RHB Bank Singapore is reiterating its “buy” recommendation on Delfi with a lower target price of $1.33 from $1.55 previously.
Analyst Alfie Yeo likes the stock for its compelling valuation and earnings growth outlook which, in turn, is based on the recovery in regional consumption and Indonesia’s rising middle-income segment.
“Despite our earnings estimate cut and imputing higher raw material prices, Delfi still has a FY2023-FY2026 earnings CAGR growth of 7.5%, and trades at an attractive 9x FY2204F P/E,” says Yeo, adding tis this is -1 standard deviation (SD) from the 16x mean.
Referring to the group’s latest FY2023 ended December 2023 results, earnings were 5.4% higher y-o-y at US$46.3 million, while revenue was 12.7% higher y-o-y at US$538.2 million, with the growth driven by Indonesia and regional markets.
On a half year basis, 2HFY2023 earnings were 14.1% lower y-o-y, while revenue was 9% higher at US$255.2 million. This is due to higher trade promotions during the year to counter increasing competition as well as to strategically increase investment to strengthen its core brands and build products which the company believes have the strongest growth opportunities.
The board has proposed a final dividend of 1.74 US cents and special dividend of 0.52 US cents per share. Together with the interim dividend of 2.06 US cents, the total dividend for FY2023 would be 4.32 US cents per share, representing 57% of the patmi.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents.
See more: Delfi’s 2HFY2023 earnings decline 14.1% y-o-y to US$21.1 mil, proposes special dividend
Meanwhile, gross profit margin (GPM) was below Yeo’s forecast, at 28.5% due to increased trade promotions and reclassification. Its Ooperating profit margin (12%) as a result, was below forecast 13%.
“Following misses in revenue growth and operating margins, we now impute slower revenue growth as well as narrower margin assumptions to reflect the current hike in cocoa prices. As we believe higher cocoa prices may pressure margins going forward, we pared down our gross margin assumptions,” says Yeo.
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However, Yeo is not overly pessimistic, as he notes that Delfi does have a strategy on hedging against price hikes, as well as the ability to right-size its products and defend margins.
On the outlook, Yeo is upbeat as he sees positive upside for growth. “Delfi continues to be a beneficiary of the growth of Indonesia’s middle-income segment and rising disposable incomes, while its growth strategies like premiumisation, healthy snacking and introducing product variants remain intact,” says Yeo.
The analyst also sees Delfi as a potential M&A target.
RHB’s economists expect Indonesia’s GDP to grow by a robust 5% y-o-y in 2024, driven by an increase in private consumption. “We continue to like Delfi for its market leadership in Indonesia; positioning to capture Indonesia’s rising middle class consumption; strong and comprehensive general trade network nationwide; premiumisation and healthy snacking strategies; exposure to regional markets; and strong cash flow-generative abilities,” says Yeo.
As at 3.05pm, shares in Delfi are trading at 90 cents.
