CGS-CIMB Research analysts Tay Wee Kuang and Izabella Tan are keeping &ldquo add&rdquo on Delfi Limited after it reported a record set of results for the 3QFY2022 and 9MFY2022 ended Sept 30.

 

On Nov 15, Delfi posted a patmi of US$7.5 million ($10.27 million) for the 3QFY2022, representing a 539% surge y-o-y.

 

The company&rsquo s quarterly revenue, which grew by 28.7% y-o-y to US$112.0 million, was supported by a record US$42 million from regional markets, the Philippines, Malaysia and Singapore.

 

According to Tay and Tan, Delfi&rsquo s record regional figures were likely due to the successful launch of its &ldquo Better for You&rdquo campaign.

 

The company&rsquo s patmi for the 9MFY2022, at US$26.9 million, beat the analysts&rsquo FY2022 forecasts at 82%, suggesting lower non-operating expenses, such as depreciation and amortisation.

 

&ldquo We note that [Delfi]&rsquo s year-to-date (ytd) capex of US$2.0 million is significantly lower than FY2021&rsquo s US$6.9 million,&rdquo they write.

 

On this, Tay and Tan have upped their earnings estimates for the FY2022, FY2023 and FY2024 by 4.3%, 3.5% and 4.2%. This is due to their expectations of seeing lower administrative expenses, which include depreciation and amortisation.

 

That said, the analysts have lowered their target price to $1.26 from $1.28 previously due to a lower P/E multiple of 15x, which is slightly below Delfi&rsquo s five-year mean. The lower P/E multiple was reduced from 17x previously as the analysts roll their valuation to FY2024.

 

To them, Delfi is currently trading at an &ldquo attractive&rdquo forward P/E of 9.5x, 1 standard deviation (s.d.) below its historical average. At its current share price levels, Delfi is also trading at a &ldquo steep discount&rdquo to its peers&rsquo average of 20x, while providing a yield of 5% based on its 50% payout ratio.

 

The company&rsquo s payout ratio is supported by its strong net cash position of US$67.3 million, the analysts note.

 

In the upcoming 4QFY2022, while the company traditionally enjoys a stronger season due to the holidays, Delfi has cautioned about the potential macro headwinds such as currency volatility, supply chain bottlenecks and inflationary pressures.

 

&ldquo Although Delfi undertakes commercial strategies such as product resizing and price adjustments to protect its margins, we think the company may have to absorb any drastic cost increases that could disrupt consumption behaviours, especially if economic conditions deteriorate,&rdquo the analysts write.

 

&ldquo Purchases of raw material are also typically denominated in US dollars (USD) and the strong USD could compound cost pressures,&rdquo they add. &ldquo Nevertheless, Delfi has mentioned that its Premium format category has observed better sales growth, supporting its strategy of product premiumisation that tends to be more demand inelastic.&rdquo

 

The way the analysts see it, a swifter revenue growth momentum could serve as a positive catalyst to the company&rsquo s share price. On the other hand, cost spikes and a slowdown in sales momentum are downside risks.

CHOCOLATE confectionery company Delfi : P34 -1.33% posted a net profit of US$19.4 million in H1 2022, up 57.6 per cent from the corresponding period last year.

 

Delfi said in a bourse filing on Wednesday (Aug 10) that the strong H1 2022 bottom-line performance was on the back of a 17 per cent year-on-year increase in revenue to US$246.3 million, surpassing the US$226.9 million it achieved in H1 2019 - signalling a &ldquo recovery and return to pre-Covid-19 levels&rdquo .

 

Revenue growth was driven by the Indonesian segment which rose by 16.1 per cent to US$167.2 million and also from regional markets improving by 18.9 per cent to US$79.1 million.

 

&ldquo Delfi attributed its strong performance to the resilience of its own brands and its complementary agency brands, which posted year-on-year revenue growth of 20.2 per cent and 12.2 per cent respectively, as well as its ongoing efforts to strengthen its established distribution network,&rdquo the mainboard-listed company added.

 

The group has declared an interim cash dividend of US$0.0158 to be paid out to shareholders on Sep 7.

