May 11, 2017

Delfi’s 1Q17 results were not pretty but were more of a quarterly blip, than a structural change in our view.

Group sales were down 10.1% yoy, reflecting the company’s own brand product rationalisation exercise in Indonesia. Regional markets sales were actually up by a modest 2.7% yoy.

Operating margins were down 2.3%pts yoy in 1Q17, as the group continues to invest in brand-building initiatives and route-to-market capabilities, exacerbated by higher taxes on dividends and royalty income. 1Q17 core net profit was down 33.4% yoy, forming only 18% of our FY17F.

Sales decline in Indonesia (-14.7% yoy, -16.6% yoy in constant currency) was the main culprit behind 1Q’s weak earnings, though Delfi’s Indonesia market share is largely unchanged at c.50%.

We expected Delfi to build on 2016 momentum (improvement in own brand and premium product sales), underestimating impact of its product rationalisation initiatives (culled c.30% of SKUs in Indonesia since it started in 2H16). We think the product rationalisation programme will continue to hinder near-term sales. However, we like the company’s strategy of focusing on its core brands, better positioning the business in the long term, as well as improve profitability from freed resources of underperforming SKUs.

Delfi’s biggest improvement in 2016 was its GPM, and expectations were running high after the stellar 38.4% GPM in 4Q16. Hence, 1Q17 GPM of 33.0% will be seen as low, even though it was up yoy (1Q16: 31.9%), mostly due to a change in sales mix of lower premium products in Indonesia, as well as higher discounts and rebates in regional markets. Management highlighted that a sustainable GPM range is 33-35%.

Although 1Q17 results were a miss, we keep our FY17-19F EPS forecasts as we foresee earnings recovery in 2H17F. Maintain HOLD. No change to TP S$2.30, based on 25x CY18 P/E. –CIMB


Delfi closed at: S$2.26