CHOCOLATE maker Delfi : P34 -1.56%on Tuesday (May 16) posted a 24.5 per cent increase in its earnings before interest, taxes, depreciation and amortisation (Ebitda) for its first fiscal quarter ended March to US$25.5 million.

 

In a brief business update filing to the bourse, the company attributed this to higher revenue, higher profitability and a &ldquo tight control of operating expenses&rdquo . 

 

Revenue for Q1 was up 20.8 per cent to US$160.8 million from US$133.1 million. 

 

The group attributed the stronger financials to &ldquo robust growth&rdquo for both its own brands and agency brands, and across both its Indonesia and regional markets. 

 

Segmentally, revenue contributions from the group&rsquo s own brands rose 17.6 per cent year on year to US$100.3 million, while agency brands&rsquo revenue was up 26.7 per cent to US$60.5 million. 

 

In Indonesia, Delfi said, revenue growth was driven chiefly by the SilverQueen and Delfi Premium products.

 

The company said its Ebitda and sales figures were stronger as its team continued to capture higher consumer demand by driving the growth of its core strategic products amid the continued post-Covid recoveries in its key markets. 

 

In Q1, the group&rsquo s gross profit margin rose to 30.4 per cent from 29.1 per cent in the corresponding year-ago period due to a higher contribution from its premium brands in the sales mix. 

 

However, on a quarter-on-quarter basis, the group&rsquo s profit margin was lower compared to Q4&rsquo s margin of 32.8 per cent, which the group attributed primarily to higher levels of trade promotions in Q1 to drive sales growth and higher consumer demand for Valentine&rsquo s Day and Lebaran. 

 

Looking ahead, the company said it remains unclear how much longer the global economic uncertainties such as higher interest rates, currency volatility, geopolitical tensions and inflationary pressures, will persist. 

 

Delfi said it expects the positive momentum in Q1 to carry on for the most of the year. 

 

&ldquo We remain focused on executing growth strategies for our core brands, strengthening our distribution capabilities and supporting growth in our regional businesses so as to continue to benefit from this expected growth in consumer demand in our key markets,&rdquo said the company.

 

&ldquo With our strong balance sheet and effective product and distribution strategies in place, barring unforeseen circumstances, we look forward to a good performance in 2023.&rdquo

 

UOB Kay Hian&rsquo s analysts John Cheong and Heidi Mo are keeping their &ldquo buy&rdquo call on Delfi Limited P34 -0.91% on the basis of strong economic moats resulting in better growth in an underpenetrated Indonesian market. The analysts have also kept their target price unchanged at $1.71.

 

In their April 12 report, the analysts say that Delfi&rsquo s strong balance sheet, iconic brands and strong market distribution network place it in a good position to maintain its market leadership position and continue to capture future growth.

 

The analysts explain that macro indicators of Indonesia point to a sustained performance for Delfi in FY2023.

 

The chocolate confectionary product manufacturer and distributor delivered an exceptional FY2022 as earnings grew by 49.9% y-o-y to US$43.9 million ($58.19 million), driven by the strong double-digit growth in its two business lines, Own Brands and Agency Brands, across all its operating markets.

 

&ldquo To recap, Own Brands and Agency Brands recorded respective increases in sales of 19.0% and 19.6% y-o-y,&rdquo they say. &ldquo We expect demand to remain strong in Indonesia, its key market.&rdquo

 

Indonesia&rsquo s gross domestic product (GDP) is expected to grow by approximately 5% in 2023, and strengthen slightly in 2024 as a result of favourable commodity prices and strong capital inflows. Along with Delfi&rsquo s management reporting a substantial US$50.6 million increase in inventory levels last year, this signals confidence in continued sales momentum in 2023.

 

Delfi&rsquo s premiumisation strategy has also seen success, as its premium brands SilverQueen and Cha Cha have seen double digit growth. Since its rationalisation exercise in FY2016, 10 to 15 new products have been launched annually, targeting new customer segments.

 

The analysts add that despite Indonesia being the largest chocolate confectionery market in Asean, the nation&rsquo s annual chocolate consumption per capita of around 0.3 kg has still lagged behind the likes of Malaysia (about 0.5 kg), most European countries and the US (more than 5kg), suggesting untapped market potential.

 

In addition, the analysts think that Delfi&rsquo s healthy balance sheet and positive operating cash flow can provide the group with a large enough cash buffer to weather any tough conditions.

 

Having scaled down long-term borrowings since FY2015, Delfi has zero long-term debt obligations as at end-FY2022. The group has short-term borrowings mainly used for financing the working capital to purchase cocoa beans, but their net cash position remains healthy at US$58 million, although lower than its FY2021 amount of $76 million.

 

The analysts say that this difference is due to management&rsquo s heavy investment of US$50.6 million in inventories in anticipation of boosted sales in 2023, which was offset by their strong performance during the year.

 

Delfi has also consistently maintained a dividend payout ratio of around 50% for may years, with the exception of 2020 where its payout ratio increased to 84% in order to maintain its absolute dividend amid a decline in earnings per share (EPS) due to the impact of Covid-19.

 

&ldquo In the recent announcement, management proposed a final dividend of 2 US cents per share and a special dividend of 0.72 US cents per share. Together with interim dividend of 1.58 US cents per share, the total dividend of 4.3 US cents per share for 2022 is 51.9% higher than that of 2021, increasing the payout ratio to 60%,&rdquo the analysts say.

 

The analysts expect Delfi&rsquo s payout ratio to be maintain at at least 50% in FY2023 to FY2025.

 

The target price of $1.71 is based on 17x 2023 P/E, pegged to its long-term mean. Delfi is currently trading at an FY2023 P/E of 11x, or a 50% discount to its Indonesian peers&rsquo FY2023 P/E average of 22x.