&ldquo This will be the highest interim dividend paid since 2014 and is consistent with the practice of returning profits to our shareholders through dividend, reflecting our longstanding practice of delivering value to them,&rdquo the group noted.

 

John Chuang, Delfi&rsquo s chief executive officer, said since last year the group&rsquo s markets have gradually come out of tight Covid-19 restrictions, and this has resulted in higher social and economic activities and improved consumer sentiment across the region.

 

&ldquo We continue to capitalise on this uptrend in consumption patterns that enabled us to deliver 2 consecutive quarters of strong revenue growth during H1 2022,&rdquo he added.

 

Barring any unforeseen circumstances, the group expects its performance for the year ending Dec 31, 2022, to be better than the performance in 2021. 

CHOCOLATE confectionary company Delfi : P34 +0.68% posted an earnings before interest, taxes, depreciation and amortisation (Ebita) of US$20.5 million in Q1, up 13.9 per cent from the corresponding period last year.

 

Delfi said in a business update late on Wednesday (May 18) that the growth came from higher sales and continued tight control of operating costs for the period.

 

&ldquo The growth achieved reflects the company&rsquo s focus on growing core strategic products to capture the momentum from higher consumer demand, supported by improved sentiment in the markets as economies opened up,&rdquo the mainboard-listed company added.

 

Revenue was up 11.4 per cent year on year to US$133 million, on growth from both the Indonesian and regional markets segments. Revenue for the Indonesian segment rose 9.5 per cent to US$92.8 million that for the regional markets improved by 16.1 per cent to US$40.2 million.

 

The group generated a free cash flow of US$24.9 million for the quarter ended Mar 31, which it attributed to &ldquo higher profitability and a positive moment in working capital&rdquo . The latter was achieved by a reduction in inventory of US$6.4 million and an increase in trade payables of US$3.7 million.

 

Delfi expects an improved operating environment for the remainder of the year, as economies continue to open up, improving consumer sentiment in the markets in which it operates.

 

Even so, it foresees that ongoing political uncertainties, economic volatility and supply-chain bottlenecks will lead to continued raw-material inflation in the coming year.

 

&ldquo However, with our strong balance sheet and commercial strategies in place, we can &mdash provided these uncertainties and challenges are managed, and barring unforeseen circumstances &mdash be cautiously optimistic for a better performance in 2022,&rdquo said the group.

 

CGS-CIMB Group Research analysts Tay Wee Kuang and Izabella Tan have kept an &ldquo add&rdquo rating on Delfi with an unchanged target price of $1.09, following a recent story on Delfi and its CEO John Chuang published by The Edge Singapore.

 

In the interview with The Edge Singapore, Chuang expressed his interest for the company to expand into China in the long term. Although no concrete plans have been laid out, 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 hopes to set up a manufacturing plant in China.

 

Looking at the China market, information from the Association of Chinese Chocolate Manufacturers has shown that the chocolate consumption per capita in China is 70g/year, far below the world average of 0.9kg/year. This could suggest that China presents an attractive growth opportunity with a growing demand for chocolate confectionery driven by higher discretionary income and lifestyle changes.

 

At present, Delfi mainly operates in Indonesia and the Philippines, with distribution presence in Malaysia, Singapore and other regional markets.

 

For FY2021 ended December 2021, Delfi improved its cash position from US$65.5 million to US$86.2 million while paring down its debt by US$39.3 million, reflecting good potential for future expansion plans.

 

&ldquo We think Delfi&rsquo s liquidity will remain ample even if it decides to undertake expansionary capex in FY2022, such as in FY2016, where its total capex was roughly US$12 million,&rdquo say the analysts. &ldquo Otherwise, we have estimated maintenance capex of US$4 million-6 million per annum for the company.&rdquo

 

On that note, Chuang is confident in Delfi&rsquo 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. According to Chuang, cost containment measures such product re-sizing and price adjustments have been a key element of Delfi&rsquo s operations, and have allowed the company to maintain a stable gross margin over the past two years despite rising raw material prices.

