• Indonesia cuts key rate again
  • Stable 2H sales expected vs. 1H
  • Investments for the long term

Soft Consumption for Key Market Indonesia

Delfi Ltd’s key markets have been Indonesia and Philippines, with Indonesia typically accounting for about 70% of overall revenue. As of 1H17, Delfi saw lower sales in Indonesia YoY amid the weak retail sales environment and its own product rationalization exercise to focus on core brands. Last Friday, Indonesia’s central bank cut its interest rate for the second consecutive month, against the backdrop of soft domestic consumption growth. Overall, management expects operating environment to remain challenging amid uncertain economic conditions in its key markets.

Bright Spots

Management has been making efforts to improve the quality of earnings. The product rationalization programme is an example, whereby the group had eliminated lower performing SKUs, with the bulk of elimination made in late FY16, so that they could focus on growing sales of their core brands. Particularly, in the last two months of 2Q17, sales for Own Brands products saw a double digit growth in Indonesia.
In addition, the group has been able to maintain a healthy level of gross profit margin at around 30%, with 1H17 at ~33% vs. a threeyear average of ~32%, backed by initiatives such as pricing and right-sizing adjustments, as well as pushing for higher sales of premium products.

Read More - Most movable SGX stocks of The day ?
But High Expenditures

With continuous investments being made in various aspects of the business such as brand building, capacity, distribution capabilities and supply chain integration, realizing benefits from these investments would be pertinent to sustaining growth for the long term. However, costs would likely remain high.

Read More - The Secret of Successful Share Investment in Singapore Companies

On the expectation of stable sales in 2H vs. 1H, FY17 revenue would still be lower YoY, and with higher expenditure, management has also guided for lower profitability this year.
Notably, the group was in a net cash position of US$23.5m as of 30 Jun-17, and has paid 3.01 S-cents/share of dividends YTD. They have also formed strategic initiatives with Japan’s Yuraku Confectionery and South Korea’s Orion Corporation. With that said, due to an internal reallocation of resources, we are ceasing coverage on the stock..

More update: Stocks To Watch, 2017 Stock Market Outlook, Stock Market Investing Outlook & Investment Outlook 2017