• Maintain BUY and SGD1.33 TP, 55% upside. We remain positive on Delfi despite the current environment of high cocoa prices. We believe our earnings forecasts and margin assumptions for both FY24 and FY25 are conservative. The stock’s valuation remains attractive, at 8x FY24F P/E, ie near -1SD from the mean of 16x, while its c.6% FY24F yield is based on a 50% dividend payout assumption. Our TP is pegged to -0.5SD from the mean, at 13x FY24F P/E.

• 1Q24 revenue below, but margins and EBITDA ahead of estimates. DELFI reported 1Q24 revenue of USD150.7m (-5.3% YoY) and EBITDA of USD23.3m (-8.3% YoY). While revenue fell below estimates, its margins outperformed expectations. GPM was at 30.2% (vs our 28.5% estimate) while its EBITDA margin was at 15.5% (vs our projection of 13%). The revenue decline spanned across its Indonesia (-6.6% YoY, USD103.5m) and regional markets (-2.5% YoY, USD47.2m), where there was reduced spending on trade promotions, while the value of regional currencies softened against the USD (Delfi’s results are denominated in USD terms). Across the Indonesia and regional markets, its own-brand sales declined - albeit offset by better agency brand sales. The reduction in spending on trade promotions led to a stronger GPM (+0.5ppt, at 30.2%), while more efficient opex led to a better-than-expected EBITDA margin.

• Neutral impact on estimates. DELFI’s results have a neutral impact on our earnings forecasts, since its wider-than-estimated margins offset the impact of lower-than-expected revenue. Based on 1Q24 numbers, we have left our earnings estimates and TP largely unchanged. Management is confident of driving growth from core brands in both the premium and value formats, as well as from the modern trade independent channel. It is also capable of adjusting prices and right-sizing to preserve margins against higher input costs. There is also scope to drive margins via more efficient management of operating costs, collection and working capital. We believe that our margin assumptions are already conservative. In our view, the impact of high input prices is priced in, as we have already factored in lower GPMs – post imputing the currently elevated cocoa prices – in our projections. Indonesia’s 2024F GDP growth remains robust, at 5% YoY based on our RHB economists’ projection, supported by consumption, trade and foreign direct investments. DELFI is now trading at 8x FY24F P/E, and offering a c.6% dividend yield.

• Key downside risks to our earnings estimates include lower-than-expected consumption of chocolate-based confectionery in Indonesia, an increase in raw material prices (eg cocoa beans, sugar, etc) that could affect GPMs, and the negative effect of a change in the USD/IDR rate. Our TP includes a 2% discount to the intrinsic value, as per our in-house proprietary ESG methodology, as Delfi’s ESG score of 3 (out of 4) is one notch below the country median of 3.1.

Source: RHB Research - 4 Jun 2024