• BUY, new SGD1.33 TP from SGD1.55, 48% upside with 6% FY24F yield. We maintain BUY on Delfi, due to its compelling valuation and earnings growth outlook which, in turn, is based on the recovery in regional consumption and Indonesia’s rising middle-income segment. Despite our earnings estimate cut and imputing higher raw material prices, Delfi still has a FY23-26F earnings CAGR growth of 7.5%, and trades at an attractive 9x FY24F P/E, ie -1SD from the 16x mean. Our TP is pegged to 13x FY24F P/E, at -0.5SD from the mean.

• FY23 revenue and core operating profit were lower than estimated. Delfi’s FY23 revenue of USD538m (+13% YoY) and operating profit of USD64m (+2% YoY) were below estimates. Headline earnings were, however, in line at USD46m (+5% YoY) lifted by lower effective taxes and higher-than-expected non-operating income. Revenue growth was driven by both its Indonesia (USD353m, +11% YoY) and regional markets (USD185m, +12% YoY). Its GPM was also a tad below our forecast, at 28.5% due to increased trade promotions and reclassification. Its Operating profit margin (12%) as a result, was below our forecast of 13%. Delfi declared final and special dividends of 1.74 and 0.52 US cents, which brings full year DPS to 4.32 US cents, amounting to a dividend payout ratio of c.57%.

• We cut FY24-25F earnings by 11-12%, Following misses in revenue growth and operating margins, we now impute slower revenue growth as well as narrower margin assumptions to reflect the current hike in cocoa prices. As we believe higher cocoa prices may pressure margins going forward, we pared down our gross margin assumptions. However, we are not overly pessimistic, as Delfi does have a strategy on hedging against price hikes, as well as the ability to right-size its products and defend margins. Our FY24- 25F net profit, as such, is lower by 11-12%.

• Outlook for growth is still positive. Delfi continues to be a beneficiary of the growth of Indonesia’s middle-income segment and rising disposable incomes, while its growth strategies like premiumisation, healthy snacking and introducing product variants remain intact. It is also a potential M&A target. RHB’s economists expect Indonesia’s GDP to grow by a robust 5% YoY in 2024, driven by an increase in private consumption. We continue to like Delfi for its: i) Market leadership in Indonesia, ii) positioning to capture Indonesia’s rising middle class consumption, ii) strong and comprehensive general trade network nationwide, iii) premiumisation and healthy snacking strategies, iv) exposure to regional markets, and v) strong cash flow-generative abilities.

• Key downside risks to our earnings include lower-than-expected consumption for chocolate confectionery in Indonesia, an increase in raw material prices (eg cocoa beans, sugar, etc) that could affect GPMs, and the negative effect of 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 - 19 Mar 2024