confectionery & snacks trading data perf. vs sti index ... · figure 1: delfi’s most popular...

INITIATION Confectionery & Snacks ▪ Singapore

Delfi Limited (DELFI SP/DELF.SI)

June 5, 2020 KGI Securities (Singapore) Pte. Ltd.

Favourable demographic and economic conditions in Indonesia continue to underpin Delfi Limited’s (Delfi) growth strategies in the long term. Delfi receives more than 70% of its revenues from Indonesia, whose growth is largely supported by a flourishing young middle class who are on the continuous pursuit for elevated lifestyles.

With a renewed in-house distribution model for its key Modern Trade customers, and its recent acquisition of the perpetual and exclusive license to the Van Houten brand for markets in Asia (excluding India, Korea and the Middle East), Delfi is primed to capitalize on the premiumisation trend among Indonesia’s youth and the young at heart.

We initiate on Delfi with an OUTPERFORM rating, and a blended 12-month target price (TP) of S$0.93. We believe that Covid-19 disruptions are merely speedbumps on the road to strong sustained growth, as Delfi continues to evolve with the Indonesian consumer, and their changing tastes and preferences.

Delfi manufactures and distributes many of Indonesia’s favourite chocolate confectionery products, holding a strong and unwavering market share of close to 50%. Even global chocolatiers such as Cadbury (owned by Mondelez International Inc), Ferrero and Nestlé combined hold less than 20% of the Indonesian confectionery market. This has been and will continue to be the trend as Indonesian shoppers are not only fiercely loyal to local brands for many of their daily needs, but are also more price sensitive, especially for the value product ranges that cater to the Traditional Trade (mom-and-pop stores) consumers. In catering to the Modern Trade consumers in supermarkets and convenience stores, Delfi is working on the rejuvenation of their newly acquired Van Houten brand, as they have previously done before with the Philippine Goya and Knick Knack brands. This will work towards supporting its growth strategies of capitalising on the up and coming premiumisation trend among Indonesian youths. Delfi has also restructured its distribution model to help reduce costs while improving the quality and timeliness of its deliveries to key customers.

Due to the global supply chain and demand disruptions resulting from Covid-19 lockdowns, the International Monetary Fund (IMF) has reduced Indonesia’s growth forecasts for 2020 to 0.5%, while projecting for unemployment rates to rise to 7.5% in 2020 (2019: 5.3%). However, we also note that emerging markets such as Indonesia have consistently recovered more quickly than developed markets – Indonesia too particularly as it is much more domestic-demand-oriented. In 2019, domestic consumption contributed almost 60% of Indonesia’s GDP, a stark difference to Singapore’s c.36%. As a result, the IMF has also projected for one of the fastest recoveries for Indonesia in the last 25 years, a GDP growth of 8.2% in 2021. We believe that this is consistent with past trends where Indonesia has recovered not only quickly from crises, but emerged even stronger than before. In addition, consumer sentiment has remained relatively buoyant especially in the grocery category, with many expressing the intention and expectation to spend more on snacks and groceries as they continue to stay home. Valuation & Action: We initiate on Delfi with a blended 12-month TP of S$0.93, using a conservative 15.0x P/E as compared to its Indonesian confectionery peers who are currently trading at an average of 25.5x P/E. This represents a total upside of 23.4%, including a blended dividend yield of 2.4% for FY20/21. Risks: Longer than expected recovery from Covid-19 disruptions, foreign exchange risks as Delfi’s reporting currency is denominated in USD, and further claims associated with the disposal of Delfi Cacau Brazil Ltda.

Financials & Key Operating StatisticsYE Dec USD mn 2018 2019 2020F 2021F 2022FRevenue 427.0 471.6 428.0 471.6 554.6 Gross Revenue 147.9 170.7 156.2 175.3 199.0 PATMI 20.9 28.2 26.4 28.1 32.4 Core PATMI 23.0 28.5 26.4 28.1 32.4 Core EPS (SG cents) 4.9 6.1 5.6 6.0 6.9Core EPS Growth (%) 33.0 23.8 (7.3) 6.6 15.0 Core P/E (x) 14.5 11.7 12.6 11.9 10.3 DPS (SG cents) 2.6 3.3 1.2 1.9 3.7 Div Yield (%) 3.5 4.3 1.6 2.5 4.9 Net Margin (%) 5.4 6.0 6.2 6.0 5.8 Price/Book (x) 2.3 2.1 1.7 1.7 1.7 ROE (%) 11.2 13.1 9.7 6.3 7.0 Source: Delf i, KGI Research

