• Own Brands to support growth
• Efforts made towards sustainability
• Higher dividends YTD

2Q17 Helped by Divestment Gain

Delfi Ltd’s 2Q17 revenue was down 5.8% YoY to US$100.2m while PATMI was up 14.4% to US$9.3m, helped by a one-off pre-tax divestment gain of US$4.6m. 1H17 revenue of US$193.3m and PATMI of US$14.9m met 49% of our full year estimates. 1H17 PATMI was down 10% amid a weak retail environment in Indonesia, and the group had eliminated the bulk of weaker performing SKUs in late 2016.

Some Positive Indicators

There were some bright spots – 1) while Own Brands sales started on a soft note, sales saw double digit growth in the remaining two months of 2Q, 2) higher underlying sales (in local currency) in Regional Markets, 3) gross profit margin (GPM) sustained at 33.2% for 2Q vs. 33% in 1Q given lower input costs albeit higher depreciation from the Bandung production facility.

Continued Investments for Sustainable Growth

Delfi has been continuously investing in various aspects of the business for the future, including brand building, capacity, distribution capabilities and supply chain integration. Efforts have also been made within the organization such that there are now a few teams to focus on each of the various trade channels. Realizing benefits from these investments is increasingly necessary as the retail environment becomes more challenging in the group’s key markets. Given the above on-going investments, we expect operating costs to remain high.

Maintain Hold

As such, management has also guided lower profitability this year on the expectation of stable sales in 2H vs. 1H. The group sees demand to be driven by their core products, while they also continue to push for higher margin products. We believe GPM is able to sustain at the normalized level of 33%, while upside could come from a better sales mix.

Considering the outlook, we tweak our estimates and rolling forward to 30x FY18F P/E, we keep our HOLD with a FV estimate of S$2.08 (previous: S$2.21). An interim DPS of 1.66 S-cents was declared. Together with the 1.35 DPS paid in May-17, total DPS of 3.01 S-cents/share YTD is higher than 1.83 S-cents last year (excluding the capital reduction).

Source: OCBC Research - 10 Aug 2017