Revenue growth stave off margin pressures
- FY23 PATMI grew 5.4% yoy to US$46.3m, in line at 101.1%/99.4% of our/Bloomberg consensus’ FY23F estimates.
- In its analyst briefing call on 28 Feb 24, management attributed GP margin compression of 2.0% pts yoy in FY23 to higher promotional expenses.
- Reiterate our Add call on attractive valuation of 9x forward 12M PE; TP lowered to S$1.47 pegged at 13.8x FY25F P/E from 15.0x previously.
Underlying growth masked by weaker functional currencies
DELFI recorded revenue growth of 12.7% to US$538.2m in FY23, which we think was dampened by the weaker currencies (Fig 1) across its key countries of operations, such as Indonesia, Philippines, and Malaysia, which contributed 98.4% of its FY23 revenue. On a constant currency basis, DELFI disclosed that sales would have achieved a higher 16.2% yoy growth, translating to an additional US$4.8m in gross profit, with a constant GPM. Nevertheless, DELFI reported a 2.0% pts decline yoy in GPM for FY23, which management attributed to higher promotional spending amidst increased competition and an increase in strategic investments to strengthen core brands and into new products.
Confident in hedging against rising raw material prices
Despite the record high cocoa prices, management remains confident of its hedging policy in which DELFI maintains a forward cover on its key raw materials (i.e. cocoa, sugar, milk etc.) to allow DELFI to lock in costs in the near term, while allowing it to reevaluate product, sizing, and pricing strategy ahead of the cost pressures that are coming through. The management has also cited moderation of milk and palm oil prices that have mitigated the impact on costs from record cocoa prices.
Operating in countries with structural growth in demand
The management offered more insights to DELFI’s operations, with growth observed across both modern trade and general trade channels in Indonesia on a largely stable sales mix. With their visibility on product sell-through across the markets, management is also positive about the structural growth in demand, highlighting that revenue growth observed in FY23 was mostly driven by higher sales volume.
Maintain Add; lower TP of S$1.47 on de-rating of valuation multiple
We lower our FY24F/25F EPS by 1.4%/2.1% on lower revenue growth and GP margins, partially offset by lower selling and distribution costs. We continue to like DELFI for its market leadership in Indonesia that contributed 92.0% of its FY23 EBITDA and believe that its current trading valuation of 9x forward-12M multiple is unwarranted given regional peers’ valuation of 14.9x CY25F P/E (exc. NESZ MK). Our TP is lowered to S$1.47 after rolling forward our valuation to peg at 13.8x (5-year mean) FY25F P/E, which has fallen from 15.0x previously. Re-rating catalysts: easing cocoa prices, buoyant revenue momentum. Downside risks: escalating cocoa prices resulting in lower GP margins, and depreciation of the Rp against US$, resulting in lower revenues from translation impact.
