Analysts are keeping their “buy” calls on Delfi Limited P34 after the company’s results for the FY2022 ended Dec 31, 2022, surpassed their expectations.
Delfi’s FY2022 earnings of US$43.9 million ($59.1 million) surpassed DBS Group Research’s expectations by 29.3%. Delfi’s full-year earnings also accounted for 125% of UOB Kay Hian’s estimates for the FY2022.
The analysts at DBS Group Research and UOB Kay Hian have also lifted their target prices with DBS’s new target price at $1.52 from $1.31 previously. UOB Kay Hian’s target price has been lifted to $1.71 from $1.42 previously.
“Our target price is pegged to 14.5x FY2023 earnings based on -1.5 standard deviation (s.d.) of its five-year mean historical P/E,” writes DBS analyst Andy Sim.
“We expect 53% upside as the valuation re-rates towards its five-year historical average, which we believe will happen when investors are convinced that the business is back on a growth trajectory and delivering on shareholder returns,” he adds.
UOB Kay Hian’s new target price is based on an FY2023 P/E of 17x, which is pegged to its long-term mean, say analysts John Cheong and Heidi Mo.
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To Cheong and Mo, Delfi’s two business lines, own brands and agency brands, displayed a “solid performance” across all its markets in FY2022.
“Overall, own brands and agency brands recorded respective increases in sales of 19.0% and 19.6% yoy. In particular, Indonesia’s growth in revenue is attributable to Delfi’s premium brands SilverQueen and Cha Cha, which both saw double-digit growths. New products, largely healthier snacks targeting millennials and Gen-Zs, were also launched during the year, supporting the segment’s revenue growth,” they write.
During the year, Delfi also reported a “healthy balance sheet” of US$58 million and positive operating cash flow, which the analysts like.
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“Having scaled down long-term borrowings since FY2015, Delfi had zero long-term debt obligations as at end-FY2022. The group does however have short-term borrowings that are mainly used for financing the working capital to purchase cocoa beans,” the analysts note.
“We think Delfi’s healthy balance sheet and positive operating cash flow provide the group with a large enough cash buffer to weather any tough conditions,” they add.
Further to their report, UOB Kay Hian’s Cheong and Mo say they expect to see “steady earnings growth” as Indonesia’s consumers “emerge stronger” from the pandemic.
“We expect Delfi’s revenue from the Indonesia market to grow 10% in FY2023 to FY2025 as Indonesia’s economy and consumers emerge stronger after the pandemic. Bank Indonesia projects Indonesia’s economy to grow 4.9% in 2023 and 5.1% in 2024. For 2022, Indonesia’s economy grew 5.3%, a solid recovery from the pandemic years where the economy contracted by 2.1% in 2020 and grew by only 3.7% in 2021. Increasing health consciousness and a surge in disposable income are seen to be the growth drivers,” they write.
To this end, Cheong and Mo have lifted their earnings estimates for the FY2023 and FY2024 by 22% and 18% to $47 million and $50 million respectively.
“These figures reflect the strong performance recorded in 2022 and improving margins moving forward,” they say.
To DBS’s Sim, Delfi’s market dominance in the chocolate confectionery market in Indonesia, which is a result of its extensive distribution network, is “impressive” given the geographical challenges in the Indonesian market.
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Looking ahead, the analyst expects Delfi’s ebitda margins to remain at around 15% with “higher input costs offset by [an] product mix of premium offerings”.
“With a majority of the Group’s products catering to the mid-upper income, we expect demand to remain resilient while it extends its reach in the premium category and introduces more products in the healthy snacks category targeting millennials and Gen-Z consumers,” says Sim.
As Indonesia’s GDP is expected to register a growth of 5% for 2023 with consumer confidence on the path to recovery from the pandemic, Sim expects the buoyant sentiment to drive higher chocolate consumption.
Domestic consumption could also see a boost in the lead-up to Indonesia’s election in February 2024, he adds.
In Sim’s view, Delfi’s management is confident that FY2023 will be a “very strong year” for the company given the substantial increase in inventory levels.
“However, this is something to watch for given potential risk of inventory write-offs should demand fall short of expectations,” he says.
“Management indicated that they have been able to push more products to distributors ahead of the first Valentine’s Day and Lebaran without Covid restrictions in three years. We remain optimistic, but watchful of potential significant distributor returns and write-offs should end-demand be lacklustre,” he adds.
Like his peers at UOB Kay Hian, DBS’s Sim has also upped his FY2023 and FY2024 earnings estimates by 31.8% and 32.1% respectively.
“We revised our earnings up significantly on the back of blowout FY2022 earnings. We expect earnings growth to taper from a record FY2022 with lower gross margin due to higher input costs. Net margin should also come off from a flow through of lower gross margin and higher dividend withholding taxes,” he writes.
Sim’s estimates for Delfi’s FY2023 and FY2024 revenue was also increased by 12.3% and 11.4% respectively.
“We revised our revenue projection up on back of cautious optimism on sustained demand growth for chocolate especially in Indonesia, as chocolate consumption remains underpenetrated, suggesting untapped market potential,” he adds.
Shares in Delfi closed 2 cents higher or 1.89% up at $1.08 on March 6.
