Delfi (formerly: Petra Foods)

[cyclone]

Financial Results for the Quarter and Half-Year Ended 20 June 2018

Highlights :
1. Revenue of US$109.1 million for 2Q 2018, higher Y-o-Y by 8.5%
2. For 1H 2018, revenue was US$216.4 million, higher Y-o-Y by 11.7%
3. Gross Profit Margin of 34.5% for 1H 2018
4. Group ROE of 12.4% for 1H 2018
5. Earnings per share (excluding exceptional/non-recurring items) in 1H 2018 was 2.16 US cents as compared to 1.73 US cents in 1H 2017
6. Cash and cash equivalents stood at US$53.8 million as at 30 June 2018
7. Net asset value per share as at 30 June 2018 was 33.6 US cents compared to 33.7 US cents as at 31 December 2017
8. Growing chocolate confectionery markets in Indonesia and the Philippines
9. Higher Own Brands sales and Gross Profit margins are the key drivers of growth
10. Declared interim dividend of 1.08 US cents per ordinary share

More details in :
1. http://infopub.sgx.com/FileOpen/1H%20201...eID=518895
2. http://infopub.sgx.com/FileOpen/1H%20201...eID=518896
3. http://infopub.sgx.com/FileOpen/1H%20201...eID=518897

Delfi today closed at $S1.160 (-0.040).

[karlmarx]

Delfi's brand of chocolates has been in Indonesia for many decades.

Its range of products are in the lower-price range, probably positioned as an entry-level chocolate for low-income consumers.

If you have tasted Tops, Silver Queen, and the various Delfi-branded chocolates (some of which are modeled to look like its competitors), you will find that they taste quite different/distinct from your usual from Mars, Nestle, and Hershey. Much of the reason, of course, can be found in the wide price disparity between these products.

The most expensive ingredient in a chocolate confection is usually cocoa butter, which gives the confection its unique 'chocolate taste and texture.' Since the Indonesian market cannot afford chocolate made with cocoa butter, another oil/fat substitute is used; the ubiquitous palm oil.

Some may think that different brands thrive in different markets, because consumers from different geographies have their tastes 'attuned' to whichever brand they were first exposed to. American chocolates were thought to be too sweet for the European palate. Can the case be made that the Indonesians and Filipinos will prefer Delfi chocolates, even if they are able to afford those from Mars, Nestle, and Hershey?

When Indonesian consumers can afford more expensive chocolates made with cocoa butter, I'm not so sure if they will still stick to Delfi. At least, I wont be betting on it. Delfi's current pricing -- which assumes a high level of future growth -- appears to be much too optimistic to me.

[cyclone]

Disclosure of becoming a Substantial Shareholder

Name of Substantial Shareholder/Unitholder: First Pacific Advisors, LP
Date of acquisition of or change in interest: 23-Dec-2019
Immediately before the transaction (Total): 5,800,000 (0.95%)
Immediately after the transaction (Total):  32,800,000 (5.37%)
Amount of consideration paid : SGD26,460,000 for 27,000,000 shares => SGD0.98 per share

More details in https://links.sgx.com/FileOpen/_2020-01-...eID=593239

Website : https://fpa.com/about-us

Delfi today closed unchanged at SGD 1.

[alexeliasson]

Delfi nearing 4-years low in term of stock price and most importantly: valuation. The company keep growing its products and the premiumization seems to be working. 

Here's the two latest equity reports: 

75% upside (7 February): https://i.imgur.com/04PrA5c.png

60% upside (november) https://i.imgur.com/CYgtJpG.png


No brainer, IMHO. 

When Indonesians can afford real cacao of course Delfi can change ingredients. Brand strength remains.

[fallscushion]

Something new and interesting, Q&A prior to Live AGM:
https://links.sgx.com/FileOpen/Delfi%20-...eID=608095

Hopefully more and more companies can follow and provide such!
Kudos for Delfi!

[pianist]

Can investors still go the agm venue to attend it these days?

[karlmarx]

Its good that they're engaging shareholders. But whether such Q&A prove to be useful depends on the amount of disclosure, or the quality of answers, from the company.

Apart from updates on its manufacturing and sales activities, the rest of the Q&A does not provide any information that hasn't already been mentioned in past annual reports. Most of the important questions are sidestepped and answered in a manner that is too general to be useful.

Here are some of my own answers.

Will the depreciation of IDR against USD impact results negatively? Will sales/profit be hit?

Yes. Revenue may fall. Margins may shrink. Profits may not be likely. And equity will be hit with currency translation losses.

FY20 is likely to be a repeat of FY15, when IDR depreciated sharply against USD. And when Delfi's sales fell due to weaker Indonesian consumer spending, as a result of lower earnings from its commodity exports. Still, the economy expanded by 4.9% in FY15. So if FY20's growth comes a lot lower as what most economists are predicting, then the hit to Delfi's sales will be worse than FY15.

Why is the share price falling?

The growth expected of the company -- as implied by its high valuation of 20-30 p/e -- since the divestment of its cocoa ingredients business in 2013, did not materialise. Much of the company's progress has been thwarted by IDR depreciation against USD. This meant higher COGS, which necessitated increasing prices periodically. Though price increases are unlikely to match (sharp) cost increases, since that may cause customers to be upset.

Chocolates are still a luxury/discretionary product for most Indonesians, and their disposable income is not rising fast enough to consume more of it.

In the long-term, the market for chocolates in Indonesia will still grow, but the runway for growth is probably longer than previously expected.

[ksir]

Its good that they're engaging shareholders. But whether such Q&A prove to be useful depends on the amount of disclosure, or the quality of answers, from the company.

