Consumer Staples - DBS Research 2020-06-09: Singapore – Proxy To Regional Recovery

Consumer Staples - DBS Research | SGinvestors.io THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) JAPFA LTD. (SGX:UD2) DELFI LIMITED (SGX:P34) DEL MONTE PACIFIC LIMITED (SGX:D03)

Consumer Staples - Singapore – Proxy To Regional Recovery

  • Anticipate weak 1H20 due to demand disruption ledby COVID-19.
  • FY20F/FY21F earnings growth resilient at +2%/+11%despite 6% earnings cut for FY20F.
  • Demand recovery ahead with regional restrictions loosening from 2H20.



Resilience sales of upstream and midstream players despite challenges posed by COVID-19


Resilience in branded food manufacturers….

  • Unlike downstream F&B Foodservice stocks, branded food manufacturers are seeing more resilience both operationally and flow through to earnings. While the COVID-19 outbreak has impacted the economy across multiple sectors, we have seen limited negative impact on food manufacturers. We have cut earnings expectations by up to 17% to account for challenges posed by COVID-19.

…but with some challenges.

  • Challenges faced by food manufacturers include lower sales from lower sell-through led by closure of F&B Foodservice outlets, as well as reduced production as a result of safe distancing measures and to a small extent, logistical issues regionally. These may in some ways led to lower revenue and earnings growth outlook.

Lower alcohol volumes at Thai Beverage.

  • Thai Beverage (SGX:Y92)’s lower sales of Spirits, Beer and Food segments was offset by Non- Alcoholic Beverages (NAB). Spirits volume fell domestically and from Grand Royal Group as a result of COVID-19. Beer volumes also fell largely due to Sabeco which was impacted by
    1. strict drink driving laws;
    2. repercussions of fake news relating to Sabeco, and
    3. lockdown arising from COVID-19.
  • Sales volume for NAB improved due to higher demand for drinking water offset by volume declines in ready-to-drink tea, carbonated soft drinks, Jubjai and 100Plus. Food segment sales fell due to COVID-19 on reduced footfall.

Upstream production and sales remained strong.

  • There was minimal disruption on Japfa (SGX:UD2)’s operations during COVID-19. Revenue was driven by higher sales volumes of Poultry and Aquafeed at Japfa Comfeed in Indonesia, higher swine and feed volumes at Animal Protein in Vietnam, and higher raw milk prices and volume growth in China. Margins continued to improve y-o-y led by dairy and animal protein segment due to the abovementioned reasons.

Softer demand for Del Monte since February.

  • Del Monte Pacific (SGX:D03) saw lower sales volumes for fresh pineapples to China and Korea due to lockdowns. Demand for packaged fruit and vegetable products in the USA increased on panic buying and pantry loading. Supply of pineapple juice to F&B Foodservice in the Philippines were soft as dine-in declined. Packaged tomato and beverage products increased to food retailers in the Philippines. Consumption in the Philippines market has also shifted from F&B Foodservice to grocery retailers as consumers stayed home.

Delfi remains relatively resilient.

  • With Indonesia in a partial lockdown, Delfi (SGX:P34)’s general trade was affected mitigated by resilient demand from minimarkets and decent sales during the Lebaran period. We estimate proportion of general trade sales to be c.40%, lower compared to modern trade. General trade has higher volumes but comparatively lower average selling prices.
  • In the Philippines, mall closures affected sales of grocery retailers. Independent retailers outside of malls were operational. Demand has been resilient despite less distribution points. As a local manufacturer, we believe Delfi may have gained market share in Indonesia’s modern trade since competitors’ products are imported and with COVID-19 disruptions globally, supply of competitors’ products may have reduced.
  • Otherwise, safe distancing measures are lowering output at its production plant but there has been no disruption to procurement and logistics and minimal impact of IDR-USD FX on margins.


Challenges include lower demand from closure of F&B outlets, reduced production and logistical issues


Lower sell through for food manufacturers.

  • With regional governments encouraging people to stay home and with the closure of non-essential businesses and no dining in, these measures have led to food demand shifting from F&B Foodservices to supermarkets. Food manufacturers would see lower demand affected by loss of on-trade sales volumes either through lower footfall or temporary closures of F&B outlets.
  • Even if orders from distributors remain resilient over this period, sales to distributors might slow eventually as a result of destocking in the channels. Food sales through supermarkets have not been spared as mall closures in regions like the Philippines have led to slower volume sales as well.

Some supply chain issues.

  • Some supply chain issues have been seen regionally as governments institute restrictions on businesses. Food manufacturers nonetheless remain essential businesses and will ultimately be allowed to operate. Sourcing by and large has not been disrupted with upstream food suppliers still allowed to operate, and food manufacturers continuing to supply finished goods. Any hiccups should be minor, such as the confusion which has largely been resolved in the early days of governments implementing restrictions.
  • Delfi had experienced logistical issues in Indonesia and the Philippines in the early days of government restrictions but this has since been resolved. Apart from that, other sourcing issues may include lower production volumes that may lead to procurement constraints. Most would be able to circumvent this by finding alternate sources.
  • In the case of Del Monte, it has faced procurement issues in China over raw and packaging materials and equipment sourcing. Supply issues from China has since reverted to normal and Del Monte has also alleviated risks by sourcing from other countries.


Expect performance to gradually improve as regional consumer markets open up


Slow and gradual recovery.

