Aiming for new sweet spots and next generation of sweet tooth for growth
Chocolate confectionery company Delfi has seen gradual recovery from the pandemic, supported by the reopening measures in its key operating markets. While there are still some lingering uncertainties in the business prospects, the company has guided its business to recover in the short term. Furthermore, at the moment, Delfi is relatively cheaper than its peers, which suggests potential upside.
Founded by the Chuang family back in the 1950s in Indonesia but now based in Singapore, Delfi has a well-established portfolio of chocolate confectionery brands such as “SilverQueen”, “Ceres”, and “Delfi”. According to Euromonitor, Delfi commanded about 40% of Indonesia’s chocolate confectionery market based on retail value in 2020.
Despite the spike in infection rates across its key markets, Delfi recorded ebitda of US$6.4 million ($8.6 million) on revenue of US$87 million in 3QFY2021. This 20.8% and 4.1% growth y-o-y respectively was driven by higher sales and margin.
Delfi’s gross profit margin in 3QFY2021 improved to 27% from 24.2% y-o-y, arising from higher sales and increase in proportion of premium format category compared to value products in its sales mix, and lower inventory write-offs.
Thanks to better earnings plus tight management of its working capital, Delfi managed to generate a free cash flow of US$67.7 million for 9MFY2021 ended September 2021, nearly double that of US$38 million from the same period in the preceding year. The company used the cash generated to cut its debt by US$39.8 million, thereby putting it in good stead of saving on interest expenses going forward.
Delfi has started positioning for growth beyond Covid-19 through the optimisation of offerings. For example, the company started in-house distribution capabilities such as having its own fleet of trucks.
DBS Group Research analyst Chung Wei Le, who has a “buy” call and $1.07 target price on Delfi, said the company’s new healthier and refreshed products under the SilverQueen brand allows Delfi to capitalise on Indonesia’s growing millennial middle class.
The company will continue to reinforce its portfolio by introducing healthier and more contemporary products to cater to its younger consumers’ desire for healthier lifestyles, Delfi noted in its 3QFY2021 business update. It will also push for innovation by leveraging digital marketing.
In his Nov 23 report, Chung describes Delfi as an “undervalued” consumer stock. The forward FY2022 P/E of industry peers is north of 20 times. Delfi, in contrast, trades at around 12 times.
Considering Covid-19 as the main factor for Delfi’s previously tumultuous quarters, Chung says the rise of vaccination rates and better management of the pandemic across its major operating regions have moved Delfi past its worst quarter, which was 3Q2020. Chung expects Delfi to generate a CAGR of 25% for its earnings between FY2021 and FY2023.
In its 3QFY2021 business update issued on Nov 16, 2021, besides risks of new waves of infections, Delfi warns of “higher input costs” too, given broken global supply chains.
Meanwhile, Delfi is keeping its product range updated. Specifically, it is focusing its efforts on digital marketing to reach out to the younger group of consumers, the Gen Zs and the Millennials, with a new range of “healthier and contemporary” products.
“Even though we are living with the uncertainties relating to Covid-19, barring unforeseen circumstances, we expect to remain profitable and will achieve growth in the business albeit at a slower rate in the short term,” the company says.