 

Tay and Tan believe that 1QFY2022 will be a good litmus test for post-Covid demand, and expect Delfi&rsquo s strong sales momentum from 4QFY2021 to be carried into 1QFY2022. driven by seasonality factors as well as potential success of its &lsquo Better for You&rsquo campaign which was only rolled out in regional markets such as the Philippines and Singapore in the later part of FY2021.

 

Delfi&rsquo s &lsquo Better for You&rsquo campaign involves the group introducing into the market for sale healthier options of its chocolate treats that are lower in sugar and higher in cocoa content. Chuang has mentioned that this effort has been implemented across most of the group&rsquo s products, providing the market with a healthier alternative for almost all of the products that are under Delfi&rsquo s belt.

 

Thanks to the group success in this campaign, along with its premiumisation efforts bearing fruit, the group has dished out a final dividend of 1.8 US cents and a special dividend of 0.48 US cents in FY2021. This represents a yield of 4.8%.

 

Overall, the analysts view the stock&rsquo s valuations as attractive, as it is trading at 13x 12-month forward P/E with a core dividend yield of about 4%.

 

Some downside risks the analyst anticipate include margin compression from extenuating cost conditions.

 

Delfi achieved full-year Patmi (including non-recurring items) of US$29.3 million for the 12 months ended Dec 31, the company' s FY2021, up 67.5%. Excluding the US$3.3 million of non-recurring items, the Group&rsquo s Patmi y-o-y growth was 48.9% as revenue and profit margins in 2021 were higher y-o-y.   Revenue grew 5.2% y-o-y to US$405.1 million in FY2021.Earnings per share in FY2021 was 4.79 US cents compared to 2.86 US cents in FY2020. Net asset value per share was 39.2 US cents as at Dec 31, up 6.2% y-o-y. 

 

Delfi has proposed a final dividend of 1.08 US cents per share and a special dividend of 0.48 US cents per share, which together with the interim dividend of 1.27 US cents per share, brings the total dividend for FY2021 to 2.83 US cents per share. Delfi last traded at $0.75. 

CHOCOLATE confectionery company Delfi Delfi: P34 0% posted earnings before interest, taxes, depreciation and amortisation (Ebitda) of US$6.4 million for the third quarter ended September, up 20.8 per cent from Ebitda of US$5.3 million in the corresponding period last year.

 

In a bourse filing on Tuesday (Nov 16), Delfi said the growth was due to higher gross profit margin and tighter control on operating expenses.

 

Gross profit margin rose 2.8 percentage points to 27 per cent in Q3, from 24.2 per cent a year ago.

 

Revenue rose 4.1 per cent to US$87 million in Q3, from US$83.6 million in the year-ago period, on the back of improvements in Indonesia and regional markets.

 

For the first 9 months of FY2021, Ebitda was 6.6 per cent higher at US$32.9 million, while revenue increased 6 per cent to US$297.5 million.

 

Quarter on quarter, however, Ebita and group revenue fell 25.3 per cent and 4.5 per cent, respectively. The group said this was due to a seasonally weaker quarter following the Lebaran festive season in Indonesia.

 

" We will continue to focus our efforts to reach out to our targeted consumers, especially Gen-Z and millennials, introducing healthier and contemporary products, as well as with the use of digital marketing," the group said.

The confectionery manufacturer' s focus is in South-east Asia, with Singapore, Malaysia and Thailand as secondary markets.