Indonesia’s Sweet Darling Amirah Yusoff / 65 6202 1195 / [email protected]

Outperform - Initiation

Price as of 4 Jun 20 (SGD) 0.77 Performance (Absolute)

12M TP (SGD) 0.93 1 Month (%) 19.4

Previous TP (SGD) - 3 Month (%) -16.3

Upside, incl div (%) 23.4% 12 Month (%) -38.1

Trading data Perf. vs STI Index (Red)

Mkt Cap (USD mn) 471 Absolute (%) 1M 19.4

Issued Shares (mn) 611 Absolute (%) 3M -16.3

Vol - 3M Daily avg (mn) 1.5 Absolute (%) 12M -38.1

Val - 3M Daily avg (SGD mn) 1.0 52 week lo $0.56

Free Float (%) 47.5 52 week hi $1.40

Major Shareholders Previous Recommendations

Berlian Enterprises Ltd 51.8%

First Pacific Advisors LP 7.3%

First State Investments ICVC 7.0%

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mailto:[email protected]

Delfi Limited Singapore

June 5, 2020 KGI Securities (Singapore) Pte. Ltd. 2

Contents Investment Thesis ....................................................................................................... 3

Loved and trusted by all .......................................................................................... 3

Strategic operational enhancements ...................................................................... 4

Favourable demographics to underpin sustained growth ...................................... 6

Key Risks ..................................................................................................................... 9

Longer than expected recovery from COVID-19 disruptions. ................................. 9

Foreign currency risks ........................................................................................... 11

Claims associated with the disposal of Delfi Cacau Brazil Ltda ............................. 12

Valuation & Peer Comparisons ................................................................................. 13

Company Overview ................................................................................................... 14

History and background ........................................................................................ 14

Management......................................................................................................... 15

Financial Forecasts .................................................................................................... 18



Investment Thesis

Loved and trusted by all

Delfi has the largest market share in chocolate confectionery in Indonesia in 2019. Delfi’s best-selling brands – SilverQueen, Ceres, and Selamat – have been household names in Indonesia since the early 1950s, and have continued to epitomise quality and taste through generations of chocolate-lovers. In an economy highly driven by domestic consumption, there have been few who have been able to break into the chocolate-confectionary space, much less convert Delfi’s strong brand loyalists. In 2006, Delfi also acquired a chocolate manufacturing, marketing and distribution operation in the Philippines, acquiring two equally well-established and loved Philippine chocolate brands in the process – Goya and Knick Knacks. Continuously diversifying and evolving its portfolio to suit changing consumer preferences. From chocolates to beverages, spreads and baking ingredients, from value to premium tastes, Delfi has been able to continuously innovate to cater to the constantly changing tastes of both young and old – making them the brand of choice in all its markets. In Indonesia, Delfi has also been maintaining its substantial lead against other competitors by continuously launching new formats, flavours, and packaging for its own existing brands, such as Delfi, TOP, Cha Cha, Van Houten, and many more.

Figure 1: Delfi’s most popular chocolate confectionery brands

Source: Delfi Annual Report 2019, KGI Research

Delfi has also entered into two joint ventures (JVs) in an effort to expand into adjacent categories. In its 50-50 JV with South Korea’s Orion Corporation, established in 2016, Delfi-Orion Pte Ltd has extended its portfolio into the soft biscuits and cakes categories to introduce Orion’s flagship Choco Pie, a chocolate-covered soft biscuit with marshmallow fillings. Its other 60-40 JV with Japan’s Yuraku Confectionery Company Ltd, introduced a new range of chocolate snacks – Black Thunder and Big Thunder. Delfi Yuraku Pte Ltd facilitates the broadening of both companies’ product portfolios and market reach by serving as a launch pad for new products, targeted at young consumers in Indonesia under the Delfi brand.

Figure 2: Products under Delfi’s JVs – Choco Pie and Big Thunder

Image source: happyfresh.id



Strategic operational enhancements

Premiumisation strategy to pay off among growing middle-class. According to Deloitte’s Consumer Insights on Indonesia, published January 2020, a desire to purchase more premium products was observed across all household income levels. Statista’s chocolate confectionery consumption data and forecasts also support a premiumisation strategy, as revenue has historically been increasing despite decreases in consumption volume.

