Brokers’ take: RHB cuts Delfi target on narrowing margin amid cocoa price hikes

RHB has lowered its target price for chocolate confectioner Delfi to S$1.33 from S$1.55 after trimming earnings forecasts.

Despite staying positive on the company’s growth outlook, RHB analyst Alfie Yeo expects slower revenue growth as well as a narrower gross margin amid a cocoa cost surge. He cut Delfi’s net profit estimates for FY2024 by 11 per cent and for FY2025 by 12 per cent, while maintaining a “buy” call for the counter.

This followed the company’s FY2023 financials released on Feb 27 that missed RHB’s revenue growth and operating margins estimates.

Cocoa prices had skyrocketed to around US$8,273 per tonne as at Tuesday (Mar 19), more than double the price of cocoa from a year earlier due to shrinking supplies, based on data by Trading Economics.

“However, we are not overly pessimistic, as Delfi does have a strategy on hedging against price hikes, as well as the ability to right-size its products and defend margins,” Yeo noted in a report on Monday.

He also highlighted Delfi’s “compelling valuation” and earnings growth projection based on a recovery in regional consumption and a rising middle-income segment in Indonesia, its largest market.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Despite the lowered earnings forecasts, Delfi still has a FY2023 to FY2026 compound annual growth rate of 7.5 per cent. The stock currently trades at about nine times the brokerage’s estimates for FY2024 price-to-earnings, which is one standard deviation below the historical average since its listing.

Yeo added that the new target of S$1.33 is pegged to 13 times the FY2024 price-to-earnings estimates, at 0.5 standard deviation below the historical mean.

Given that the brokerage expects Indonesia’s gross domestic product to grow robustly at 5 per cent year on year in 2024 – driven by heightened private consumption, Yeo noted that Delfi is well-positioned to capture Indonesia’s middle-class consumption growth with its market leadership in the country.

He continues to like the stock for the company’s comprehensive general trade network nationwide, growth strategies such as premiumisation and healthy snacking, as well as exposure to regional markets.

“Key downside risks to our earnings include lower-than-expected consumption for chocolate confectionery in Indonesia, an increase in raw material prices that could affect gross profit margins, and the negative effect of the US dollar against Indonesian rupiah rate,” Yeo added.

As at 10.43 am on Tuesday, shares of Delfi : P34 0% were trading flat at S$0.905.