• Better set of earnings thus far
• Own Brands to drive growth
• Upgrading on price correction

Share price took a dip

After keeping our sell call on Delfi on 11 Aug following its latest results, the share price has declined by 14% vs. STI’s loss of ~0.7%. With the group’s key market being Indonesia and Philippines, broader market developments such as concerns on Indonesia’s tax amnesty program may have affected sentiment to some extent.

Delfi’s own brands to help growth

We note that Delfi’s performance had generally improved in 1H16, as management had in place cost containment initiatives, and implemented price adjustments and product rightsizing while also discontinuing some slow-moving SKUs. In addition, we have seen a smaller impact from currency depreciation. Recall that overall Own Brands sales growth in local currency terms was at 7.5% for the first half of this year, which was mainly driven by higher sales of premium products. Sales in Indonesia in local currency terms had also increased by 4.8% for 1H16. Notably, margins have also improved to 32.6% for 1H16 vs. 29.8% in 1H15 with better profitability.

Looking ahead

The group had previously highlighted that their agency brands’ sales were lower, partly due to the cessation of the distribution business in Singapore since 31 Aug-15, as well as lower sales in Indonesia due to changes in regulatory standards. Nonetheless, we do not expect major issues here. Own Brands sales have been the major contributor to the group’s business (~60% of total revenue), and we believe this segment’s sales growth momentum in local currency terms can maintain as the group continues to invest in channel expansion and brand building. That said, this also means selling and distribution costs may remain high as a percentage of sales.

Upgrading to HOLD

We had previously acknowledged the better set of earnings and outlook, but noted that valuations were not relatively attractive then. Following the share price dip, we believe downside could be limited and hence upgrade the stock from sell to HOLD with an unchanged fair value estimate of S$2.34.  

Source: OCBC Research - 22 Sept 2016