• Potentially favourable cocoa ingredients prices
• US$4.9m gain on proposed disposal
• A better FY17 expected

Cocoa prices at multi-year low

Cocoa prices have tumbled down as much as ~44% to levels seen in 2008, on abundant supply due to favourable weather conditions and weak demand. We believe lower cocoa prices could eventually translate to better cocoa ingredients prices for end buyers like Delfi. In addition, Delfi buys forward its raw material needs and manages its pricing and sizing strategy, which has contributed to a commendable gross profit margin (GPM) performance thus far. Recall that GPM has been improving sequentially from 30.8% in 4Q15 to a high of 38.4% in 4Q16.

Exiting a JV after review

Delfi recently announced its decision to exit a JV with Meiji. The group had entered into a conditional agreement with Meiji Co., Ltd (purchaser) and Meiji Seika (Singapore) to sell 50% of shareholding interest in PT Ceres Meiji Indotama (CMI). CMI was incorporated pursuant to a JV agreement in Dec-00 to engage in manufacturing and sale of confectionery products in Indonesia. After an extensive review, Delfi believes CMI is best suited to continue growing under the stewardship of Meiji, hence discussions between the parties have led to a mutual and amicable agreement to terminate the JV.

The proposed disposal’s total consideration is US$8.3m, and Delfi will recognize a pre-tax gain (after deducting associated fees) of ~US$4.9m. Importantly, exiting the JV will also allow Delfi to re-deploy its financial and human resources to focus on growing their core business in Indonesia and regional markets.

Focused on core business

OCBC Treasury Research noted that private consumption in Delfi’s core market Indonesia has been largely supportive of overall economic growth. Against this backdrop, we highlight that the group’s Own Brands segment has been growing, and higher sales of its premium products would reap better margins than the value products. Besides product innovation and tapping on new opportunities (as reflected by the JV with Orion), the group continues building its presence, thus selling and distribution costs are likely to remain high. As such, we prefer to maintain our HOLD rating with fair value estimate of S$2.37.

Source: OCBC Research - 20 Mar 2017