Remain confident for 2018. Key reasons being:
i. Positive consumer sentiment. Indonesia saw two consecutive monthly improvements in consumer confidence in April and May. We believe the improved sentiment and tapered inflation would help to encourage consumption of consumer discretionary goods like confectionery.
ii. YoY growth could be propped up from low base effect in 2017. Retail environment was difficult for Delfi in 2017. Consumer spending was negatively affected by the withdrawal of electricity subsidies while products were not readily available in minimarts. It has since re-organised supply chain to cater to the rise of minimarts. Moreover, it has completed the rationalisation of stock-keeping units (SKUs), which should reverse the negative trend in sales growth.
iii. Strong traction in core brands. According to management, core brands including SilverQueen, Cha Cha, Ceres and Delfi premium products have been growing at above 20% YoY. We believe it still can generate a high single-digit growth in sales even after we account for slower-moving SKUs and IDR depreciation.
iv. Currency appreciation outside Indonesia. We expect sales to grow at 3% YoY. However, appreciation of the MYR and PHP should further support topline numbers.
Value emerging. Upgrade to BUY. We think valuation is attractive, as it has come down to 27x FY18F P/E. Historically, it traded at an average of 35x historical P/E. Valuation is also undemanding compared to other consumer companies in Indonesia and Philippines (average: 34x P/E). Delfi is trading close to a 5-year low of SGD1.28.
Nonetheless, we think cocoa prices are still manageable due to Delfi’s forward purchase programme. We note that current prices are still below 2016 levels and it was able to generate a decent gross margin of >30% in 2016. The rise in cocoa prices could also be partially offset by lower sugar and palm oil prices.
Source : RHB Research