Excerpts from CGS-CIMB report
Analysts: TAY Wee Kuang & Izabella Tan

Delfi Ltd 1H23F a litmus test for sustainable growth

■ We think Delfi will benefit from the strong retail sales index for Indonesia’s food, beverage and tobacco industry, which has risen yoy for 26 months.


Share price:


■ While average price of its key raw materials have risen 4.5-10.7% YTD, we think Delfi’s premiumisation efforts will support its GP margins.
■ Findings from our channel checks suggest that Indonesia’s snacking category is likely to see revenue growth in 2023F, driven by volume.

Delfi choc

• Demand supported by a strong retail sales index

Indonesia’s retail sales index for the foods, beverages and tobaccos industry rose 3.2% yoy in May 2023 to 329.7 pts (Fig 1), its 26th consecutive month of yoy growth (since Apr 2021).The positive industry trend was also reflected in Delfi’s return to revenue growth in 2Q21 (Fig 2).

Our economics team, which recently raised our 2023F private consumption growth forecast for Indonesia from 4.3% to 7.2%, expects that to anchor the 4.8% real GDP growth we estimate (unchanged) for the nation for the year. We think the healthier economy will continue to drive revenue growth for Delfi, especially given its strong brand presence in Indonesia, with a diversified portfolio across various price points and trade channels.

• Prices of key raw material prices have been on the rise…


“The average price for Delfi’s key ingredients cocoa and sugar, which we estimate account for c.40-45% of its cost of sales combined, have risen 10.7% and 4.5% YTD.


The average price for Delfi’s key ingredients cocoa and sugar, which we estimate account for c.40-45% of its cost of sales combined, have risen 10.7% and 4.5% YTD (Figs 3 and 4), with sugar futures reaching an 11-year high of 26.99 US cts/lb at end-Apr.

Although, sugar prices have since tapered to c.25 US cts/lb, the likelihood of El-Nino effect in Asia could reduce sugar and cocoa harvests in 2H23F. India’s recently-announced cap on sugar exports is also likely to keep global sugar prices near record high, in our view.

• … but premiumisation and hedging efforts to offset cost pressures

Apart from a forward hedge of up to 18 months that Delfi maintains across various key ingredients such as cocoa and sugar, we think its premiumisation efforts have also improved its sales mix as observed in its resilient GP margins since FY19 (Fig 5).

Furthermore, Delfi’s shift towards healthier product offerings with higher cocoa content and substitute ingredients like nuts and berries should reduce its reliance on sugar, in our view.

• Reiterate Add with unchanged TP of S$1.65

TayWeeKuang6.23Tay Wee Kuang, analyst.Delfi’s share price has declined c.15% since its 1Q23 trading update on 16 May, despite a strong beat to our and Bloomberg consensus revenue forecasts, likely due to the lack of visibility on its cost management ahead.

It re-rated from 7x to 12x forward P/E over the last 6 months, but still trades at 0.5x s.d. below its 5-year mean of 14.4x.

Our TP remains pegged at 15x FY24F PE, which we think is justified as we expect FY23F/FY24F EPS growth of 8.4%/5.0% driven by robust domestic consumption, and modest yields above 4.0-4.5%.

Key re-rating catalysts: clarity on its cost pressures and stronger-than-expected revenue growth.

Downside risks: cost escalation from rising raw material prices, and consumer down-trading from its premium products to its value products as a result of an economic downturn in Indonesia.

Full report here.

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