CGS International ‘add’ $1.47

Lower multiple unwarranted

Delfi has reported a better FY2023 ended December 2023, with both revenue and earnings up over the preceding year. While CGS International’s Tay Wee Kuang is keeping his “add” call, he has trimmed his target price for the chocolate maker to take into account lower valuation multiples as growth is seen slower ahead.

In his Feb 28 note, Tay now rates Delfi at $1.47, down from $1.56 previously.

Revenue for FY2023 was up 12.7% y-o-y to US$538.2 million ($723 million) but earnings for the same period were up by a lower 5.4% to US$46.3 million.

The management attributes the 2ppt drop in gross margin to higher spending on marketing and promotion for new and existing products.

In line with the better bottom line, Delfi has declared a final dividend of 1.74 US cents per share, plus a special dividend of 0.52 US cents, bringing the total payout for FY2023 to 4.32 US cents, up slightly from 4.3 US cents paid for FY2022.

However, Tay points out that with the depreciation of the US dollar for Singapore investors collecting their dividends in Singdollar, this translates into a payout of 5.77 cents for FY2022 versus 5.75 cents for FY2023.

Nonetheless, the payout ratio at 57% represents a yield of 6% based on Delfi’s Feb 28 closing price of 95.5 cents, which is above the company’s guidance of a 50% payout ratio, plus a “commendable” yield of above 5% for the current FY2024.

According to Tay, Delfi is confident that its hedging can help it lock in prices amid record cocoa prices while allowing it to reevaluate product, sizing, and pricing strategy ahead of the cost pressures that are coming through.

Delfi has also pointed out that some key ingredients such as milk and palm oil prices are moderating, thereby offsetting higher cocoa prices.

Costs aside, Delfi is achieving revenue growth via different sales channels across different markets.

“With their visibility on product sell-through across the markets, management is also positive about the structural growth in demand, highlighting that revenue growth observed in FY2023 was mostly driven by higher sales volume,” says Tay.

His revised target price is to take into account lowered revenue and margin assumptions, thereby with a lowered valuation multiple of 13.8 times earnings, its five-year mean, down from 15 times.

“We continue to like Delfi for its market leadership in Indonesia,” adds Tay, noting that the counter, trading valuation of 9 times forward one-year multiple is unwarranted, given how regional peers are fetching 14.9 times.—