Delfi Ltd: 1H22 performance surpassing pre-COVID
- 1H22 net profit surged 58% y-o-y, surpassing pre-COVID levels in 2019 – above expectations
- Gross margins improved marginally despite cost pressures
- Interim dividend of 2.18 Scts declared, highest since 2014
- At <11x PE of our revised earnings with c.25% of market cap in cash, counter looks like a steal; BUY with higher TP of S$1.31
Strong balance sheet and low share price presents opportunity for re-rating beyond operational performance. We believe its strong balance sheet offers the company an opportunity to pursue inorganic growth strategies. With its attractive valuation and strong turnaround, we believe a clearer signal to enhance shareholder value via a higher payout ratio and/or a share buyback programme could be constructive for its share price. The adoption of the latter would signal to the market that the board/management believes the current share price is undervalued, in our view.
1H22 results review
Strong surge in net profit (+58%) for 1H22, surpassing pre-COVID performance in 2019 – above expectations. Delfi reported a strong set of 1H22 results, surpassing its pre-COVID performance in 2019. Net profit surged by 57.6% y-o-y to US$19.4m on the back of a 17% revenue growth to US$246.3m. The growth in revenue was driven by both its Indonesia and regional markets, on the back of easing COVID-19 restrictions and improving consumer sentiment.
Gross margin improved by 40bps to 29.4%, on sales mix, right sizing, and lower inventory write-offs. Despite worries of rising raw material costs, the group’s gross margin improved by 40bps to 29.4%, driven by the sales of its premium products along with “price actions” taken, which, we believe, meant product right-sizing. We also noted that inventories written off fell by US$1.8m from the same period last year, which, we estimate, helped to improve margins by an estimated 70bps.
Indonesia achieved strong performance. The group’s Indonesia operations performed well, achieving revenue of US$167.2m (+16.1% y-o-y), accounting for 68% of total revenue, similar to 1H21. Growth was seen in its own brands across its product categories, especially in its premium brands such as SilverQueen and Cha Cha. Its agency business grew by a smaller 7.2%, helped by its snack and consumer categories. Indonesia EBITDA grew by 30.4% y-o-y to US$32.2m, with margins improving to 19.2% in 1H22, from 17.1% a year ago.
Regional markets’ performance helped by Malaysia and Philippines. Albeit smaller, its regional markets’ performance was also stellar, registering revenue growth of 18.9% to US$79.1m, while EBITDA was at US$2.4m (+31.5%). This was driven by its operations in Malaysia, with strong performance in its consumer and healthcare categories. Over in the Philippines, operations benefitted from the easing of restrictions as well as the group’s earlier investments in the market.
Balance sheet remains healthy with cash of US$94.6m. Along with its positive operating performance as well as its control of costs, cash flow, and capital spending, the group’s cash increased further to US$94.6m, up from US$86.2m as of 31 Dec 2021. This implies that the group’s net cash as of 30 Jun 2022 accounts for about 25% of its current market capitalisation. We believe there lies an opportunity for the board/management to deploy the cash and/or to return it to shareholders to enhance value for the counter.
Interim dividend of 1.58 UScts (or 2.18 Scts) declared. An interim dividend of 2.18 Scts was declared, making it the highest interim dividend since the group’s divestment of its cocoa business in 2014. Book closure for the interim dividend will be on 24 Aug and the dividend will be payable on 7 Sep 2022. The dividend equates to a payout ratio of 50%.
Valuations and forecasts
Raised FY22F/23F earnings by 23%/16%. On the back of its better-than-expected top-line growth and the improvement in Indonesia’s Consumer Confidence Index, we revisited our assumptions and raised our FY22F/23F forecasts by 23%/16%. We expect margins to remain relatively stable going into 2H22, given the company’s cost hedging strategies; sales mix, which is likely to be similar to 1H22; and a lower level of inventory write-offs compared to the same period last year.
Maintain BUY, TP:S$ 1.31. The strong 1H22 results highlight the group’s recovery, along with the easing of COVID restrictions. While inflationary pressures and uncertainties remain, we believe the group should be able to navigate these, given its brand and distribution strength, along with its strong balance sheet. The counter is trading at 10.4x FY22F PE based on our revised earnings estimates, and along with its healthy net cash accounting for 25% of its market cap, it seems like a steal for a branded consumer company.
Beyond operational performance for share price re-rating. The strong operational performance can be a catalyst for its share price to re-rate. We believe a further re-rating could arise if and when the board/management decides to leverage on its strong balance sheet to enhance further value for shareholders either through inorganic growth opportunities, higher dividend payout/capital reduction, and/or a share buyback programme.
FY Dec | 1H2021 | 2H2021 | 1H2022 | % chg yoy | % chg hoh |
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Revenue | 210 | 195 | 246 | 17.0 | 26.6 |
Cost of Goods Sold | (149) | (136) | (174) | 16.3 | 27.8 |
Gross Profit | 61 | 59 | 72 | 18.8 | 23.5 |
Other Oper. (Exp)/Inc | (41) | (33) | (44) | 5.4 | 31.0 |
Operating Profit | 20 | 25 | 29 | 46.9 | 13.6 |
Other Non Opg (Exp)/Inc | 0 | 0 | 0 | - | - |
Associates & JV Inc | 0 | 0 | 0 | - | - |
Net Interest (Exp)/Inc | (1) | 0 | 0 | nm | - |
Exceptional Gain/(Loss) | 0 | 0 | 0 | - | - |
Pre-tax Profit | 19 | 25 | 29 | 50.9 | 14.3 |
Tax | (7) | (8) | (9) | 38.6 | 14.6 |
Minority Interest | 0 | 0 | 0 | - | - |
Net Profit | 12 | 17 | 19 | 57.6 | 14.1 |
Net profit bef Except. | 12 | 17 | 19 | 57.6 | 14.1 |
EBITDA | 26 | 32 | 35 | 32.7 | 9.0 |
Margins (%) |
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Gross Margins | 29.0 | 30.1 | 29.4 |
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Opg Profit Margins | 9.4 | 13.1 | 11.8 |
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Net Profit Margins | 5.8 | 8.7 | 7.9 |
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