Apart from updates on its manufacturing and sales activities, the rest of the Q&A does not provide any information that hasn't already been mentioned in past annual reports. Most of the important questions are sidestepped and answered in a manner that is too general to be useful.

Here are some of my own answers.

Will the depreciation of IDR against USD impact results negatively? Will sales/profit be hit?

Yes. Revenue may fall. Margins may shrink. Profits may not be likely. And equity will be hit with currency translation losses.

FY20 is likely to be a repeat of FY15, when IDR depreciated sharply against USD. And when Delfi's sales fell due to weaker Indonesian consumer spending, as a result of lower earnings from its commodity exports. Still, the economy expanded by 4.9% in FY15. So if FY20's growth comes a lot lower as what most economists are predicting, then the hit to Delfi's sales will be worse than FY15.

Why is the share price falling?

The growth expected of the company -- as implied by its high valuation of 20-30 p/e -- since the divestment of its cocoa ingredients business in 2013, did not materialise. Much of the company's progress has been thwarted by IDR depreciation against USD. This meant higher COGS, which necessitated increasing prices periodically. Though price increases are unlikely to match (sharp) cost increases, since that may cause customers to be upset.

Chocolates are still a luxury/discretionary product for most Indonesians, and their disposable income is not rising fast enough to consume more of it.

In the long-term, the market for chocolates in Indonesia will still grow, but the runway for growth is probably longer than previously expected.

Generally agreed with most of your points.
But by and large, if we are investing in the company for long run. It wouldn't have mattered to look at a year or 2 results.
Rupiah depreciation & hit in consumer confidence are not new. They have been through that.

At price of $1, I wouldnt be interested to get in, but at $0.5? I will be glad to.

Their balance sheet is not stretched!
Likely can go through Covid without much damage.
Buying well known choc brands in Indo with earning yield of about 10% is rather interesting.

The question to ask is whether their brands still intact and can perform in long run? My gutfeel is yes! Silverqueen & TOP are rather well known and Indons grew up with sweet association with them!

The wildcard of growth is actually van houten! whose runway is wider!


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[karlmarx]

I don't doubt the investment merits of Delfi. But its 50% share of the Indonesian market may not be as attractive as it seems.

Delfi competes with global players which are many times its size. Nestle's (Kit Kat) market cap is US$300b, Mondelez's (Cadbury) market cap is US$73b, and our dear Delfi's market cap is US$360m, or about 1/1000 of Nestle's. (Mars is unlisted, but it has US$35b of revenue, which is 70x of Delfi)

The difference in size means that the giants can and will eventually wear Delfi out in a war of attrition -- by lowering their prices for a prolonged period of time -- if they decide to do so. This is in spite of Delfi's brands being well-established, because if they can get something as good at a lower price, why won't they? Nestle, Mondelez, and Mars have both the time and money to lower prices long enough to win over the new generation of Indonesians.

If I were a Delfi executive, this is probably what keep me up at night. And that makes me think twice whenever I have to raise prices.

Already, I have seen reports which show that the three giants have grown their market share over the past few years. I cannot remember the link, but its not hard to google it.

And while the three giants can easily invade Delfi's turf, it is not possible for Delfi to return the favour by expanding into (US, EU, etc) overseas markets to compete with them. Delfi's past results bears evidence of this. Its Philippines segment reflects this as well.

Delfi's 50% market share will only be meaningful if the rest of the competitors are also domestic players.

===

On the other hand, Delfi's closest competitor, Mayorah Indah, has done swimmingly in growing its top and bottomline, even after adjusting for currency depreciation.

Mayorah has a 20ish percent of the Indonesian chocolate market, with its long-time chocolate brand selling at low cost (Beng Beng), but that's not the jewel of its product portfolio. Mayorah produces the KopiKo sweet, which probably dominates the market for coffee-flavoured sweets, in most parts of the world. What makes it even sweeter for Mayorah is that none of the giants, or even Delfi, has a similar product which can compete with KopiKo.

Given the product difference between Delfi and Mayorah, my take is that the latter's top and bottom line will grow at a faster rate than the former. I don't think the difference in p/e valuation between the two companies are coincidental. The Fund Managers selling Delfi probably also realised the limits to Delfi's long-term business potential.

===

I do agree that a long-term investor shouldn't judge a year or so of bad results. Usually, it is that year of bad results which will allow long-term investors to make purchases.

Delfi will probably do okay after a year or so of bad results. But I think the kind of profits and dividends that it may potentially deliver, say over the next 5 years, will not be vastly different from its recent results, for reasons mentioned in this and my previous post. I'm not saying that Delfi's profits will not be higher; my take is that growth in profits, if any, will likely be subdued.

[ksir]

Agree if the giants want to fight over the market share, they could.
They are likely to win as well, but with what COST?
It’s not in benefit of anyone if they pick fight or do a price war.
Delfi earning is rather peanut to them.
It’s easier for them to work with Delfi and leverage on them instead.

The environment for biz in Indon is just so darn tough.
Toggling over human resouce, Gov, state Gov, polices, politician, flip flop policies, it requires tons of connection and perhaps just too much for the big guys to put effort in.
Otherwise most big brands should prosper in Indons, but in actual fact, not really.

In Indon, the equivalent of SATS (ie CASS) is earning peanut.
Although it’s duopoly as well.

I ran through Mayora numbers before.
Their products and brands are quite well known.
But their numbers are mostly accounting profit.
The Cashflow is just horrible.
And yet, it’s almost always selling at high valuation.
Such is Indon Mr Market, its manic depressive is really alive and kicking.


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