• Maintain BUY with unchanged Target Price of SGD1.59.
• 70% of Delfi sales are derived from Indonesia. We expect Delfi to do well in FY19F, led by strong sales momentum at its core brands. Growth in the premium products range should also help hold up margins.
• On the macro side, we are OVERWEIGHT the Indonesian consumer sector. Consumer sentiment in Indonesia has been upbeat. With the coming 2019 election, we believe consumer spending will be boosted by higher government stimulus and subsidy.

Positive Macros Weighed in

• Indonesia’s Consumer Confidence Index remained in the optimistic zone in Oct 2018, buoyed by positive economic outlook and income expectations. With the general election expected to be held in 2019, we note that the number of recipients for cash handouts has increased, while public servants’ salaries and pensions are to be raised by 5% on average. We believe these measures are positive for raising domestic spending in Indonesia next year.
• In addition, the IDR has strengthened 7% over the past one month. We believe this will help raise Delfi’s gross margin as the bulk of its raw material costs are denominated in USD.
• Consumer purchasing power has also improved. Given that 70% of Delfi sales are derived from Indonesia, we believe the uptick in domestic spending driven by positive macro factors is beneficial for the group.

More Can be Done With Van Houten

• More can be done with Van Houten, while sales for core brands continue to grow. Delfi’s 9M18 sales grew by 16% y-o-y, led by strong traction of its own brands. With the acquisition of the exclusive and perpetual licence for the Van Houten brand for key markets in Asia Pacific in Apr 2018, management believes more efforts can be put in to drive higher sales and profitability of this brand in 2019.
• Given that Van Houten products are largely associated with gifting, we expect to see stronger sales especially during the upcoming festive seasons like Christmas, Lunar New Year and Valentines’ Day.

SG&A Has Stabilised

• Delfi saw a sharp increase in distribution and selling fees in 2017, due to the proliferation of mini-marts in Indonesia. We note that SG&A has stabilised this year.
• We believe major investments and negotiations over trade terms with these distribution channels have largely completed, and we do not foresee big changes in SG&A next year.

BUY With Unchanged DCF-derived Target Price SGD1.59

• Delfi is the market leader in Indonesia’s confectionery space. We expect its brands to do well, in line with Indonesia strong consumption momentum for FY19.
• The stock’s current P/E valuations are also undemanding compared to its historical average of 34x.

Source: RHB Invest Research - 14 Dec 2018