Delfi (formerly: Petra Foods)

[BlackCat]

Disappointing announcement above.

For comparison, Pt Mayorah Indah posted a 2% YoY drop in revenue and gross profit (p3)
https://www.mayoraindah.co.id/assets/upl...-252fa.pdf

[fritz]

New write-up on Delfi. Investment thesis:

• Delfi's brands SilverQueen, Ceres, Delfi, and Goya have been consumed by 4 generations of Indonesians over six decades, building up significant consumer mindshare in the process.
  

• Indonesians have grown accustomed to the typically less-sweet and less-milky type of chocolate that Delfi is offering. In addition, the company controls a distribution system with access to 400,000 points-of-sale across Indonesia, with a 280 million population and an average age of just 30.
  

• Chocolate is a growth business. Global chocolate consumption has grown at a 3% CAGR over the past century. And the fundamentals are especially strong for Indonesia. The country’s chocolate consumption is only 1/4 that of Japan and 1/15 that of the United States.
  

• Delfi’s management team has a decent reputation. The company has paid very generous dividends over the past few decades with an average pay-out ratio of 60%+.
  

• Delfi’s valuation multiple remains at a huge discount to global peers at just 0.73x sales. The market cap remains a measly US$367 million. Indonesian competitor Mayorah Indah trades at 2.15x. Delfi’s forward PE multiple of 12x is half that of global peers, even though Delfi enjoys a net cash position.
  

• With CEO John Chuang buying shares in the open market at just below the current share price, I have a high conviction that the shares are currently undervalued.
  

• Over the past few years, Delfi’s financials have been burdened by a significant depreciation in the Indonesian Rupiah (Delfi reports in US Dollar). It also reduced the number of SKUs by 30-40% from 2015 onwards, hurting top-line growth but improving the potential for higher margins. Several major shareholders such as Mitsubishi and Aberdeen have been trying to sell their stakes since 2018. And finally, Delfi’s general trade segment was hit by COVID-19 in early 2020.
  

• Most of these factors are temporary. Several of Delfi’s brand names such as SilverQueen are in fact doing very well and in 2018-19 the company enjoyed organic growth rates of 5-10%. I think the company will resume its growth trajectory once the pandemic is over.
  

• Delfi could eventually get acquired at 2-3x the current price, representing 20-30x PE - in line with global peers. Delfi has been approached by potential buyers several times. I think there is a significant probability that Delfi will eventually be acquired by a multinational.
  

Full write-up here: LINK

[karlmarx]

Most of the points mentioned are already well-noted here.

Delfi does have a lower valuation against local peer Mayorah Indah (not exactly peer, but somewhat) and global peers. But consideration has to be made that unlike them, Delfi does not have a global market. Given the already saturated global market, and the lower quality perception of Delfi's proprietary brands, there is little chance that Silverqueen has the ability to grow into global markets.

It has the lion's share of the Indonesian market, but this market is probably already saturated. Having operated for 60 years, I'm of the impression that they should already have presence in all towns and cities of significant population size. So a growth in sales will come from higher per capita consumption of their products (customers who used to buy 1 bar now buy 2), or price inflation.

The former will be the ideal situation, and there is a good probability of that happening, as incomes grow. But also consider that the global players have been growing in the Indonesian market as well.

Locally, Valuedollar is selling Mars & Snickers bars (50g) for 50 cents (definitely a value buy). My last visit to Indo about 2 years ago, a TOP rice chocolate bar (38g) was selling for 3,500 IDR (about 35 cents). On Shoppee, you can find Mini Snickers (20g) selling for 1,500 IDR. So the competition is certainly there.

Delfi will definitely still maintain its market lead, there will probably be some growth in sales, and maybe profits too. But high growth? I'm not so sure.

What is less mentioned, but probably more important (than its proprietary brands), is Delfi's distribution system.

[ghchua]

Hi karlmarx,

Delfi has always been trying to position their brands across various segments of the market, from low to high end. SilverQueen has been a well-received premium brand in the Indonesia market. They have also innovated to come out with products that attract the younger generation with the brand. Growth had been seen in their Premium brand market. So, it is not the case whereby they only go for numbers, but rather also a stable profit margin via pricing of their products across different segments.

As to your concern on SilverQueen and its position in the global market, it is for this reason that they have acquired the Van Houten brand. SilverQueen chocolates taste is more suited for local Indonesians but Van Houten should be able to appeal to the global taste in Asia.

Your last point on their distribution system is on the spot. Because of their wide distribution network in Indonesia (across traditional and modern trade), it is very difficult for a new player to set up shop and enjoy their wide coverage. This allows Delfi to distribute not only their own brand products, but also agency brand ones efficiently.

