UOB Kay Hian’s analysts John Cheong and Heidi Mo are keeping their “buy” call on Delfi Limited P34 on the basis of strong economic moats resulting in better growth in an underpenetrated Indonesian market. The analysts have also kept their target price unchanged at $1.71.
In their April 12 report, the analysts say that Delfi’s strong balance sheet, iconic brands and strong market distribution network place it in a good position to maintain its market leadership position and continue to capture future growth.
The analysts explain that macro indicators of Indonesia point to a sustained performance for Delfi in FY2023.
The chocolate confectionary product manufacturer and distributor delivered an exceptional FY2022 as earnings grew by 49.9% y-o-y to US$43.9 million ($58.19 million), driven by the strong double-digit growth in its two business lines, Own Brands and Agency Brands, across all its operating markets.
“To recap, Own Brands and Agency Brands recorded respective increases in sales of 19.0% and 19.6% y-o-y,” they say. “We expect demand to remain strong in Indonesia, its key market.”
Indonesia’s gross domestic product (GDP) is expected to grow by approximately 5% in 2023, and strengthen slightly in 2024 as a result of favourable commodity prices and strong capital inflows. Along with Delfi’s management reporting a substantial US$50.6 million increase in inventory levels last year, this signals confidence in continued sales momentum in 2023.
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Delfi’s premiumisation strategy has also seen success, as its premium brands SilverQueen and Cha Cha have seen double digit growth. Since its rationalisation exercise in FY2016, 10 to 15 new products have been launched annually, targeting new customer segments.
The analysts add that despite Indonesia being the largest chocolate confectionery market in Asean, the nation’s annual chocolate consumption per capita of around 0.3 kg has still lagged behind the likes of Malaysia (about 0.5 kg), most European countries and the US (more than 5kg), suggesting untapped market potential.
In addition, the analysts think that Delfi’s healthy balance sheet and positive operating cash flow can provide the group with a large enough cash buffer to weather any tough conditions.
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Having scaled down long-term borrowings since FY2015, Delfi has zero long-term debt obligations as at end-FY2022. The group has short-term borrowings mainly used for financing the working capital to purchase cocoa beans, but their net cash position remains healthy at US$58 million, although lower than its FY2021 amount of $76 million.
The analysts say that this difference is due to management’s heavy investment of US$50.6 million in inventories in anticipation of boosted sales in 2023, which was offset by their strong performance during the year.
Delfi has also consistently maintained a dividend payout ratio of around 50% for may years, with the exception of 2020 where its payout ratio increased to 84% in order to maintain its absolute dividend amid a decline in earnings per share (EPS) due to the impact of Covid-19.
“In the recent announcement, management proposed a final dividend of 2 US cents per share and a special dividend of 0.72 US cents per share. Together with interim dividend of 1.58 US cents per share, the total dividend of 4.3 US cents per share for 2022 is 51.9% higher than that of 2021, increasing the payout ratio to 60%,” the analysts say.
The analysts expect Delfi’s payout ratio to be maintain at at least 50% in FY2023 to FY2025.
The target price of $1.71 is based on 17x 2023 P/E, pegged to its long-term mean. Delfi is currently trading at an FY2023 P/E of 11x, or a 50% discount to its Indonesian peers’ FY2023 P/E average of 22x.
Shares in Delfi Limited closed at 1 cent higher or 0.91% up at $1.09 on April 13.
