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CGS International keeps ‘add’ on Delfi with lower TP of $1.10 on rising cocoa prices concerns

Khairani Afifi Noordin
Khairani Afifi Noordin • 2 min read
CGS International keeps ‘add’ on Delfi with lower TP of $1.10 on rising cocoa prices concerns
Average cocoa prices have risen 51.4% over the past 12 months against average prices in 2023. Photo: Delfi
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CGS International (CGSI) analyst Tay Wee Kuang has kept “add” on Delfi with a lower target price of $1.10 from $1.47 previously, expecting the company’s margins to start facing pressure in 2HFY2024.

In his June 3 note, Tay points out that Delfi benefitted from the stronger 1QFY2024 ended March with the Valentine’s Day gifting period as well as Lebaran earlier this year, resulting in its US$25.5 million ebitda, in line with CGSI’s estimates. 

That said, Delfi’s revenue declined 5.3% y-o-y in 1QFY2024, marking the first quarter of y-o-y decline since 1QFY2021. This is primarily due to the decision to reduce and refocus spending on trade promotions, which suggests a weaker outlook for the rest of FY2024, Tay notes. In its 1QFY2023, revenue and ebitda contributed larger shares at 29.6% and 34.2% of FY2023’s results respectively.

Although Delfi’s gross profit margin expanded 0.5 percentage points y-o-y in 1QFY2024 to 30.2% after a reduction in trade promotions, average cocoa prices have risen 51.4% over the past 12 months against average prices in 2023.

This could lead to margin pressure going into the second half of the year, even though Delfi maintains a forward hedge policy for its raw materials to average out costs of its raw materials.

Meanwhile, RHB Bank Singapore's Alfie Yeo says Delfi's results have a neutral impact on his earnings forecasts as its wider-than-estimated margins offset the impact of lower-than-expected revenue. To this end, RHB has kept its earnings estimates and target price largely unchanged. 

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"We remain positive on Delfi despite the current environment of high cocoa prices. We believe our earnings forecasts and margin assumptions for both FY2024 and FY2025 are conservative," he adds.

Yeo has kept his "buy" call on Delfi with a target price of $1.33. 

CGSI’s new target price is based on a lower valuation multiple of 10.3x FY2025 P/E that is 0.5 standard deviation below its 5-year mean. 

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Nevertheless, Tay says Delfi continues to trade at an attractive valuation of 8.2x 12-month forward P/E compared to regional peers’ while offering a 5.8% yield for FY2024, according to CGSI’s estimates. 

As at 11.40am, shares in Delfi are trading 1.5 cents higher or 1.75% up at 87 cents.

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