SINGAPORE (Feb 23): CIMB Research is leaving its “hold” rating on Delfi unchanged with a slightly lower target price of $2.30 from $2.31 previously despite a recent fourfold surge in 4Q16 earnings to US$3.7 million ($5.2 million).
(See also: Delfi’s 4Q16 earnings surge more than fourfold on record margins)
In a Wednesday report, CIMB analyst Jonathan Seow opines that the stock is fully-valued, and that current valuations are not compelling enough for an upgrade to “buy”.
While the distributor of chocolate confectionery products reported record profit margins of 38.4% in the latest quarter, the analyst points out that the stock’s 4Q net profit of US$5.7 million was still a miss despite improving margins and positive signs “hinting at an improved consumption environment”.
Nevertheless, Seow notes that Delfi’s 4Q sales growth would have been a higher 17.5% y-o-y if not for the cessation of its Singapore distribution business – suggesting that the group’s efforts earlier in the year to rationalise underperforming products in the Philippines are “now bearing fruit”.
“We think downside risk could come from higher selling and distribution (S&D) costs as the company’s focus is now on investing in its brand building initiatives (consistent with its premiumisation strategy),” cautions the analyst.
“It is also trying to grow shelf space presence across all its retail channels and invest in more in-store promotions. Hence, S&D expenses/sales of 24% in 4Q were on the high side (vs. 15-20% range historically).”
As at 10.55am, shares of Delfi are trading 1.72% higher at $2.36.
