Delfi - DBS Research 2020-08-13: The Deal Remains Sweet


Delfi - The Deal Remains Sweet

  • Delfi's 1H20 earnings below expectations on lower Indonesia sales and higher opex.
  • Worse is likely behind us with easing of lockdown measures and consumer confidence bottoming in May.
  • Discount to peers’ c.18-21x FY21F PE.

Delfi's 1H20 results below expectations

Net profit trailing estimates on lower sales and margins.

  • Delfi (SGX:P34)'s 1H20 net profit declined 29.6% y-o-y to US$10.8m, on the back of lower revenue as well as higher opex and operating margins led by Indonesia.
  • An interim dividend of 1.76 Scts was declared, slightly above the 1.73 Scts per share in 1H19 arising from an appreciation of USD against SGD. In USD terms, Delfi's DPS was similar at 1.27 US cts. 1H20 payout ratio increased to 71.7% versus 50-56% in recent years.

Revenue slightly below as Indonesia sales disappoints.

  • Delfi's 1H20 revenue declined to US$211.4m (-12.1% y-o-y) with Indonesia posting revenue of US$145.6m (-16.9% y-o-y) as lockdown measures impacted operations. Revenue from regional markets increased 0.6% y-o-y to US$175.2m, buoyed by higher sales in Malaysia and strong performance of the Van Houten brand.
  • Robust demand for Agency Brands in the snacking, breakfast, and healthcare categories supported sales.

Governmental lockdowns impacted sales.

  • Large-scale social restriction measures curtailed consumer mobility and affected the operations of retail customers. General Trade customers were affected by the temporary closure of many wholesalers and some distributors. Modern Trade customers experienced shorter operating hours and even the temporary closure of some retail malls.
  • Consumers are preferring to shop at physical stores closer to their homes and although online purchases have increased, the increase is at a lesser extent as compared to the western countries. These contributed to lower than expected revenue in Indonesia.

Lower operating margins.

  • While 1H20 gross profit margin increased slightly to 36.3% (+0.3ppts y-o-y) on better sales mix of premium products and direct cost containment initiatives, higher opex shaved EBIT margin to 9.3% (-1.6 ppts). Administrative costs have increased while productivity has fallen due to implementation of safety measures including disinfecting and health screening to keep its employees and products safe. This resulted in a net margin decline of 1.3ppts to 5.1%, from 6.4% in 1H19.

The worse is likely over

Signs of recovery in June following the easing of lockdown measures.

  • While 1Q20 showed modest improvement y-o-y, sales in April and May were substantially lower y-o-y as governments in their operating regions locked down their countries. However, since June 2020, business activity has started to pick up with the easing of lockdown measures, albeit not yet back to pre-COVID-19 levels.

Indonesia’s consumer confidence index (CCI) bottomed in May.

  • With the gradual easing of lockdown measures by the Indonesian government since June, the re-opening of the economy has lifted consumer sentiment. The Indonesia’s CCI bottomed in May at 77.8 (-39.3% y-o-y) as consumers’ perception on revenue hike, job availability, and purchase of durable goods improved.

Lowered FY20-21F earnings to reflect 1H20 results

Reduce sales and margin assumptions by 17-22%.

  • We have lowered our FY20-21F sales by 12% each, to account for weaker sales due to social restriction measures. We have also cut FY20F/21F net profit margins by 0.6/0.3ppts to 4.8%/5.5% to account for the impact on profitability due to smaller economies of scale (social distancing) and higher cost of implementing health screening measures at their production facilities.

Outlook remains positive

Continue to stick with our rejuvenation/rebranding of Van Houten thesis.

  • Premiumisation strategy for Van Houten remains intact in our view. Sales of Van Houten products grew in excess of 20% in FY19 and contributed to US$3m (c.5%) of sales in its regional markets in 1H20.
  • As Delfi has a track record of revitalising its acquired brands such as Knick Knacks and Goya, we continue to believe that rejuvenation and rebranding of the Van Houten brand will come through eventually.
  • With the increase in demand for healthier products, the brand building for Van Houten will take heed of this trend as well.

Maintain BUY on optimism that the worst is now behind us, Delfi's target price lowered to S$0.98, still attractive relative to peers.

  • Arising from our earnings revision, our Target Price is lowered to S$0.98. But this is partially mitigated as we roll our valuation peg to FY21F earnings, from average of FY20F/21F. We believe we are past the worst point in relation to the impact from the pandemic and cast our sights on recovery in FY21F.
  • Our Target Price for Delfi is based on 18.0x FY21F earnings, which is -1 SD of its 4-year historical mean.
  • See Delfi Share Price; Delfi Target Price; Delfi Analyst Reports; Delfi Dividend History; Delfi Announcements; Delfi Latest News.
  • Delfi is currently trading at 13.2x FY21F PE, which is -1.5 SD below its 4-year average. We think Delfi is attractively priced relative to its Indonesian-focused peers who are trading at c.18-21x FY21F PE.
  • Key risks to our recommendation could arise from second and subsequent wave of COVID-19 infection and the lingering effects on the economy and hence consumer sentiment.

Singapore Research DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2020-08-13
SGX Stock Analyst Report BUY MAINTAIN BUY 0.98 DOWN 1.080