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Biding time for growth

  • In a recent NDR with Delfi, the management shared its concerns on short-term uncertainties as consumption remains affected by Covid-19.
  • Beyond Covid-19, Delfi is positioning for growth through optimising its portfolio offerings and enhancing service levels.
  • We think the Philippines could be a potential market of growth with the introduction of other brands within its portfolio from adjacent categories.
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Recovery underway, but at uncertain pace

Sales of chocolate confectionery are down during the pandemic due to lower footfall at supermarkets and hypermarkets, as a result of mall closures amid Covid-19 restrictions. Although gradual reopening measures are in place, the situation across Delfi’s key operating markets, Indonesia and the Philippines, remains fluid. This is due to the resurgence of cases from the more transmissible Delta variant, coupled with low vaccination rates from the shortage of supplies. Nevertheless, we believe that Delfi will take no longer than two quarters for sales to recover once the situation stabilises.

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Positioning for growth beyond the pandemic

In 2020, Delfi launched two new flavours under its Indonesian flagship brand, the Green Tea Matcha and Very Berry Yoghurt, as part of its ongoing efforts to expand its product portfolio and focus on emerging consumer trends by Gen Z and millennial consumers. Delfi remains committed to product innovation in terms of flavours and packaging, and expects to continue to launch products with a healthier twist to reach its target market more effectively. Furthermore, Delfi continues to rationalise its product portfolio beyond extensive efforts during 2015-2017, and optimise route-to-markets to ensure the higher services levels that contributed to higher sales momentum observed pre-Covid-19.

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Opportunities in Philippines

The Philippines became Delfi’s second core market after the acquisition of Goya and Knick Knack in 2006. Although Indonesia and the Philippines share similar business models with sales anchored on key brands, differences in brands’ product categories meant a different consumer profile. In the Philippines, Delfi’s brands target the mid-to value level of consumption. Meanwhile, in Indonesia, a larger product range across various chocolate categories and price points captures all levels of consumption. We believe Delfi may potentially introduce adjacent categories within its current portfolio to grow its market share in the Philippines over the longer term.

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Reiterate Add with unchanged TP of S$1.02

Delfi continues to trade at a discount to peers’ average P/E of 28.8x for CY21F and below 1 s.d. of its 3-year historical mean. We expect valuations to re-rate given its recovery and growth prospects, pegging our TP at 3-year historical average P/E of 20x to FY22F earnings. Re-rating catalyst: swifter reopening of Indonesia following faster vaccination rollout. Downside risk: reinstatement of movement restriction measures.