices on Delfi’s gross profit margins typically surfaces c.1-2 quarters later when Delfi rolls forward its hedging contracts.
  • Cocoa prices averaged US$2,544/MT in 4Q19 (+8.9% q-o-q) and US$2,762/MT in QTD-1Q20 (+8.6% q-o-q). We are expecting slight downward pressures on gross profit margins in 1Q20/2Q20.

Raised FY20-21F earnings by 3%

  • Expect premiumisation strategy to continue driving growth. We are slightly more positive on earnings going forward as we believe Delfi is capable of sustaining FY19’s gross margin of c.36.2%. We have hence raised our gross profit margin assumption from 35.5% to 36.0% on the back of higher sales of premium products.
  • Given that current margin run rate of 4Q19 was much higher at 38%, we could have been more positive in our margin assumptions had we not accounted for increasing cocoa prices in 1H20. We are also more bullish on FY21F revenue on stronger Regional Markets growth.

Valuation attractive at c.-1.5 SD of its mean valuation, with 3.6% dividend yield.

  • As a result of our earnings revision, our Target Price based on 23x FY20F PE is raised slightly to S$1.55, below - 0.5SD of its 4-year historical mean.
  • Valuation remains attractive with the stock currently trading at 13.9x FY20F PE, or close to -1.5 SD its historical mean.
  • Dividend yield is also decent at 3.6%.

Decoupled relationship between TTM EPS and share price persists.

Alfie YEO DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-02-27
SGX Stock Analyst Report BUY MAINTAIN BUY 1.55 UP 1.510