Delfi Ltd: Solid 1H23 paving the way for a strong FY23
- 1H23 revenue/earnings +16.2%/30.1% y-o-y, within expectations, forming 53% of our FY23F estimates
- Slower y-o-y growth in 2Q23 compared to 1Q23 due to early Lebaran resulting in demand mostly flowing into 1Q23
- Raised FY23F/24F revenue by 2.1% and FY23F/FY24F earnings by 2.0%/1.7% on optimism for low double-digit top-line growth in 2H23
- Maintain BUY with slightly higher TP of S$1.63 as we roll our valuation forward to FY24F
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Y-o-y growth in 2Q23 slowed considerably compared to the jump seen in 1Q23. 2Q23 revenue and EBITDA y-o-y growth of 10.7% and 3.1% is a significant slowdown from 1Q23 revenue and EBITDA y-o-y growth of 20.8% and 24.5%, respectively. This was mostly due to consumer demand being front end to 1Q23, given the earlier Lebaran celebration this year (late April versus early May last year).
Gross margin in 1H23 expanded 0.6% pt y-o-y, but EBITDA margin remained flat. Gross margin was stronger y-o-y due to improved sales mix and pricing actions, which offset ingredient cost increases. However, EBITDA margin remained flat on slightly lower operating income in 1H23. Higher selling and distribution costs as % of sales was offset by lower administrative expenses as % of sales in 1H23 vs 1H22.
Inventory saw a slight dip to US$98m in 2Q23 from US$102m in 1Q23. Inventory continues to remain elevated versus 1H22, due to inventory from new agency brands, management’s decision to ensure a higher stockpile in case of supply chain issues, and the overall expansion of the business. In terms of average inventory days, management expects it to stay at around 100 days for the reasons highlighted earlier.
Capex came in at US$13.6m for 1H23. The company expects similar to slightly lower capex spend for 2H23, and end-FY23 capex spend of US$20-25m.
Declared 2.06US$cts interim dividend. The company declared a higher interim dividend of 2.06US$cts versus the 1.58US$cts in 1H22, 30% higher y-o-y, in line with the company’s practice of a 50% payout ratio for the interim dividend.
Our View
Earnings within FY23 estimates. Revenue and earnings form c.53% of our FY23 revenue and earnings estimates. Prior to Covid-19, 1H traditionally contributed a higher proportion to full-year sales and earnings, given the contribution from Valentine's Day and the Lebaran festive season. With earnings at 53% of estimates, it was less compared to historical trends, with 1H traditionally contributing ~60% of the full-year revenue.
2Q a seasonally weak quarter. As per historical trends, 2Q is usually the weakest quarter for the company post the festive celebration in 1Q, especially Valentine’s Day in February period. We believe 2H23 will not see as high a level of growth as in 1H23 due to a high base effect, but it will still be able to achieve decent top-line growth of 10%. A key driver will be the upcoming Indonesia presidential election in Feb 24, which could boost consumer demand in late 2H23 with handouts distributed ahead of the elections. Accordingly, we adjusted our FY23F revenue/earnings estimates up by 2.1%/2.0%.
For FY24F, we see normalised growth of 5% and higher depreciation costs on higher FY23F capex spend. We expect the company to achieve 5% growth in FY24F on the revised, higher FY23F revenue. We assumed slower growth given the high base in FY23F, a Covid-free year. On capex, management guided for higher-than-expected capex spend of US$20-25m to increase capacity, given the currently high utilisation rate at the factories. Accordingly, we adjusted our capex spend assumptions for both FY23F and FY24F from US$10m to US$23m, which will lead to depreciation costs ticking up from FY24F onwards. Overall, we adjust FY24F revenue/earnings up by 2.1%/1.7% on continued growth from FY23F, negated partially by higher depreciation expenses.
See lower write-off risk. While we were initially concerned that the high inventory levels as of end-Dec 22 could pose a write-off risk, we believe the risk is now lower on the back of continued optimism for 2H23 and a portion of the inventory being a result of onboarding new agency brands.
Rolled our valuation forward to FY24F earnings. Maintain BUY call with revised TP of REF TP \* MERGEFORMAT S$1.63, based on 14.4x FY24F earnings, +0.25SD of its five-year forward PE ratio.
FY Dec | 1H2022 | 2H2022 | 1H2023 | % chg yoy | % chg hoh |
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Revenue | 246 | 237 | 286 | 16.2 | 20.9 |
Cost of Goods Sold | (174) | (161) | (200) | 15.2 | 24.5 |
Gross Profit | 72 | 76 | 86 | 18.5 | 13.2 |
Other Oper. (Exp)/Inc | (44) | (42) | (51) | 18.0 | 22.6 |
Operating Profit | 29 | 34 | 35 | 19.2 | 1.7 |
Other Non Opg (Exp)/Inc | 0 | 0 | 0 | - | - |
Associates & JV Inc | 0 | 0 | 0 | - | - |
Net Interest (Exp)/Inc | 0 | 1 | 1 | nm | 64.7 |
Exceptional Gain/(Loss) | 0 | 0 | 0 | - | - |
Pre-tax Profit | 29 | 34 | 35 | 23.4 | 2.8 |
Tax | (9) | (10) | (10) | 9.6 | 3.0 |
Minority Interest | 0 | 0 | 0 | - | - |
Net Profit | 19 | 25 | 25 | 30.1 | 2.8 |
Net profit bef Except. | 19 | 25 | 25 | 30.1 | 2.8 |
EBITDA | 35 | 39 | 40 | 13.7 | 1.5 |
Margins (%) |
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Gross Margins | 29.4 | 32.0 | 30.0 |
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Opg Profit Margins | 11.8 | 14.3 | 12.1 |
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Net Profit Margins | 7.9 | 10.4 | 8.8 |
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