Healthier chocolates, novelty products and more sustainable business practices are just a few of the areas Delfi is working on to cater to the modern consumer, Mr Chuang told The Business Times in an interview.
Making chocolate healthier is not as simple as formulating healthier versions of existing products, he explains, because consumers will notice even subtle taste differences. It is particularly challenging to reduce sugar content without compromising on taste.
In addition, the products and existing brand perceptions could be conflicting since chocolate has been regarded as an unhealthy indulgence for so long.
This is where Delfi will use its rights to the Van Houten brand - acquired in 2018 - in certain markets in Asia and Oceania. Mr Chuang said Delfi will leverage the brand' s strong reputation while revamping it to market new, healthier products.
" It' s a long-established, credible brand globally. In Singapore, it used to be famous, but not so much now. That' s a good thing for us, because the young generations do not know much about Van Houten," he said. " In other words, we can tell a new story."
Novelty products, such as chocolates coupled with collectible items, toys and access to online experiences and games, are another growing segment that Delfi has been eyeing for the last 15 to 20 years, but only started pursuing in earnest recently.
Delfi has beefed up its product line with new products and brand collaborations to include Disney character designs on the toys.
Mr Chuang is excited about incorporating games, the Internet and educational tools into aspects of these products too.
" This is a new frontier, and I think as people have fewer children, the parents will want to buy the best for their kids. Anything to do with stimulating the mind, that is great."
Going green
Along with these new projects, Delfi has been working on going green. It is exploring ways to reduce the amount of plastic packaging used for its products, and has managed to reduce its palm oil use by replacing it with other fats like soya oil.
Rising income levels have also resulted in greater demand for real chocolates, as opposed to the cheaper compound chocolate products that use vegetable oil substitutes for cocoa butter.
Mr Chuang noted that many oil palm plantation owners are aware of the need to farm responsibly, and Delfi' s sourcing team ensures that it buys only from suppliers that conform to recycling waste and planting more trees, and do not use child labour.
Delfi' s share price has risen 36.4 per cent since the beginning of this year to S$0.955 as at last Friday, near a 52-week high of S$0.97 achieved on June 15.
Although its 2020 net profit fell 38.1 per cent to US$17.5 million from US$28.2 million the previous year, the net impact of the pandemic was " not as bad as what I would expect" , Mr Chuang said.
Delfi had formulated an emergency plan for pandemics, based on its experience with the Sars outbreak, and implemented it quickly.
It also invested nearly US$2 million in infrastructure to segregate zones in its manufacturing plants and improve air filtration and air flow, and continues to hold weekly meetings to review the situation.
The overall impact to operations has been " very minimal" , Mr Chuang said.
Retail sales at shops located in shopping malls suffered during the worst of the pandemic, but minimart sales went up as customers shopped closer to home. The lockdown baking frenzies also boosted sales of chocolate products used in baked goods.
The company saw chocolate sales recover in the second half of 2020, when people started going back out to shop more frequently.
Said Mr Chuang: " This year, we figure it should be better than last year. The indications are there for a slow recovery to pre-Covid levels. I' m confident that in the future, chocolate will be there, and people will still eat chocolates."
The recent rise in commodity prices does not faze him, as he recalls facing much greater challenges in Delfi' s early days in Indonesia, when it was still called Petra Foods.
Hedging
" The market was totally closed, with no imports, and no exchange of currencies," he said. " You needed to buy ' creatively' to get milk. And inflation was running at over 1,000 per cent a year. How can it be more challenging than that?"
He shared that Delfi hedges for longer coverage when prices are good, and uses the extra time to make adjustments to formulas, product sizes and prices to keep sales and gross profits healthy.
" Consumers hate price increases, but sometimes it' s needed, there is no other way for us. We have to deliver it with niceness, and find ways to compensate for it. . . It' s not (that you) just say, whack the price and don' t care about volume."
Delfi' s focus continues to be on South-east Asia, specifically Indonesia and the Philippines, with Singapore, Malaysia and Thailand as its secondary markets.
The two primary markets have relatively low levels of chocolate consumption per capita compared to other countries, but also have significant potential for growth on the back of rising population and income levels.
Delfi helped to cultivate the local taste for chocolate in Indonesia, where Mr Chuang' s father founded Delfi' s original chocolate manufacturing business in the 1950s.
It is now one of the market leaders in the country, which has a chocolate consumption per capita of around 300g according to Euromonitor, compared to 2kg per capita in Singapore.
The Philippines' chocolate consumption is around levels similar to Indonesia. " They still have a huge way to go. Just to get to Singapore' s level would be good enough," Mr Chuang said, referring to the room for growth in consumption per capita.
" This is the reason why all the big companies are interested in the market in Indonesia and the Philippines. This is our main market."
Expansion into other markets including China, the country with the largest market share in Asia-Pacific, is on the cards, but Delfi takes a cautious approach to entering such competitive markets.
" You can' t just come up with any chocolate that you want and send it there as an export, because everybody else is doing this, not just us," Mr Chuang said.
" Uniqueness is important. This is where we need to package it so that we can enter the market relatively successfully without taking too much risk."
The group' s cash and cash equivalents totalled US$65.5 million at the end of 2020, versus US$48.7 million in borrowings. It improved this to US$72.1 million in cash and US$18.3 million in borrowings in Q1 2021.
Looking out for acquisitions
Mr Chuang said the group is always on the lookout for brands to acquire, especially if the investment can be recouped within three to five years. However, it also conserves cash for capacity increases, which can be sizeable.
For example, a building built about five years ago cost Delfi US$50 million, which was accumulated over a few years. The group was also planning to spend US$20 million on machines this year, but postponed it because of the pandemic.
" It' s prudent to see first if the horizon is clear or whether there are dark clouds coming. But once we are clear that the situation is okay, we will be spending that," Mr Chuang said. " Right now, we have just enough to spend on the capacity investment level. But longer term, we will need to spend more money."

