Committed to be ‘Better for You’
? In a 7 Apr article on The Edge, Delfi CEO Mr John Chuang shared its market
strategy of premiumisation and expansion plans ahead.
? We remain optimistic of Delfi’s earnings ahead with potential re-rating from a
successful ‘Better for You’ campaign. Reiterate Add with an unchanged TP.
Expressed interest in China
In an article on The Edge on 7 Apr 2022, Delfi CEO Mr John Chuang expressed his interest
for the company to expand into China in the long term. Although no concrete plans have
been laid out, Mr Chuang shared some of his considerations, including potentially working
with a local partner to enter the market due to the competitive landscape, as well as
intentions of setting up a manufacturing plant in China. Today, Delfi mainly operates in
Indonesia and the Philippines, with distribution presence in Malaysia, Singapore and other
regional markets. China resents an attractive growth opportunity with a growing demand
for chocolate confectionery driven by higher discretionary income and lifestyle changes.
According to the Association of Chinese Chocolate Manufacturers, the chocolate
consumption per capita in China is 70g/year, far below the world average of 0.9kg/year.
Strong cash balance supportive of potential expansion plans
In FY21, Delfi improved its cash position from US$65.5m to US$86.2m while paring down
its debt by US$39.3m. We think Delfi’s liquidity will remain ample even if it decides to
undertake expansionary capex in FY22F, such as in FY16, where its total capex was
roughly US$12m. Otherwise, we have estimated maintenance capex of US$4m-6m per
annum for the company.
Cost visibility to help tide margin pressures
Mr Chuang has confidence in Delfi’s ability to manage cost pressures due to the cost
visibility of up to 24 months for its key ingredients such as sugar and cocoa. Cost
containment measures such product re-sizing and price adjustments have been part-andparcel of Delfi’s operations, and have allowed the company to maintain a stable gross
margin over the past two years despite rising raw material prices (Fig 1), he said.
Maintain Add on upbeat short-term earnings outlook
1Q22F will be a good litmus test for post-Covid demand and we expect Delfi’s strong sales
momentum from 4Q21 to be carried into 1Q22F, driven by seasonality factors as well as
potential success of its ‘Better for You’ campaign which was only rolled out in regional
markets such as the Philippines and Singapore in the later part of FY21. We peg our TP of
S$1.09 on 18x CY23F P/E, 0.5 s.d. of its 5-year historical average, to account for the
disposal of its cocoa-processing business. The stock is trading at an attractive valuation at
13x 12M forward P/E with a core dividend yield of c.4%. Investors will also be entitled to
special dividend declared for FY21 of 0.48 US cents (ex. date: 29 Apr 2022), which will
bring yield to c.4.8%. Potential re-rating catalysts: a strong success from its brand
relaunches. Downside risks: margin compression from extenuating cost conditions.