  • We hold the view of a slow and gradual recovery post resumption of activities from the lifting of regional COVID-19 restrictions. While upstream consumer companies continue operating, end demand recovery could take time as consumer and businesses take time to adapt to a new consumption and business environment post COVID-19. As growth strategies remain largely intact, growth rates could moderate on more cautious consumption.

Worst month could be over for Thai Beverage.

  • We expect April sales to be the worst with the alcohol ban in Thailand. Sales should witness a progressive, albeit gradual recovery as life reverts to normalcy. With Thai Beverage’s sales skewed towards the off-trade segments and its wide repertoire of brands across different price points (particularly for Spirits), it should be better positioned to withstand headwinds. While sales would inevitably be affected in an economic slowdown, management’s focus on cost control bodes well.

Expect slower capex outlook at Japfa.

  • Growth at Japfa continues to hinge on margin expansion led by demand and supply imbalances of increasing raw milk prices in China and strong swine prices in Vietnam. However, farm expansion is expected to continue at a slower rate on weak broiler and day-old chicks (DOC) prices from weak demand due to the closure of wet markets, restaurants, and hotels caused by the COVID-19 pandemic in Indonesia.

Delfi’s growth strategy remains intact.

  • Despite impact of COVID-19 which has affected production due to distancing measures at its production plant, Delfi's premiumisation strategy remains intact. As overall production volume declines, production mix has shifted to higher priced products. As consumer markets open, and retailers return to normal activities, we expect sales volumes to improve, supporting our earnings growth forecast.


Lowered earnings by up to 17% to reflect slower demand due to COVID-19


Earnings lowered to account for drop in volumes at Thai Beverage.

  • We lowered Thai Beverage’s FY20-21F earnings by 9-16% as we factored in contraction in sales volume on the back of the impact from COVID-19. This is particularly so with lockdowns seen in its key markets, such as Thailand and Vietnam.

Lowered Japfa earnings on weaker Indonesian operations.

  • We lowered Japfa’s FY20-21F earnings by 4-9% on weaker contribution from its Indonesian operations arising from lower broiler and DOC prices, weaker IDR, mitigated partially by elevated Vietnam swine prices.

Lowering Delfi’s sales volumes forecast for FY20-21F.

  • We lowered Delfi's FY20-21F earnings by 8-17% as we expect sales to decline marginally by 1.6% y-o-y led by lower sales volumes along with a less favourable IDR-USD FX assumption after its recent deterioration. It also reflects reduced production as distancing measures are implemented at its production plants.
  • We also forecast lower FY20F EBIT margins largely due to lower utilisation at its production facilities which has some fixed costs, including depreciation. However, overall EBIT and gross margins are expected to improve due to its move to premium products that will be executed over the next few years. Earnings growth remains robust albeit lower at 20%/11% y-o-y for FY21F/FY22F.


Overweight upstream and midstream listed players in Singapore with BUYS on Thai Beverage, Delfi and Japfa


Thai Beverage (SGX:Y92)


Japfa (SGX:UD2)

  • BUY, Target Price S$0.86.
  • While we expect Japfa’s Indonesian operations to face headwinds (Japfa Comfeed Tbk [JPFA]) due to lower broiler and day-old chicks (DOC) prices on weaker demand in 2Q20, we expect this to be partially mitigated by its diversified operations across other geographical areas. That said, recent market prices of broiler and DOC in late May/ early June shows a decent rebound, and share price of JPFA has reflected an optimism in the past week.
  • Swine prices in Vietnam remain robust, at c.VND70,000-80,000/kg. We have trimmed our FY20-21F earnings earlier for Japfa by 9%/4% on weaker contributions from JPFA. Upside could come from higher-than-expected swine prices in Vietnam vs our assumption of VND55,000/kg for FY20 if prices stay alleviated. Despite recent share price performance, valuation looks attractive at 5.5x/ 4.7x FY20F/21F EV/EBITDA.
  • See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.

Delfi (SGX:P34)

  • BUY, Target Price S$1.08.
  • We maintain our positive stance on Delfi as we see resilient earnings despite the impact from COVID-19. Although COVID-19 has brought about lower production volumes in recent months, its business as a food staple producer remains on-going, with decent demand expected during the Lebaran period and production leaning towards higher-margin ones. We believe recent FX weakness of IDR against USD would have minimal impact on margins as raw materials have been secured for up to 18 months.
  • Factoring regional disruptions to businesses due to governmental laws to curb the virus spread, we impute in lower sales volume in FY20F and a gradual recovery for FY21F. Nonetheless, we expect Delfi's earnings growth in FY21F to remain strong, led by a recovery from recent months’ disruptions and its premiumisation strategy. Valuations remain compelling at 11x FY20F earnings or -1.5 SD of is 4-year historical mean and below 20x peer average. Dividend yield is attractive at close to 4%.
  • See Delfi Share Price; Delfi Target Price; Delfi Analyst Reports; Delfi Dividend History; Delfi Announcements; Delfi Latest News.

Second wave of infection is a key risk.

  • The risk to our forecast and recommendation would be a second wave of COVID-19 infections post the regional lockdown. That could potentially moderate our earnings forecasts on the back of an even slower end demand.





Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-06-09
SGX Stock Analyst Report BUY MAINTAIN BUY 0.900 SAME 0.900
BUY MAINTAIN BUY 0.860 SAME 0.860
BUY MAINTAIN BUY 1.080 SAME 1.080
NOT RATED MAINTAIN HOLD 99998 SAME 99998



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