The confectionery manufacturer' s focus is in South-east Asia, with Singapore, Malaysia and Thailand as secondary markets.

 

PICKING up some sweets on impulse while grocery shopping was probably a common practice for many people before the pandemic.

 

But the shift to online grocery shopping has reduced the number of opportunities for confectionery companies to tempt shoppers with strategically placed, attractive store displays.

 

Such changes in consumer behaviour, especially due to technology and better access to information, have been happening more quickly in recent years, said John Chuang, the group chief executive of chocolate confectionery manufacturer and distributor Delfi.

 

" Everybody has a cellphone and can Google what is good chocolate and where it comes from. So the young consumers today are much more curious. They want to look at the label, where it' s made, what are the ingredients," Mr Chuang said.

 

" What this means is that people today and in the future can cross-check everything we say. The challenge is how do we make our products and brands relevant to today' s consumers, what they are particular about, what they are concerned with, what they are interested in? And for consumers in the future, even more so."

 

Healthier chocolates, novelty products and more sustainable business practices are just a few of the areas Delfi is working on to cater to the modern consumer, Mr Chuang told The Business Times in an interview.

 

Making chocolate healthier is not as simple as formulating healthier versions of existing products, he explains, because consumers will notice even subtle taste differences. It is particularly challenging to reduce sugar content without compromising on taste.

 

In addition, the products and existing brand perceptions could be conflicting since chocolate has been regarded as an unhealthy indulgence for so long.

 

This is where Delfi will use its rights to the Van Houten brand - acquired in 2018 - in certain markets in Asia and Oceania. Mr Chuang said Delfi will leverage the brand' s strong reputation while revamping it to market new, healthier products.

 

" It' s a long-established, credible brand globally. In Singapore, it used to be famous, but not so much now. That' s a good thing for us, because the young generations do not know much about Van Houten," he said. " In other words, we can tell a new story."

 

Novelty products, such as chocolates coupled with collectible items, toys and access to online experiences and games, are another growing segment that Delfi has been eyeing for the last 15 to 20 years, but only started pursuing in earnest recently.

 

Delfi has beefed up its product line with new products and brand collaborations to include Disney character designs on the toys.

 

Mr Chuang is excited about incorporating games, the Internet and educational tools into aspects of these products too.

 

" This is a new frontier, and I think as people have fewer children, the parents will want to buy the best for their kids. Anything to do with stimulating the mind, that is great."

 

Going green

 

Along with these new projects, Delfi has been working on going green. It is exploring ways to reduce the amount of plastic packaging used for its products, and has managed to reduce its palm oil use by replacing it with other fats like soya oil.

 

Rising income levels have also resulted in greater demand for real chocolates, as opposed to the cheaper compound chocolate products that use vegetable oil substitutes for cocoa butter.

 

Mr Chuang noted that many oil palm plantation owners are aware of the need to farm responsibly, and Delfi' s sourcing team ensures that it buys only from suppliers that conform to recycling waste and planting more trees, and do not use child labour.

