CGS-CIMB Research analyst Tay Wee Kuang has initiated “add” on chocolate confectionery company Delfi with a target price of $1.02, representing a 32.1% upside to the counter’s last-closed price of 775 cents.

Citing Euromonitor, Tay notes that Delfi commands about 40% of Indonesia’s chocolate confectionery market based on retail value in 2020. One of its flagship brands, SilverQueen, is also the leading brand in the nation.  

See also: DBS ups Delfi's TP to $1.06 on cautious optimism for FY2022

Indonesia is a key driver to Delfi’s profitability, generating approximately 70% of its sales and more than 90% of its EBITDA over the past five years. 

Tay says Delfi’s sales have also recovered from the Covid-19 trough of US$70.5 million in the 2Q20, to a normalised level of US$119.4 million in 1Q21.

CGS-CIMB expects Delfi’s sales momentum to grow beyond the pre-Covid-19 levels by FY22F, supporting EPS growth of 15%, 16% and 4% for FY21F, FY22F and FY23F respectively.

Since 2015, Delfi has expanded its product offerings through various joint ventures, executed strategic brand acquisitions and undergone an extensive portfolio rationalisation exercise until 2017 to remove non-performing stock-keeping units (SKUs) across its numerous brands. 

This allowed Delfi to expand its presence across various chocolate categories and other snacking segments, on top of maintaining a stable and lean portfolio of about 300 SKUs in 2017. The company had then experienced greater operating efficiencies and reduced risk of inventory obsolescence. 

Unlike its regional peers that are mostly in net debt position, Delfi had a net cash of US$65.5 million as of FY20, Tay highlights. This sustained its cash dividend of 2.35 US cents in FY20 despite a 38% year-on-year decrease in net profit. 

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Tay says the dividend represented a modest yield of about 4%, which CGS-CIMB believes is sustainable into FY23F. The average dividend yield of Delfi’s peers is 2.2%. 

Delfi is currently trading at an attractive valuation of 15.8 times forward 12-months price-to-earnings (P/E), which is more than 1 standard deviation below its 3-year mean and below regional peers’ valuations of 27.1 times. 

CGS-CIMB pegs its target price of $1.02 to 20 times FY22F P/E, projecting a demand recovery as the pandemic cases shrinks across Delfi’s operating geographies. 

As at 1.25pm, shares in Delfi are trading 1.935% higher at 79 cents, with an FY2021F price to book value of 1.53 times and dividend yield 4.06%.

Photo: Delfi