Delfi, the chocolate manufacturer which was founded in the fifties, is still generating new growth by staying on top of trends and consumer preferences.

In recent years, Delfi has rolled out healthier versions of its current range of chocolate with lesser sugar and higher cocoa content as consumers become more discerning.

More consumers, especially those from Gen Z and the millennials, are getting health-conscious. They still crave chocolate but want less sugar and preservatives and more nutrition.

Chocolate bars have gotten a bad reputation as many brands made theirs with copious amounts of sugar. However, Delfi CEO John Chuang points out that cocoa — the main ingredient in chocolate — is a superfood.

“The good thing about cocoa is that so far, there is no bad news about it. Pure cocoa is very healthy and full of antioxidants. In fact, it’s better than wine,” says Chuang in an interview with The Edge Singapore.

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Based in Indonesia, Delfi’s key brand in its product portfolio is SilverQueen but its Van Houten brand is better known. However, both brands have undergone a refresh to be more health-conscious.

For example, Van Houten’s Dark Milk series, which features a higher 43% cocoa content, was launched in 4QFY2021 ended December 2021 and will be progressively rolled out in regional markets this year. This move is part of Delfi’s “Better for You” campaign that aims to present the market with healthier and more premium options.

“In order for the business to be successful, you have to put your ear on the ground all the time,” adds Chuang. “By improving our existing products, now with a higher cocoa percentage adaptation for almost every stock-keeping unit (SKU). That is how we have been transiting into healthier products that taste great, with more cocoa.”

In its latest FY2021 results, Chuang says the campaign led to an increase in revenue in Indonesia, its largest market with revenue coming in 5.9% higher y-o-y at US$270.2 million ($366.4 million). “Launching new products to capture the ‘Better for You’ trend has been proving to be a strong growth category,” says the CEO.

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The other key trend of premiumisation will help provide Delfi with higher margins, says Chuang. With better economies and higher disposable income increases, products like premium chocolate are a status symbol and make good gifts.

“We take advantage of the gift-giving spirit during festive seasons which creates an impact for us,” says Chuang. “In Indonesia, we celebrate New Year and the Lunar New Year when chocolate continues to be a common gift item so we must try to get everybody excited during the festive seasons.”

Again, Van Houten is getting a “refresh” as part of the premiumisation strategy. “Before we acquired Van Houten, it was known a bit of an ‘old’ household name in Indonesia and other parts of Southeast Asia like Singapore and Malaysia. So our job was to really to make it relevant and useful [for the younger crowd],” he explains.

“However, one advantage of dealing with a brand from people’s grandmother’s generation is that people do not know or remember what the chocolate originally tastes like,” he adds.

The refresh includes packaging it under a “Dark Milk” series and refining its taste with more cocoa but less sugar as those from Gen Z and the millennials make up 80% of its overall consumer base.

In FY2021, the company's premiumisation strategy raised the gross profit margin to 29.5% from 28.6%. “Premium products do remain resilient amid major devaluation of the Indonesian rupiah or when consumption patterns change,” Chuang says. “Moving forward, we hope to continue with premiumisation as a core strategy.”

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Over the years, Delfi has been expanding along the value chain. Besides making chocolates, it used to own a cocoa-processing business too. However, with an output of about 400,000 metric tonnes a year, Delfi was not able to compete with bigger players that were doing at least a million metric tonnes a year. “At the time, we were faced with a choice in balancing our manpower and capital requirements,” Chuang recalls.

In 2013, Delfi sold the ingredients business to Swiss cocoa processor and chocolate manufacturer Barry Callebaut for US$950 million. The company then recycled part of the proceeds into the business such as investing more heavily in its existing premium brands such as SilverQueen.

Today, Delfi has to rely on other manufacturers for its cocoa ingredients but Chuang is not too worried about the cost of raw materials getting out of hand. According to Chuang, he has visibility of up to 24 months down the road for the main ingredients like cocoa and sugar. This means he can better plan his operations and pass on some of the cost increases to the customers if needed.

In FY2021, Delfi reported 5.2% y-o-y higher revenue of $405.1 million, thanks to stronger demand across the board. Earnings also improved by 67.5% y-o-y to US$29.3 million due to better costs control. Higher sales from products with better margins helped too.

Along with better earnings, Delfi has increased its dividend payout with a final dividend of 1.4 cents plus a special dividend of 0.64 cents, giving FY2021 a total payout of 3.79 cents, including an interim payout of 1.71 cents. In contrast, Delfi paid 3.19 cents for the whole of FY2020.

Year to date, Delfi’s share price has increased by 0.65% to trade at 77 cents on April 5. At this level, the company is valued at 11.86x historical earnings and has a market value of $470.6 million.

Following an impressive FY2021, analysts are positive about the company. DBS Group Research and CGS-CIMB Research both have “buy” and “add” recommendations on the stock, with a target price of $1.10 and $1.09 respectively. Both research houses have increased their target price in place of a better outlook for the company.

According to Woon Bing Yong of DBS, Delfi’s valuation is at an attractive level of around 12.1x forward FY2022 earnings. “Following the company’s special dividend announcement, we see Delfi as a potential dividend play, offering between a 4%–5% yield based on current prices.”

CGS-CIMB analysts Tay Wee Kuang and Izabella Tan say they like the stock for its margin growth and cost control: “Better sales momentum also translated to improved operating leverage, with lower selling and distribution expenses per revenue dollar.”

They also note that although Delfi has pared its debt by some US$39.3 million, it is sitting on a “healthy and growing” cash balance of US$86.2 million. This has given the analysts confidence to forecast the possibility of future special dividends even as Delfi runs an operating expenditure kept at between US$4 to US$6 million a year.

Apart from its domestic market, Delfi is upbeat about the Philippines as well and is keen to explore opportunities in China although there are no solid plans yet.

However, entering a new market comes with several risks and he would prefer to enter the market with a local partner. “China has a lot of potential but there will be a lot of competition because there are all sorts of sweets and local snacks already present. What I have noticed is that the younger generation is getting into chocolate but the consumption is still very low,” says Chuang, who plans to set up a manufacturing facility there.

“Our ambition is to enter the China market. We cannot run away from China but we don’t want to just take all the risks for the sake of entering the market. We still have good prospects even without entering the China market but for the long term, we can’t do without China,” says Chuang.

Photo: The Edge Singapore/ Albert Chua

How Delfi is staying tasty for consumers and investors with good nutrition, premiumisation

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