• Giving back to shareholders through capital reduction
• Expected to be payable on 24 Jun
• Prefer better valuations first

Stock goes ex today, 9 June

Since the completion of disposal of Delfi’s entire Consumer Ingredients business to Barry Callebaut in Jul-13, as well as the settlement over a subsequent dispute with Barry Callebaut, Delfi had proposed a capital reduction and cash distribution of ~US$60.0m or 9.82 UScents/share to shareholders. Note that the stock goes ex-entitlement for the capital reduction exercise today, and the cash distribution will be converted to SGD at an exchange rate determined on the date of books closure (13 Jun). The expected payment date is 24 Jun.

Cash pile sufficient

Over the past three years, the group had been giving back special dividends to shareholders. Finally, after consideration of capital expenditure needs and investment opportunities available to the group, it was decided that the company’s paid up capital and cash position was in excess of its medium term needs.

The capital reduction exercise is part of management’s aim to enhance shareholders’ value and obtain a more efficient capital structure. There would not be any operational changes to the company. As guidance, based on FY15 numbers, the effect is a reduction of the paid-up share capital from US$155.95m to US$95.9m, while the company’s FY15 cash balance would have had S$51.7m retained for its operations.

Remains unmoved on valuation grounds

Post 1Q16 results, we acknowledge the better set of earnings and outlook for the company, attributable to underlying sales growth and ongoing cost containment initiatives. Looking ahead, management continues to focus on developing their Own Brands segment, drive sales growth and improve cost efficiencies.

Recall that the company also recently signed a JV agreement with South Korea’s Orion Corporation, to market and distribute co-branded confectionery products in the soft biscuits and cakes category across Indonesia this year. This alliance allows both parties to tap onto each other’s distribution network, product knowledge and manufacturing expertise, potentially leading to further collaborations ahead.

Nonetheless, due to unattractive valuations at this juncture, we have a SELL rating, with an unchanged fair value estimate of S$2.15 based on 30x FY16F P/E.

Source: OCBC Research - 9 Jun 2016