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DBS sweet on Delfi; maintains ‘buy’ call and raises TP to $1.63

Bryan Wu
Bryan Wu • 3 min read
DBS sweet on Delfi; maintains ‘buy’ call and raises TP to $1.63
Delfi is the market leader in chocolate confectionery in Indonesia, where confectionery consumption looks to remain high. Photo: Albert Chua
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DBS Group Research has maintained its “buy” call on Delfi with a higher target price of $1.63, up from $1.52 previously, as confectionery consumption in Indonesia looks to remain high.

In their report dated Aug 10, analysts Chee Zheng Feng and Andy Sim say they expect Delfi, the market leader in chocolate confectionery in Indonesia, to benefit from “buoyant” consumer confidence that is likely to drive higher chocolate consumption. The company’s “solid” 1HFY2023 ended June 30 results are paving the way for a strong set of full-year numbers, according to the analysts.

For the six months ended June, Delfi’s revenue increased 16.2% y-o-y and earnings increased 30.1% y-o-y to US$286.2 million ($386.1 million) and US$25.2 million, respectively. While the analysts say that this formed 53% of their full-year FY2023 earnings estimates, they also note that the first half period has historically contributed to around 60% of Delfi’s full-year revenue.

Nevertheless, the company’s top-line growth in 1HFY2023 was boosted by stronger growth of 21.5% in regional market sales, while Indonesia sales grew by 13.7%. Excluding the currency effect arising from weaker regional currencies, overall revenue grew by 22.2% and earnings grew by 30.1%.

Gross margins for the period expanded 0.6 percentage points y-o-y, due to an improved sales mix and pricing actions which offset ingredient cost increases, as ebitda margins remained flat on slightly lower operating income in 1HFY2023. Meanwhile, higher selling and distribution costs as a percentage of sales was offset by lower administrative expenses as a percentage of sales in 1HFY2023 compared to 1HFY2022.

With around 90% of Delfi’s operating profit coming from Indonesia, they have taken the country’s overall economic performance and the Indonesia Consumer Confidence Index (CCI) as key indicators for Delfi’s sales performance and, by extension, its share price.

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According to them, Indonesia’s CCI has been on the uptrend and has recovered to pre-Covid levels, signalling buoyant consumer sentiment, which is positive for discretionary chocolate consumption.

Meanwhile, Delfi’s newly onboarded agency brand is driving top-line growth with margins remaining stable amidst high raw material costs. As such, the analysts expect revenue and earnings to grow at 15.2% and 5.0% in FY2023 and 10.2% and 5.7% in FY2024, respectively.

The analysts see Delfi’s margins remaining relatively stable in the near term with tight cost control offsetting increases in raw material costs, in particular cocoa and sugar prices, which have surged year-to-date.

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For FY2024, Chee and Sim see a normalised growth of 5% and higher depreciation costs on higher FY2023 capex spend, which came to US$13.6 million for 1HFY2023. Overall, they have adjusted their FY2024 revenue and earnings estimates up by 2.1% and 1.7% on continued growth from FY2023, negated partially by higher depreciation expenses.

The analysts have rolled forward their valuation and applied a 14.4x price-to-earnings ratio (P/E) or 0.25 standard deviations (s.d.) above its five-year average on FY2024 earnings. They estimate that about 70% of the target price upside comes from their projected FY2022 to FY2024 earnings growth of 16%, while the remaining 30% is from a valuation re-rating, with investors gaining more confidence in the sustainability of the growth trajectory.

Their key risk remains inventory write-offs which will impact margins and earnings should end-demand fall short.

Shares in Delfi closed 1 cent or 0.76% up at $1.32 on Aug 11.

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