To The Moon

Lim & Tan Securities analyst Chan En Jie has kept his “buy” call on $DELFI LIMITED(P34.SI)$ Delfi Limited with a higher target price of $1.48 from $1.20 previously. The new target price is pegged to 14.8x of Delfi’s FY2023 P/E or at a 15% discount to its five-year average P/E.

In his report dated March 17, Chan’s optimism towards the chocolate confectionery maker is backed by their steady recovery from the pandemic as both top and bottom lines surpassed pre-pandemic FY2019.

During the FY2022 ended Dec 31, 2022, Delfi Limited remained the “undisputed market leader of chocolate confectionery products in Indonesia” after its profit rose by 49.9% y-o-y to US$43.9 million ($59.1 million). Delfi’s revenue for the year grew by 19.2% y-o-y to US$483.0 million.

“Premium brands ‘SilverQueen’ and ‘Cha Cha’ have grown by double-digits in FY2022, and sales in Indonesia (+17.5% y-o-y) were supported by the launch of [over seven] healthy snacks (August 2022) and Van Houten Vegan series (September 2022),” says Chan.

“Delfi’s huge increase in inventory levels of US$50.6 million signals management’s optimism of a FY2023 outperformance as they invest more working capital to meet higher anticipated sales,” he adds.

Looking ahead, Chan is optimistic that Delfi Limited will see a “stronger” FY2023 ahead. In his interview with Delfi, the group explained that it expects to see “strong sales” in FY2023 after it reported a huge increase in its inventory levels to US$115.5 million as at end-FY2022 from FY2021’s US$64.8 million

To this end, Chan has upped his FY2023 sales and earnings projections by 6.7% and 26.2% respectively on the back of a full recovery this year and strong GDP growth in Delfi’s key markets.

Further to his report, Chan sees other factors that support his upbeat outlook.

First, the removal of pandemic restrictions in Delfi’s key market, Indonesia, will provide an uplift to consumer demand.

Next, the group’s “premiumisation” will bode well for its margins as its premium products such as SilverQueen and Van Houten provide higher margins than projects from Delfi’s value segment.

The willingness to indulge in premium treats in Delfi’s key markets of Indonesia and the Philippines will have a “positive long-term impact on the consumption of chocolate confectioneries,” says Chan.

“In addition, Delfi’s strong branding allows it the flexibility of resizing and/or price adjustments of its premium products,” he adds.

Delfi’s “unparalleled distribution network” is still unappreciated by market watchers, the analyst notes. In his report, Chan highlights a potential for further market expansion of Delfi in Indonesia. Although Delfi is a market leader in Indonesia with a market share of over 40%, its yearly consumption per capita is only 300g, as compared to 2kg per capita of consumption in Singapore.

“Delfi remains committed to continue expanding its logistics platform to enhance its reach in major cities and remote areas,” says Chan.

Finally, the increasing distributions from the group signals confidence from its management. Since its listing in 2004, Delfi has had a steady track record in paying out dividends, which Chan believes they will continue doing so going forward.

“The dividends dished out by Delfi have been on a rising trend since FY2017, with a consistent 50-60% payout ratio over the years,” he says.

However, Chan cautions that the payout ratio may return to 50% in FY2023/FY2024, as compared to 60% in FY2022, as Delfi invests into more expansionary capex moving forward.

At its current share price levels, Delfi is trading at an attractive valuation of 10.4x FY2023 P/E compared to its 5-year average P/E of 17.5x and its peers average P/E of 23.6x.

“With both FY2022 top and bottom line at its highest since 2015, we continue to see sustained growth in FY2023/FY2024 as consumer optimism emerge from the first full years without major pandemic restrictions,” says Chan.

Shares in $DELFI LIMITED(P34.SI)$ Delfi Limited closed at $1.03 on March 20.

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