Finally, the investment merits for Delfi should not be only about growth and nothing else. They have managed their cash flow prudently throughout the years and even during a Covid disrupted year like FY20, they have managed to generate a higher free cash flow. Their dividend track record since listing had also been decent.

[mslee888]

Hi GHChua,

I have similar viewpoints as you. I am wondering if Delfi will be able to increase the profitability level of its regional markets....regional market revenue is about 30% which i feel is healthy but regional EBITA only contributed about 7.7%. 

They are pretty well entrenched in Indonesia and a strong market leader. In terms of population size, Philippines will be key regional market for growth.

[ghchua]

Hi mslee888,

For Philippines, it is always tough for Delfi as they are not the market leader there. The market leader (i.e. their competitor) actually captured a big market share as compared to the rest of the players. EBITA margin for regional markets is lower simply because they don't have the huge distribution network like in Indonesia and therefore will not be able to enjoy the economics of scale.

Having said that, I think their efforts to refresh their brands and products plus discarding underperforming ones, should be able to bear fruits in the long run. Van Houten brand had contributed decent growth to the regional market since acquisition, and hopefully the numbers will continue to grow.

[karlmarx]

As to your concern on SilverQueen and its position in the global market, it is for this reason that they have acquired the Van Houten brand. SilverQueen chocolates taste is more suited for local Indonesians but Van Houten should be able to appeal to the global taste in Asia.

...

Finally, the investment merits for Delfi should not be only about growth and nothing else. They have managed their cash flow prudently throughout the years and even during a Covid disrupted year like FY20, they have managed to generate a higher free cash flow. Their dividend track record since listing had also been decent.

Van Houten used to be a major brand but it is now much less popular than its early innovative days. I won't count on this being a significant contributor to Delfi's earnings, even in the next 5-10 years. Van Houten is a very uncle brand that hasn't made any effort to connect with young consumers for the past 20 years.

===

I wholly agree on these points you have mentioned, and that they make a good case of Delfi's investment merits. But these are not the points I am contending.

Well managed company? Yes. Products with market leadership? Yes. Longevity of products? Yes.

But could it get "acquired at 2-3x the current price, representing 20-30x PE" as fritz mentioned? Sure, its possible, but it could take awhile for the growth in earnings to support such valuations.

[ghchua]

Hi karlmarx,

Delfi had been working on refreshing the Van Houten brand after acquiring it. According to them, the previous owner had neglected it for quite sometime. It is still work in progress though, but the initial signs are good as you can see from the latest numbers.

As for takeover, I don't think one should be betting on that. If it comes, it will be a bonus. Otherwise, one should be happy with the dividends while waiting for them to execute their plans and hopefully deliver good outcomes for shareholders.

[¯|_(ツ)_/¯]

delfi@84
1HFY2021 result with 1.71cents div
https://links.sgx.com/FileOpen/1H%202021...eID=677962

https://drive.google.com/open?id=1ScL6SC...62YT8O3Awx

Stay home and stay safe, everyone.

[weijian]

It has been a good year for many companies doing their business in Indonesia due to the commodity boom happening there (eg. Jardine C&C)

For Delfi, COGS is ~70% of revenue, while operating costs ~15-20% of margin. As such, the leverage for operating margin is acute. This is what happened in 2022 (or 2H22) with the GPM improving as a result of more premium products been sold.

Before 2019, CAPEX was running at ~15-20mil per year (AR19 espoused that they spent 110mi in the last 6 years). During this period (2013-2018), dividends was at ~10-15mil per year.

However since 2019, average annual CAPEX is ~4mil and with annual depreciation at ~12mil, the company is now churning out decent FCF. Dividends have increased to ~20mil in FY22 and will further increase in FY23 it seems. From this simple cashflow comparison, the asset/business seems to have changed and is favoring the OPMI.

Mgt is guiding that the doubling of inventory levels is indicative of a good 2023. No surprise that the Market has responded in kind.

FY2022 Highlights

Proposed Final Dividend of 2.00 US cents/share and Special Dividend of 0.72 UScents/share proposed, and together with interim dividend of 1.58 US centspaid, total dividends for FY2022 will be 4.30 US cents
- This comprises Normal Dividend of 3.58 US cents/share (2021: 2.35 US cents/share) and Special Dividend of 0.72 US cents/share (2021: 0.48 US cents/share) - Increase of 51.9% Y-o-Y

We believe our healthy Balance Sheet, strong organization, and effective strategy will, barring unforeseencircumstances, prepare us for a better performance in 2023 compared to 2022

FY22: https://links.sgx.com/FileOpen/FY2022%20...eID=748109
FY22 PR: https://links.sgx.com/FileOpen/FY2022%20...eID=748111