SINGAPORE (June 20): RHB Research is upgrading its call on Delfi to “buy” from “neutral” on attractive valuations as the counter closed Tuesday at $1.32, which is 27 times FY18F earnings.

The upgrade comes despite a lower target price of $1.47 from $1.54 as a result of lower gross margin forecasts, with a 4% and 2% reduction to FY19-20F EPS after factoring in RHB’s forecasts for USD/IDR to average at 14,100 for 2018, as well as rising cocoa prices.

This is because Delfi is now trading close to its five-year low of $1.28, and below its historical average of 35 times historical P/E with undemanding valuations compared to its peers in Indonesia and Philippines.  

In a Wednesday report, analyst Juliana Cai says she sees value emerging from Delfi’s retracement in share price, as she remains confident in the group’s full-year results for 2018 on improving consumer confidence in Indonesia.

“Indonesia saw two consecutive monthly improvements in consumer confidence in April and May. We s believe the improved sentiment and tapered inflation would help[ to encourage consumption of consumer discretionary goods like confectionery,” says Cai.

In particular, the analyst believes Delfi’s y-o-y growth could be propped up from the low base effect in 2017 going forward, as the group has since re-organised its supply chain to cater to the rise of minimarts. She also is confident in the group’s reversal of its negative trend in sales growth now that it has completed the rationalisation of its stock-keeping units (SKUs).

“According to management, core brands including SilverQueen, Cha Cha, Ceres and Delfi premium products have been growing at above 20% YoY. We believe it still can generate a high single-digit growth in sales even after we account for slower-moving SKUs and IDR depreciation,” adds Cai.

Beyond Indonesia, Cai expects the appreciation of the MYR and PHP to further support Delfi’s topline going forward.

She also believes the recent rise in cocoa prices will still be manageable due to the group’s forward purchase programme.

“We note that current [cocoa] prices are still below 2016 levels and it [Delfi] was able to generate a decent gross margin of >30 in 2016. The rise in cocoa prices could also be partially offset by lower sugar and palm oil prices,” says Cai.

As at 11:33am, shares in Delfi are trading flat at $1.32 or 2.73 times FY18F book.