SINGAPORE (Oct 31): DBS Group Research is reinstating its coverage on Delfi Limited with a target price of $1.49, which implies an upside potential of 49%.
Despite Delfi’s share price being lacklustre due to its downbeat earnings since 2015 on its product rationalisation strategy, analyst Alfie Yeo says, “We believe there is share price upside for Delfi given the valuation discount relative to our projected earnings growth, which we expect to step up to 9%/ 13% for FY19F/20F, from -23%/+6% in FY17/18.”
“After its efforts to rationalise its product offerings and distribution channel, we believe Delfi’s earnings has reversed to a growth trajectory from FY18 and should accelerate in FY19F/ 20F. In our view, there still seems to be a gap in terms of its share price and valuation, thus offering upside to investors,” adds Yeo.
Since 2015, the group has managed to cut 40% of its total stock keeping units (SKU) and has been focusing on growing its premium brands to cater to high demand from millennials.
With its latest acquisition of the Van Houten brand license and the cessation of royalty payments (estimated at close to 7.0% Van Houten sales), the group now has a greater incentive to promote the brand in Indonesia and in the region. Yeo expects this to lift regional sales by 5.8%/7.9%/9.3% in FY19F/20F/21F.
Meanwhile, the analyst likes Delfi for its excellent distribution model to capture growth in Indonesia. The group has access to 100% of the modern trade channel and an excellent coverage of the traditional trade channel, which allows it to maintain its leading market share.
With the group’s strong brands and network, Yeo believes that Delfi could be a strategic target to acquire by investors who are keen to dominate the chocolate confectionary space in Indonesia.
As at 12.25pm, shares in Delfi are trading at $1.00, 24.6% lower YTD. The stock is also trading at 2.1 times its FY19 book with a dividend yield of 3.1%.
