CGS-CIMB Group Research analysts Tay Wee Kuang and Izabella Tan have kept an “add” rating on Delfi with an unchanged target price of $1.09, following a recent story on Delfi and its CEO John Chuang published by The Edge Singapore.
See: How Delfi is staying tasty for consumers and investors with good nutrition, premiumisation
In the interview with The Edge Singapore, Chuang expressed his interest for the company to expand into China in the long term. Although no concrete plans have been laid out, Chuang shared some of his considerations, including potentially working with a local partner to enter the market due to the competitive landscape, as well as hopes to set up a manufacturing plant in China.
Looking at the China market, information from the Association of Chinese Chocolate Manufacturers has shown that the chocolate consumption per capita in China is 70g/year, far below the world average of 0.9kg/year. This could suggest that China presents an attractive growth opportunity with a growing demand for chocolate confectionery driven by higher discretionary income and lifestyle changes.
At present, Delfi mainly operates in Indonesia and the Philippines, with distribution presence in Malaysia, Singapore and other regional markets.
For FY2021 ended December 2021, Delfi improved its cash position from US$65.5 million to US$86.2 million while paring down its debt by US$39.3 million, reflecting good potential for future expansion plans.
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“We think Delfi’s liquidity will remain ample even if it decides to undertake expansionary capex in FY2022, such as in FY2016, where its total capex was roughly US$12 million,” say the analysts. “Otherwise, we have estimated maintenance capex of US$4 million-6 million per annum for the company.”
On that note, Chuang is confident in Delfi’s ability to manage cost pressures due to the cost visibility of up to 24 months for its key ingredients such as sugar and cocoa. According to Chuang, cost containment measures such product re-sizing and price adjustments have been a key element of Delfi’s operations, and have allowed the company to maintain a stable gross margin over the past two years despite rising raw material prices.
Tay and Tan believe that 1QFY2022 will be a good litmus test for post-Covid demand, and expect Delfi’s strong sales momentum from 4QFY2021 to be carried into 1QFY2022. driven by seasonality factors as well as potential success of its ‘Better for You’ campaign which was only rolled out in regional markets such as the Philippines and Singapore in the later part of FY2021.
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Delfi’s ‘Better for You’ campaign involves the group introducing into the market for sale healthier options of its chocolate treats that are lower in sugar and higher in cocoa content. Chuang has mentioned that this effort has been implemented across most of the group’s products, providing the market with a healthier alternative for almost all of the products that are under Delfi’s belt.
Thanks to the group success in this campaign, along with its premiumisation efforts bearing fruit, the group has dished out a final dividend of 1.8 US cents and a special dividend of 0.48 US cents in FY2021. This represents a yield of 4.8%.
Overall, the analysts view the stock’s valuations as attractive, as it is trading at 13x 12-month forward P/E with a core dividend yield of about 4%.
Some downside risks the analyst anticipate include margin compression from extenuating cost conditions.
As at 4.16pm, shares in Delfi are trading at 1 cent higher or 0.63% up at 80 cents at a FY2022 P/B ratio of 1.41x and dividend yield of 4.06%.
Photo: The Edge Singapore/ Albert Chua
