SINGAPORE (Nov 18): Analysts believe chocolate confectionery company Delfi is a sweet buy following its positive 3Q19 results.

The group recorded a 47.5% increase in its 3Q19 earnings to US$5.9 million, compared to US$4.0 million in 3Q18, with revenue increasing by 9.2% y-o-y to US$112.2 million.

Breaking down by location of the markets the group operates in, both Indonesia and Regional markets saw improvements of 8.4% and 11.1% y-o-y to US$78.5 million and US$33.7 million, respectively.

Meanwhile, the group’s business segments – own brands and agency brands – saw improvements of 9.6% and 8.6% to US$71.3 and US$40.9, respectively.

Delfi’s own brand sales performance in the 3Q and 9M period continued to grow strongly, led by the premium segment products amidst the group’s strategic initiative to phase out unprofitable products in the lower-priced value format category and instead focus on growing higher priced point value products in the General Trade channel in Indonesia.

In April 2018, Delfi acquired the exclusive and perpetual license and associated rights to the Van Houten brand name for consumer chocolate and consumer cocoa products for key markets in Asia Pacific from Hershey Singapore. In 3Q19, Van Houten contributed US$3.5 million to the group’s own brands sales. Prior to the acquisition, Van Houten was classified as an agency brand in Indonesia.

In light of this, RHB Research is keeping its “buy” call on Delfi with a target price of $1.68.

In a Nov 13 report, analyst Juliana Cai says, “We continue to like the stock for its ability to generate steady growth, driven by higher sales and margins from its product premiumisation strategy.”

Delfi’s main driver of earnings seems to be the growth of its own brand sales in Indonesia. The analyst is keeping her optimism on the group’s outlook as she expects this momentum to continue to FY20 on the back of stronger domestic consumption in the group’s key markets.

However, despite delivering strong earnings performance, the analyst notes that Delfi’s share price has underperformed in the past few months as a result of lack of liquidity.

Similarly, DBS Group Research continues to rate Delfi “buy” with a higher target price of $1.51 from $1.49 previously.

In a Nov 14 report, lead analyst Alfie Yeo says, “SilverQueen, Delfi Premium, and Van Houten grew in excess of 20% y-o-y as Delfi continues to push ahead with its premiumisation strategy. Having previously revitalised its acquired brands Knick Knacks and Goya, we are positive on its initiatives with Van Houten.”

Earlier this year, the group exited its non-profitable products, which then boosted its margins in 1H19. But as sales of its IDR1,000 value products picked up to fill the void, its gross profit margins declined as these products command lower margins.

“Moving forward, we are expecting the company’s premiumisation strategy to offset the increase in sales mix of these value products and have adjusted our gross profit margin assumptions from 35.7%/ 35.9% for FY20F/21F to 35.5% each year,” says Yeo.

Furthermore, the group has in place some cost management initiatives, including the sales channel mix which will continue to shift towards higher Modern Trade (MT) channel sales mix, due to faster-growing MT channels. This will then result in slightly lower selling and distribution expenses as a percentage of revenue. In addition, investments in software (SAP) to reduce manpower hours will reduce administrative expenses as a percentage of revenue.

“Even as Delfi reports higher TTM earnings, its share price continues to trend downwards. We expect this relationship to resume as Delfi’s EPS continues to improve as a result of its ongoing efforts on premiumisation and Van Houten rejuvenation,” adds Yeo.

As at 3.45pm, shares in Delfi are trading at 98 cents or 2.0 times FY19 book with a dividend yield of 3.5%.