• Maintain BUY and SGD1.33 TP, 45% upside, c.6% FY24F yield. We retain our call on Delfi despite the current environment of high cocoa prices and a further reduction of FY25-26F earnings. We believe margin compression risks will be mitigated by existing inventory, price adjustment, right sizing, and passive inventory loading at higher cocoa prices. The stock trades at an attractive 9x FY24F P/E, ie near -1SD from the 16x mean. Our TP is pegged to 13x FY24F P/E, at -0.5SD from the mean.

• Higher cocoa prices, but slight impact for now. Since end-Dec 2023, cocoa prices have surged 122% to over USD9,000/tonne due to supply concerns in Ghana and Ivory Coast. Being a manufacturer of chocolate confectionery, cocoa is one of Delfi’s key input ingredients to its cost of sales, and higher cocoa prices would dampen its gross margins with all other factors remaining constant. As the magnitude of the recent surge in cocoa’s market price has been significant, we expect to see some but not significant impact on Delfi’s financials going forward.

• Capable of mitigating margin compression. We note that Delfi would already have up to 12 months of inventory locked in at lower prices and therefore, FY24F’s margins should not be significantly impacted due to its forward purchase strategy and existing inventory drawdown. Yet, given the recent strong rally in cocoa prices, we do not expect the company to load up aggressively on inventory at current lofted prices. Hence, we expect inventory loading to continue, albeit passively. We also believe Delfi would respond with both price adjustment and right sizing strategies to defend its margins, especially from FY25F. With a three-pronged price adjustment, right sizing, and passive inventory loading strategy in play, we expect FY25F’s margin compression to be minimal.

• We cut FY25-26F earnings by 2-3%. We have previously lowered our FY23- 24F earnings by 11-12%, imputing slower revenue growth as well as lower margin assumptions to reflect higher cocoa prices. Hence, we leave our FY24F earnings unchanged due to its ability to drawdown existing cocoa inventory. However, we trim our FY25-26F earnings by another 2-3% as we believe price adjustment would occur from FY25F – affecting demand growth further. There are no additional downgrades to our margin assumptions due to its three-pronged margin mitigation strategy. Our current FY25-26F earnings adjustment does not affect our TP, since it is pegged to FY24F’s earnings, which we have maintained.

• 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 - 12 Apr 2024