SINGAPORE (May 27): RHB Research is reiterating its strong “buy” call on Delfi with a target price of $1.68, which implies 28 times FY19F P/E and implies 24% upside and 2.5% dividend yield.

This comes after the confectionery manufacturer posted 21.6% y-o-y higher 1Q earnings of $12.6 million on the back of revenue growth and an improved gross margin, post initiatives to cull less-profitable stock keeping units (SKUs) as well as due to higher sales of premium products.

RHB is the only broker covering this stock.

In a May 16 report, analyst Juliana Cai says the group’s 1Q core PATMI of $9.4 million has met 34% of RHB’s full-year estimate, in line with expectation and thus keeping it as her top consumer sector pick.

She also thinks Delfi’s current valuation of 23 times FY19F P/E is not expensive, highlighting that at $1.35 it is trading at a “serious discount” to its competitor Mayora Indah, which is trading at 29 times.

“The group continued to see robust revenue growth of 19.5% y-o-y on the back of rising demand in Indonesia and regional markets. This was largely driven by successful marketing campaigns during Valentines’ day, launches of new products and shipment of products to trade agents in anticipation of the Lebaran festivities in early June,” comments Cai on the latest set of results.

The analyst also expects gross margin to remain high considering a fairly stable IDR in the year to date (YTD) – with no significant jump in administrative costs in sight considering how the group’s SAP system was fully implemented last year.

“Given that the IDR has been fairly stable YTD, we believe Delfi’s gross margin should be able to stay at around 35% this year,” she adds.

As at 11:21am, shares in Delfi are trading flat at $1.27 or 2.63 times Dec-29F book value.