 

Delfi' s share price has risen 36.4 per cent since the beginning of this year to S$0.955 as at last Friday, near a 52-week high of S$0.97 achieved on June 15.

 

Although its 2020 net profit fell 38.1 per cent to US$17.5 million from US$28.2 million the previous year, the net impact of the pandemic was " not as bad as what I would expect" , Mr Chuang said.

 

Delfi had formulated an emergency plan for pandemics, based on its experience with the Sars outbreak, and implemented it quickly.

 

It also invested nearly US$2 million in infrastructure to segregate zones in its manufacturing plants and improve air filtration and air flow, and continues to hold weekly meetings to review the situation.

 

The overall impact to operations has been " very minimal" , Mr Chuang said.

 

Retail sales at shops located in shopping malls suffered during the worst of the pandemic, but minimart sales went up as customers shopped closer to home. The lockdown baking frenzies also boosted sales of chocolate products used in baked goods.

 

The company saw chocolate sales recover in the second half of 2020, when people started going back out to shop more frequently.

 

Said Mr Chuang: " This year, we figure it should be better than last year. The indications are there for a slow recovery to pre-Covid levels. I' m confident that in the future, chocolate will be there, and people will still eat chocolates."

 

The recent rise in commodity prices does not faze him, as he recalls facing much greater challenges in Delfi' s early days in Indonesia, when it was still called Petra Foods.

 

Hedging

 

" The market was totally closed, with no imports, and no exchange of currencies," he said. " You needed to buy ' creatively' to get milk. And inflation was running at over 1,000 per cent a year. How can it be more challenging than that?"

 

He shared that Delfi hedges for longer coverage when prices are good, and uses the extra time to make adjustments to formulas, product sizes and prices to keep sales and gross profits healthy.

 

" Consumers hate price increases, but sometimes it' s needed, there is no other way for us. We have to deliver it with niceness, and find ways to compensate for it. . . It' s not (that you) just say, whack the price and don' t care about volume."

 

Delfi' s focus continues to be on South-east Asia, specifically Indonesia and the Philippines, with Singapore, Malaysia and Thailand as its secondary markets.

 

The two primary markets have relatively low levels of chocolate consumption per capita compared to other countries, but also have significant potential for growth on the back of rising population and income levels.

 

Delfi helped to cultivate the local taste for chocolate in Indonesia, where Mr Chuang' s father founded Delfi' s original chocolate manufacturing business in the 1950s.

 

It is now one of the market leaders in the country, which has a chocolate consumption per capita of around 300g according to Euromonitor, compared to 2kg per capita in Singapore.

 

The Philippines' chocolate consumption is around levels similar to Indonesia. " They still have a huge way to go. Just to get to Singapore' s level would be good enough," Mr Chuang said, referring to the room for growth in consumption per capita.

 

" This is the reason why all the big companies are interested in the market in Indonesia and the Philippines. This is our main market."

 

Expansion into other markets including China, the country with the largest market share in Asia-Pacific, is on the cards, but Delfi takes a cautious approach to entering such competitive markets.

 

" You can' t just come up with any chocolate that you want and send it there as an export, because everybody else is doing this, not just us," Mr Chuang said.

 

" Uniqueness is important. This is where we need to package it so that we can enter the market relatively successfully without taking too much risk."

 

The group' s cash and cash equivalents totalled US$65.5 million at the end of 2020, versus US$48.7 million in borrowings. It improved this to US$72.1 million in cash and US$18.3 million in borrowings in Q1 2021.

 

Looking out for acquisitions

 

Mr Chuang said the group is always on the lookout for brands to acquire, especially if the investment can be recouped within three to five years. However, it also conserves cash for capacity increases, which can be sizeable.

 

For example, a building built about five years ago cost Delfi US$50 million, which was accumulated over a few years. The group was also planning to spend US$20 million on machines this year, but postponed it because of the pandemic.

 

" It' s prudent to see first if the horizon is clear or whether there are dark clouds coming. But once we are clear that the situation is okay, we will be spending that," Mr Chuang said. " Right now, we have just enough to spend on the capacity investment level. But longer term, we will need to spend more money."