Analysts at DBS Group Research and CGS International have kept their “hold” and “add” calls on Delfi after its 3QFY2024 ended September results release.
DBS’s Zheng Feng Chee and Andy Sim note that Delfi’s 9MFY2024 results revealed challenges facing the company in maintaining the current margins without losing significant market share.
“Accordingly, the company has pivoted to increase promotional spending to protect its market share. While we expect high cocoa prices to continue to adversely impact its margins, the effect could ease in 2HFY2025, based on Mondelez’s outlook,” they add.
CGSI’s Tay Wee Kuang similarly points out elevated cocoa prices, aside from stronger US dollar against Indonesian rupiah, which could continue to pressure margins. That said, Tay believes that demand in Indonesia could improve in FY2025.
The elevated cocoa prices also led to Delfi seeing its gross profit margin slide 2 percentage points y-o-y to 26.4% in 3QFY2024, its lowest since 3QFY2020. Given Delfi’s procurement strategy of purchasing forward for its key raw materials, such as cocoa and sugar, Tay thinks Delfi should see its gross profit margins stabilise going forward — as visibility in its average raw material prices should allow the company to undertake product strategies, such as price increases and package resizing.
Meanwhile, Zheng and Sim believe the consumer environment in Indonesia remains challenging, with the possibility of customers downtrading from premium chocolate products to mainstream chocolate products.
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Under a Trump presidency, the DBS analysts expect Indonesia to benefit from China+1 and see increased foreign investments, which could provide a much-needed boost to consumer sentiment and improve demand for premium chocolates.
DBS has maintained its target price on Delfi at 80 cents, while trimming FY2024 and FY2025 earnings estimates by 11% and 16% respectively on lower margin assumptions.
“We believe the company may continue to focus on shareholder returns with stable absolute dividends despite the current challenging climate, given its balance sheet strength and strong free cash flow generation. This translates to an attractive about 6% yield at the current price while awaiting a valuation re-rating upon returning to earnings growth,” the analysts add.
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CGSI’s Tay has kept his forecasts unchanged, expecting sales volume to pick up into 4QFY2024 on hopes the installation of the new government will spur consumer sentiment and support consumption growth. His target price has been lifted to 96 cents from 93 cents previously after rolling forward to 11x FY2926 P/E, 0.5 standard deviation below Delfi’s 5-year mean due to near-term headwinds.
As at 3.30pm, shares in Delfi are trading at an unchanged 81.5 cents.
