• Delfi’s 40% market share (FY20) and established trade channels in Indonesia will likely drive EPS growth of 15%/16%/4% for FY21F/FY22F/FY23F.
• Trimming of non-performing SKUs by 40% from ~500 in 2015 to ~300 SKUs in 2017 enables Delfi to better capture novel consumer tastes and trends.
• Initiate coverage on Delfi with an ADD rating and a target price of S$1.02, pegged at the 3-year historical mean P/E of 20x on FY22F EPS with easing restrictions as catalyst.

Delfi - More Than a Chocolate Company

• Delfi (SGX:P34) manufactures, markets and distributes chocolate and other confectioneries. Apart from its own brands, Delfi also carries third-party agency brands through its distribution channels. Delfi first established its business in Indonesia and has since expanded operations regionally to include the Philippines, Malaysia, and Singapore.
• Delfi was founded in the 1950s when the SilverQueen and Ceres brands were first launched in Indonesia. The company was listed on SGX’s mainboard in 2004 as Petra Foods. After the sale of its cocoa ingredients business in 2013, it was renamed Delfi Ltd in 2016.
• Delfi operates two product segments:
  1. own brands, which produces, sells, and distributes its chocolates and other confectioneries; and
  2. agency brands, where it distributes a portfolio of products from other brand principals in its operating geographies.

Delfi's Own Brands

• Delfi manufactures products across different chocolate formats as well as other adjacent categories, such as sweets and snacks.
• The key markets are Indonesia and the Philippines; SilverQueen and Goya are its dominant brands in the two countries, respectively.

Delfi's Agency Brands

• This segment complements and broadens Delfi’s portfolio of making up only 40% of other regions’ sales.

Reigning Chocolatier in Indonesia

• According to Euromonitor, Delfi commands ~40% of Indonesia’s chocolate confectionery market based on pre-COVID-19 levels by FY22F, supporting EPS growth of 15%/16%/4% for FY21F/FY22F/FY23F.

Portfolio Facelifted for 3-year Revenue CAGR Over 5%

• Since 2015, Delfi has rationalised its product offerings via:
  1. expanding its product offering through various joint ventures;
  2. strategic brand acquisitions; and
  3. an extensive portfolio rationalisation exercise in 2015-17 to remove non-performing SKUs across its numerous brands.
• This expanded Delfi’s presence across various chocolate categories and other snacking segments, while maintaining a stable and lean portfolio comprising ~300 SKUs since 2017 from ~500 SKUs in 2015. Delfi has since enjoyed greater operating efficiencies and reduced risk of inventory obsolescence.

Delfi's Strong Balance Sheet to Support Dividend Payout

• Relative to regional peers that are mostly in net debt dividend yield at 2.2%.

Trading at -1 Standard Deviation; Initiate Coverage on Delfi With ADD and a Target Price of S$1.02

• Delfi's share price trades at an business conditions to recover by FY23F.

• Re-rating catalysts are strong domestic recovery of demand in Indonesia and sustained growth in the Philippines and Malaysia.
• Downside risks are loss of market share for chocolate confectionery and weaker market ynamics.

Source: CGS-CIMB Research - 10 Sep 2021