Delfi Ltd - DBS Research 2020-05-22: Sweetly Valued


Delfi Ltd - Sweetly Valued

  • Slight impact to sales on regional government restrictions over COVID-19 in the past few months.
  • Operations to remain on-going and largely undisrupted.
  • Premiumisation strategy is still being executed.

Delfi is attractively valued - PEG of 0.8x

Compelling valuations at 11.9x FY21F PE, maintain BUY for 31% upside even after earnings adjustment.

  • We maintain our BUY recommendation for Delfi (SGX:P34) for its attractive valuation of - 1.5SD of its 4-year mean PE and 4.2% dividend yield. As a food staple manufacturer, Delfi remains operational across production, supply chain and logistics, albeit at a more conservative pace due to precautionary measures. Its long-term premiumisation strategy remains intact and continues to be executed despite COVID-19.
  • We like the stock for its compelling valuation (below Indonesia-focused peers that are currently trading at c.20- 22x), earnings resilience as a food staple manufacturer/ brand owner, and solid growth traction led by its premiumisation strategy.
  • Our Target Price of S$1.08 is pegged to 18x blended FY20- 21F PE.
  • Upside remains attractive at > 30% even after our earnings cut, which accounts for the slight impact of COVID- 19.

We believe share price correction is unwarranted with a good entry opportunity at current levels.

  • Since our last note Delfi Ltd - DBS Research 2020-02-27: Getting Sweeter at end-February, Delfi's share price has corrected by c.14%. We believe the correction is in part due to the deterioration in the Indonesia consumer confidence index (CCI) (correlation of 0.6) due to Indonesia’s partial lockdown stemming from the COVID-19 pandemic. However, Delfi’s operations remain largely intact apart from a slight negative impact to sales volumes and margins in recent weeks. As its earnings growth outlook remains positive, we believe the correction is unwarranted and current valuations present a good entry opportunity.

Remains operational albeit at a slower run rate

Resilient demand from minimarkets.

  • Since its first reported COVID-19 case in Indonesia in early March, the number of reported cases has risen rapidly to c.18,500 cases in late May. The Indonesian government first imposed a partial lockdown in Jakarta from 10 April to 23 April but has had to extend it as the situation worsened. Due to the partial lockdown, minimarkets have experienced good customer traffic and sell-through for Delfi remained robust. Sales to consumers were also decent throughout the Lebaran period.

General trade partially affected.

  • While modern trade is seeing resilient sell through, general trade partially affected by the outbreak with some retailers not operating. We estimate general trade sales in Indonesia to be c.40%. Even though volumes may be higher in general trade, general trade sales are compensated by lower selling prices.

Sales in Philippines on-going and impacted only by mall closures.

  • Delfi’s sales in the Philippines remain on-going with mall closures being a key negative impact, as some modern trade retailers are situated in malls. Apart from that, independent outside malls are still operating. Demand remains largely resilient, despite lesser distribution points.

Lower production capacity but premiumisation strategy still on-going.

  • As Delfi commits to ensure the safety of its employees, it has put in place social distancing and staggered working hours at its production facility which has resulted in reduced output. Due to the lower utilisation and strong demand from its minimarkets (which mainly market premium products), Delfi’s production is focused on its premium products in line with its premiumisation strategy.

Minimal impact on IDR deterioration against USD.

  • The USDIDR deteriorated to c.16,500 in March from its average of 14,100 in FY18/19 before recovering to 14,600. Impact to Delfi is minimal since it purchases its key inputs up to 18 months in advance. At the elevated FX levels, we would expect purchase commitments for forward raw materials to reduce and accelerate when the FX turns more favourable. For a procurement policy of up to 18 months in advance, there is sufficient inventory buffer for to weather short term FX volatility.

No disruption in procurement and logistics.

  • There has not been any disruption in procurement during the outbreak as suppliers are large international cocoa processors. Apart from some confusion in the distribution chain in the early days of lockdown in Indonesia and the Philippines over operational restrictions, Delfi operations have been on-going since then.

DELFI may have gained market share in Indonesia’s modern trade.

  • As a local manufacturer, Delfi was able to deliver its products to retailers’ shelves more quickly compared its foreign modern trade competitors whose finished products are imported, and the challenges may include stricter import regulations (health and safety) and higher air freight charges. Along with robust sell though in minimarkets, Delfi could have gained market share in modern trade during this period.

Cut FY20F/21F earnings by 17%/8%

Reflecting lower production and less optimistic impact from COVID-19.

  • Delfi remains largely resilient as a food staples manufacture and brand owner. However, polices implemented by regional governments have affected sell though, resulting in reduced sales vs. pre COVID-19 levels. Production will also be reduced as distancing measures are implemented in its production process. We have hence reduced our FY20-21F earnings forecasts to account for lower sales going forward.

Lower sales volumes for FY20-21F.

  • We now forecast FY20F sales to decline marginally by 1.6% y-o-y. This led by a sales growth reduction on lower sales volumes along with a less favourable IDR-USD FX assumption after its recent deterioration. We forecast sales for FY21F to be at a lower US$521m (from US$543m previously), recovering by 12.2% y-o-y due to low base and more favourable IDR-USD FX assumption. Excluding FX impact FY21F’s core revenue growth is more conservative at 10.7% y-o-y.

Lower margins in FY20F but improving due to premiumisation.

  • We forecast lower FY20F EBIT margins of 9.7% (-3ppt). This is largely due to lower utilisation at its production facilities which has some fixed costs, including depreciation. Overall EBIT and gross margins are expected to improve due to premiumisation that will be executed over the next few years.

Valuations still attractive despite earnings cut

Gradual easing of partial lockdown would benefit operations.

  • The Indonesian officials are discussing measures to gradually ease its partial lockdown from June. The current development is a five-stage draft framework which aims to restore ‘business as usual’ by the end of July. As the newly reported cases in Indonesia have yet to flatten, we believe the easing could begin from late June, which should be positive for Delfi’s sales.

PEG of 08x, maintain BUY.

Alfie YEO DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-05-22
SGX Stock Analyst Report BUY MAINTAIN BUY 1.08 DOWN 1.550