DELFI LIMITED (SGX:P34)
Delfi - Recapturing The Value Segment; Keep BUY
- Delfi (SGX:P34) is the market leader in Indonesia’s chocolate confectionery space, with a c.45-50% market share. Despite the softer outlook for Indonesia’s domestic consumption in 2020, we expect Delfi’s earnings to grow by a solid 13% y-o-y this year, underpinned by its premiumisation strategy as well as the introduction of new products to recapture the value segment.
- Recent paring down of shares by substantial shareholders could also bring about improved liquidity.
Recapturing the market for value products.
- Delfi has done well in the last two years following the premiumisation strategy, which has helped to drive margin expansion. Moving into 2020, it plans to introduce new products in the value segment to recapture this market. These products are expected to have a better margin profile than those that were previously culled.
- We believe the launch of these new products would partially offset the slower consumption outlook for Indonesia in 2020.
Impact on profitability.
- We expect to see slight gross margin erosion in FY20-21, as new products are targeted at the value segment and have lower price points. Raw material costs have been trending up in the last six months.
- However, we note that the group does forward purchasing of raw materials to manage gross margins. As a result, we may not see an immediate and significant impact from the rise in material costs.
- The appreciation of the IDR could also help to boost its gross margins. On the other hand, we expect operating margins to remain steady on higher sales volumes and operating leverage.
Better free float.
- We believe the lack of liquidity in the stock has led to a disconnect between its share price and financial performance in the last two years. In addition, the sell-down by substantial shareholders has resulted in an overhang on the stock.
- That said, this could be positive for the market in the long term, as free-float and liquidity should improve after they cease to be major shareholders.
Undervalued counter.
- We think Delfi’s valuation is still very compelling, given that it is trading at 14x FY20F P/E, at a discount to its Indonesian peers (average: 20x FY20F PE) despite the similar growth profiles.
- Delfi’s dividend yield of close to 4% is also attractive relative to its peers.
- See Delfi Share Price; Delfi Target Price; Delfi Analyst Reports; Delfi Dividend History; Delfi Announcements; Delfi Latest News.
- Key risks: further sell-down from substantial shareholders, IDR and/or PHP depreciation, slower-than-expected domestic consumption.
Juliana Cai
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-02-07
SGX Stock
Analyst Report
1.680
SAME
1.680
