September 13, 2021

Sweet delight

■ Delfi’s 40% market share (FY20) and established trade channels in Indonesia will likely drive EPS growth of 15%/16%/4% for FY21F/FY22F/FY23F.

■ Trimming of non-performing SKUs by 40% from c.500 in 2015 to c.300 SKUs in 2017 enables Delfi to better capture novel consumer tastes and trends.

■ Initiate coverage with an Add rating and a TP of S$1.02, pegged at the 3-year historical mean P/E of 20x on FY22F EPS with easing restrictions as catalyst.

Reigning chocolatier in Indonesia

According to Euromonitor, Delfi commands c.40% of Indonesia’s chocolate confectionery market based on retail value in 2020. Its flagship brand, SilverQueen, is also the leading brand in the nation. Indonesia is a key driver to Delfi’s profitability, generating c.70% of its sales and more than c.90% of its EBITDA over the past five years (FY15-20). Despite Covid-19, Delfi’s sales recovered from the trough of US$70.5m in 2Q20 to a normalised level of US$119.4m in 1Q21. Given Delfi’s established presence in Indonesia, we expect sales momentum to grow beyond pre-Covid-19 levels by FY22F, supporting EPS growth of 15%/16%/4% for FY21F/FY22F/FY23F.

Portfolio facelifted for 3-year revenue CAGR over 5%

Since 2015, Delfi has rationalised its product offerings via: (1) expanding its product offering through various joint ventures; (2) strategic brand acquisitions; and (3) an extensive portfolio rationalisation exercise in 2015-17 to remove non-performing SKUs across its numerous brands. This expanded Delfi’s presence across various chocolate categories and other snacking segments, while maintaining a stable and lean portfolio comprising c.300 SKUs since 2017 from c.500 SKUs in 2015. Delfi has since enjoyed greater operating efficiencies and reduced risk of inventory obsolescence.

Strong balance sheet to support dividend payout

Relative to regional peers that are mostly in net debt position, Delfi had a net cash of US$65.5m as of FY20. This sustained its cash dividend of 2.35 US cents in FY20 despite 38% yoy decrease in net profit, on the back of positive cash flow of US$8m, after paring down debt. The dividend represented a modest yield of c.4%, which we believe is sustainable into FY23F. Peers average dividend yield at 2.2%.

Trading at -1 s.d.; initiate coverage with Add and a TP of S$1.02

Delfi trades at an attractive valuation of 15.8x forward 12m P/E, which is more than 1 s.d. below its 3-year mean and below regional peers’ valuations of 27.1x. We peg our TP of S$1.02 to 20x FY22F P/E and project demand recovery as Covid-19 cases wane across Delfi’s operating geographies. Delfi used to trade at around c.25x P/E in FY18-19. We expect business conditions to recover by FY23F. Re-rating catalysts are strong domestic recovery of demand in Indonesia and sustained growth in the Philippines and Malaysia. Downside risks are loss of market share for chocolate confectionery and weaker market dynamics.

BUY by CGS-CIMB Research. Share price closed at $0.79.