UOB Kay Hian Research has initiated coverage for chocolate manufacturer Delfi with a “buy” rating and a target price (TP) of $1.42.
In their report dated Feb 17, analysts John Cheong and Heidi Mo note that Delfi is an “undervalued” leader in Indonesia’s chocolate products market with a “dominant” share of the market.
They expect Delfi’s earnings to grow 20% in FY2022 and 10% in FY2023 as Indonesia’s economy and consumers emerge stronger from the pandemic.
According to Euromonitor, Delfi commands a dominant market share of approximately 41% in Indonesia, thanks to its early-mover advantage in building brand loyalty since the early 1950s. Its home market, Indonesia, where it generates more than 70% of its revenue, demonstrates vast potential based on its macro industry trends of a fast-growing middle class, a young population and high domestically-driven GDP growth, say the analysts.
Bank Indonesia is projecting Indonesia’s economy to grow 4.9% in 2023 and 5.1% in 2024. For 2022, Indonesia’s economy grew 5.3%, recovering from the previous two pandemic years during which the economy contracted by 2.1% in 2020 and grew by only 3.7% in 2021.
Meanwhile, Delfi has also been focusing on its premiumisation strategy in offering differentiated products and undertaking acquisitions, and the analysts believe the company is “well-positioned” to capitalise on the premiumisation trend. “Delfi has been focusing on its premiumisation strategy to offer differentiated products based on changing consumer taste and increasing its focus on the modern trade sector,” they say.
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Delfi’s portfolio of premium brands include SilverQueen, Delfi Premium, Selamat and Van Houten, with the acquisition of the “iconic” European brand Van Houten a testament to its premiumisation strategy, point out the analysts.
According to Barry Callebaut’s Top Chocolate Trends 2023 Report, consumers are now on the market for “intense, mindful and healthy indulgences”. Some 61% of the APAC market actively seeks out premium chocolates, while 56% have switched from traditional chocolates and confectionery to low-sugar alternatives.
Cheong and Mo say they expect rising health consciousness and a surge in disposable income to drive growth in Indonesia’s market. “From Delfi’s strong results in 3QFY2022, we note that consumers continue to indulge in chocolate confectionery,” they say.
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Although revenue from Indonesia declined by 17.6% in 2020 on Covid-19’s impact on distribution channel and operations, Delfi’s efforts to optimise its supply chain efficiency and improve its sales mix materialised in earnings with a revenue growth of 5.9% in FY2021, note the analysts.
They add: “This was achieved despite the onset of a more infectious Delta variant in 2Q2021, indicating resiliency in Delfi’s products. Its premiumisation strategy has also helped lift gross profit margin by 0.9 percentage points to 29.5% in FY2021. We believe this strategy demonstrates Delfi’s ability to capitalise on Indonesia’s growing middle class and consumers’ changing spending habits while maintaining its stranglehold in the value segment to cater to low-income consumers.”
Their TP of $1.42 is based on a 17x FY2023 price-to-earnings ratio (P/E), pegged to its long-term mean, and implies a 57.8% upside. Delfi is currently trading at an 11x FY2023 P/E, a 50% discount to its Indonesia peers’ FY2023 P/E average of 22x, note Cheong and Mo.
“We believe the valuation gap should narrow as Delfi delivers a consistent set of good results and continues to increase its dividend. We also like Delfi for its attractive 2023 dividend yield of 5%, backed by strong cash flow and balance sheet,” say the analysts.
“We think the market has overlooked the dominant market position of Delfi in Indonesia, which could make it an attractive takeover target. Its closest competitor in Indonesia, Mayora Indah, with a lower market share, is trading more than 100% higher in terms of its FY2023 P/E multiple,” they add.
As at 3.12pm, shares in Delfi were trading 0.5 cents or 0.56% up at 90.5 cents.
