• Consumer food companies with strong brands are doing well. There's Food Empire's sterling 3Q2023 results on instant coffee sales.

• And there's Indonesia-based Delfi, a chocolate producer. The latter's 9M2023 profit amounted to US$32.8 million (+22% y-o-y). UOB KH expects Delfi to clock another US$12 million or so in 4Q2023.

• UOB KH's target price for Delfi stock of $1.76 is a long way up from the trading price of $1.17.

• Currently, Delfi is trading at a PE of nearly 12X, a more decent valuation than Food Empire's inexpensive 8X and stock price of $1.11. 

Which is relatively inexpensive?

 

Delfi

Food Empire

9M profit

US$32.8 m

US$42.3 m

Net profit margin

7.9%

13.9%

Stock price

$1.17

$1.11

Market cap

$709 m

$587 m


Excerpts from UOB KH report

Analysts: John Cheong & Heidi Mo

3Q23: Resilient Growth Amid Rising Costs Brings Relief

Delfi’s 9M23 profit of US$32.8m (+22.1% yoy) was in line with expectations, forming 69.8% of our full-year forecast.

Delfi

Share price:
$1.17

Target: 
$1.76

The strong 15.2% yoy revenue growth was supported by double-digit growth in both Indonesia’s and regional markets’ sales.

Delfi’s 3Q23 and 9M23 performances evinced management’s success in building its brands and strengthening its distribution network.

Maintain BUY with a 4% lower PE-based target price of SS$1.76 (S$1.83 previously).


Delfi choc

RESULTS

Results in line with expectations. Delfi reported 9M23 revenue and PATMI of US$412.6m (+15.2% yoy) and US$32.8m (+22.1% yoy) respectively, accounting for 79.7% and 69.8% of our full-year forecasts respectively.


Strong cash position


As at 9M23, Delfi’s cash position remained strong at US$61.9m with no long-term debt, driven by operating cash flow of US$37.7m (+135.6% yoy)
.”

-- UOBKH

This is in line with our expectation as 1Q and 4Q are typically better-performing periods in preparation for festivities such as Valentines’ Day and Lebaran.

The strong revenue and EBITDA performance (+9.4% yoy) in 9M23 were driven by double-digit growth across both Indonesia (+13.3% yoy) and regional (+18.8% yoy) markets.

Strong consumer demand persists. Nonetheless, 3Q23 was still a robust quarter where revenue (+12.9% yoy), gross profit (+12.1% yoy) and PATMI (+1.8% yoy) improved yoy, backed by strong consumer demand.

Amid management’s investments into building the brands, 3Q23 EBITDA declined by 6.3% yoy as a result of higher selling and distribution expenses. Gross margin also contracted marginally to 29.5%, on the back of higher input costs that were largely mitigated by management’s strategic pricing, cost efficiencies and a favourable sales mix.

Healthy cash balance with solid operating cash flow. As at 9M23, Delfi’s cash position remained strong at US$61.9m with no long-term debt, driven by operating cash flow of US$37.7m (+135.6% yoy).

STOCK IMPACT

Sustained healthy growth forecast from Indonesia’s economic growth and elections. We expect Delfi’s revenue from the Indonesia market to grow 10% in 2023-25 as Indonesia’s economy continues to grow steadily. According to OECD, Indonesia’s GDP is expected to grow by approximately 5% in 2023 and strengthen slightly in 2024.

Besides a likely surge in demand in 4Q23 amid preparations for the festive season in 1Q, the Feb 24 presidential election in Indonesia may also positively impact 4Q23 sales as handouts by political parties, which usually kick off campaigns, may boost chocolate sales.

Expect limited impact from higher cocoa prices due to hedging practice and pricing adjustments. The price of Delfi’s key ingredient cocoa has continued to rally, trading at around US$4,083/tonne (+69.3% yoy) as of date. This is likely due to a larger-than-expected supply deficit, from higher cocoa demand and El Nino.

Management has also assured that it is significantly hedged for 2024. Besides this, management has implemented pricing adjustments and cost control to mitigate rising input costs.... We are therefore of the view that Delfi’s margins should remain healthy moving forward.
-- UOB KH

However, Delfi has a prudent practice of hedging its raw materials, like cocoa, as far forward as possible, as this allows it to lock in forward costs to a major extent. This in turn provides cost visibility and margin stability, which was well demonstrated in the previous El Nino from 2014-16 where gross margins expanded 5ppt yoy in 2016 and remained above 28% since.

Management has also assured that it is significantly hedged for 2024. Besides this, management has implemented pricing adjustments and cost control to mitigate rising input costs. The effectiveness of its strategies has been demonstrated in Delfi’s stable margins for 9M23 and 3Q23. We are therefore of the view that Delfi’s margins should remain healthy moving forward.

Continued product development for strategic growth. Delfi continues to build its brand proposition such that it remains relevant to consumers, in order to continue growing sales. Delfi’s initiatives include product innovation through developing new products in the healthier snacking category, introducing new flavours to Gen-Z and Millennials, and making packaging designs more appealing to them. Management expects these brand building initiatives to support Delfi’s long-term growth.

EARNINGS REVISION/RISK

We have revised 2023-2025 revenue upwards by 6%/6%/6% to US$550m/US$589m/ US$631m respectively, on the back of strong double-digit growth during the year. However, to reflect the rising input costs, we have reduced 2023-25 net margins from 9.1% to 8.2%. 2023-25 earnings have therefore been adjusted lower by 4%/4%/4% to US$45m/US$48m/US$52m respectively.  

VALUATION/RECOMMENDATION

JohnCheong423John Cheong, analyst Maintain BUY with a 4% lower PE-based target price of S$1.76 (S$1.83 previously), based on 17x 2024F PE, pegged to its long-term mean.

Delfi is currently trading at 11x 2024F PE, a 40% discount to Indonesia peers’ 2024F PE average of 18x.

SHARE PRICE CATALYST
• Higher revenue contribution from Indonesia.
• Premiumisation of product offerings.

 

• Full UOB KH report here

 

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