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Delfi to benefit from Indonesia's strong retail sales index: CGS-CIMB

Analysts say Delfi’s 1QFY2023 results have been in line with consensus, but cite a lack of visibility on cost management ahead.

Analysts at CGS-CIMB Research have reiterated their “add” call on Delfi Limited P34 as they see the company benefiting from Indonesia’s strong retail sales index for the country’s food, beverage and tobacco industry, which has risen y-o-y for 26 months since April 2021.

“The positive industry trend was also reflected in Delfi’s return to revenue growth in 2QFY2021,” write analysts, Tay Wee Kuang and Izabella Tan.

“Our economics team, which recently raised our FY2023 private consumption growth forecast for Indonesia from 4.3% to 7.2%, expects that to anchor the 4.8% real GDP growth we estimate (unchanged) for the nation for the year,” they add.

Furthermore, the analysts expect that the healthy economy will continue to drive revenue growth for Delfi, given its strong brand presence in Indonesia, and with a diversified portfolio across various price points and trade channels.

To this end, Tay and Tan have kept their target price unchanged at $1.65. Their target price remains pegged at 15x of Delfi’s FY2024 estimated P/E. To them, this is “justified” as they are expecting the company to see an earnings per share (EPS) growth of 8.4% and 5.0% for FY2023 and FY2024 respectively. The growth is expected to be driven by robust domestic consumption, and modest yields above 4.0% - 4.5%.

That said, Tay and Tan note that shares in Delfi have declined some 15% since its trading update for the 1QFY2023 ended March 31 on May 16. To them, the dip is likely due to the lack of visibility on the company’s cost management ahead, even though Delfi’s results have been largely in line with consensus revenue forecasts.

Prices of key raw materials have been on the rise with the average price for Delfi’s key ingredients, cocoa and sugar, up by 10.7% and 4.5% year-to-date (ytd) with sugar futures reaching an 11-year high of 26.99 US cents (36 cents) per pound at end April. Cocoa and sugar accounts for around 40% to 45% of Delfi’s cost of sales combined, note the analysts.

“Although sugar prices have since tapered to [about] US$0.25 per pound, the likelihood of El-Nino effect in Asia could reduce sugar and cocoa harvests in 2H2023. India’s recently-announced cap on sugar exports is also likely to keep global sugar prices near record high, in our view.” they add.

Apart from a forward hedge of up to 18 months that Delfi maintains across various key ingredients such as coca and sugar, Tay and Tan think that its premiumisation efforts have also improved its sales mix as observed in its resilient gross profit margins since FY2019.

They are also of the view that Delfi’s shift towards healthier product offerings with higher cocoa content and substitute ingredients like nuts and berries should reduce its reliance on sugar.

Following the share price decline, shares in Delfi re-rated from 7x to 12x of its forward P/E over the last 6 months, but still trades at 0.5x standard deviation (s.d). below its five-year mean of 14.4x.

As at 3.24pm, shares in Delfi are trading 5 cents higher, or 1.55% up at $1.31.

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