Analysts at UOB Kay Hian (UOBKH) and DBS Group Research have kept and downgraded Delfi to “hold” after the confectionery manufacturer released its 1QFY2024 ended March results, expecting the company to face challenging near-term headwinds.
These include pressured Indonesia consumers, fierce market competition and high cocoa prices, say DBS’s Chee Zheng Feng and Andy Sim. The analysts expect these headwinds to pressure sales volume and margins — accordingly, DBS has trimmed its FY2024 revenue and earnings estimate by 10.8% and 20.9% respectively.
To this end, the analysts have also lowered their target price to 96 cents from $1.63 previously.
UOBKH’s John Cheong and Heidi Mo point out that while cocoa prices have fallen to US$8,942 per tonne from its all-time high of more than US$12,000 per tonne in April, it is still three times higher than a year ago. Delfi expects to mitigate the rising commodity prices via several initiatives, including introducing new product variants with less volatile ingredient costs.
The company also has a robust balance sheet and operating cash flow, with a net cash position of US$48.4 million, Cheong and Mo notes.
“We think Delfi’s healthy balance sheet and positive operating cash flow provide the group with a large enough cash buffer to weather potential tough conditions like rising commodity prices. Additionally, management reported an inventory level of US$97.5 million in 1QFY2024, which implies management’s confidence in business growth moving forward,” they add.
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UOBKH is keeping their target price at $1.07.
Moving forward, DBS expects to continue seeing volume weakness, which may offset the higher price realisation from reduced discounting in the coming quarters.
The analysts believe Indonesian consumers could continue to face pressure given the higher-for-longer interest rates, sticky inflation as well as weak rupiah. As such, they may not be well-positioned to absorb higher prices, and will instead likely downgrade to cheaper cocoa lite products like chocolate waffles.
“While valuation looks attractive at about 10x with a yield of about 6%, we believe a return to earnings growth is needed for share price to re-rate,” DBS analysts say.