Figure 3: Preference for different price options, by monthly household income (‘million IDR)

Source: Deloitte Consumer Insights Survey 2019, KGI Research

Figure 4: Revenue and volume of sales of Chocolate Confectionery in Indonesia

Source: Statista, KGI Research

This is supported by a growing middle class, who are moving away from spending merely on necessities. Consumers are exhibiting greater levels of sophistication, and price sensitivity has decreased to prioritise attributes such as quality and brand trustworthiness. For example, they are more likely to pay closer attention to what they consume, the quality of ingredients, and even how products are marketed and distributed. Another unique characteristic about the Indonesian consumer is their strong preference for local brands. While those in the more urbanised cities such as Jakarta and Medan may prefer foreign brands for their electronic gadgets and appliances, local brands continue to dominate in most product categories. However, while those who favour foreign brands may also be more affluent since foreign branded products are generally perceived to be more premium (in both price and quality) and reliable – this does further reinforce the shift in consumer preferences toward premiumisation.

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Accordingly, the push for premiumisation is clear among and Delfi’s strategies have endeavoured to align their products with the changing consumer, and their evolving preferences. The Green Tea variant of Delfi’s popular SilverQueen chocolate bar now incorporates the story behind its matcha ingredients into the new packaging. Delfi also launched multiple more premium products over the last two years under the Delfi flagship brand, including Take-It Big, Black Thunder and Big Thunder. During the year, low yielding products within the value format category, in the Traditional Trade sector, were also replaced with similar, but higher yielding products.

Figure 6: The Goya brand re-packaged to uplift and update its image


As a result of many more of these initiatives, including focusing more on the Modern Trade sector, Delfi’s overall Own Brands sales increased by 9.5% in 2019, driven mainly by increased sales in the premium format category - sales of premium brands such as SilverQueen, Delfi Premium, Van Houten and Selamat grew in excess of 20%. In the Philippines, double-digit growth were also achieved with the more premium Goya spreads and novelty Goya Bits. Rejuvenation of Van Houten brand to propel revenue growth. Following the acquisition in 2018 of the perpetual and exclusive license to the Van Houten brand for markets in Asia (excluding India, Korea and the Middle East), Van Houten has contributed US$14.7 million (or close to 5%) to Own Brands sales in 2019. We believe that further rejuvenation of the iconic European brand through Delfi’s planned initiation of a multi-phased brand repositioning program, will allow for a broadened business and customer base, which will in turn be a key driver for Own Brands sales in the next few years. This is just as it has done before with both Knick Knacks and Goya (brands it acquired in the Philippines in 2006), after which their Philippines revenue increased by almost 25% in 2008.

Figure 5: Indonesians’ brand preferences by city

Source: Deloitte Consumer Insights Survey 2019, KGI Research



Exceptional distribution model to support growth momentums. A significant development in 2019 that will further underpin Delfi’s dominance was the completion of the implementation of a direct shipment model to their key Modern Trade customers in Java (half of Indonesia’s population is on the island of Java). By returning control back in-house, significant improvements were observed in the responsiveness and service level for key customers, allowing timely fulfilment of customer orders and increased freshness of products. Management has been vocal about continuing efforts to further improve its supply chain and go-to-market strategies. In its Modern Trade sector, Delfi will focus on the seamless integration of its services in order to broaden its reach and coverage of shipments to Modern Trade channels, while a revamped team of distributors will be focusing their efforts on a new segment of value format products in the Traditional Trade sector. These initiatives will continue to boost revenue and gross profit margins.

Favourable demographics to underpin sustained growth

Accounting for more than 70% of revenue, Delfi’s key market – Indonesia – boasts a number of favourable attributes, including a fast-growing economy and strong demographic factors that support the burgeoning chocolate confectionary category. Its economy is supported by a very young population and a fast-rising middle class that continues to spur consumption and growth. Although Covid-19 disruptions may slightly hinder economic growth in the next one to two years, we remain positive on the longer term growth trends. Population. With almost 50% of the fourth largest population in the world being economically active, it also provides a positive tailwind for consumer products, especially with the strong uptrend in GDP and household expenditure per capita.

Figure 7: Indonesia’s total population vs economically active, 2019

Source: Statistics Indonesia (Badan Pusat Statistik; BPS), CEIC Data, World Bank, KGI Research

Note: The official working age in Indonesia is from 15 to 64 years old, as boxed in red.

Indonesia’s domestic private consumption also contributed close to 60% of its GDP in 2019 according to World Bank, a significantly higher proportion as compared to its neighbouring countries who are largely export-driven. GDP per capita is also still a laggard as compared to Singapore and Malaysia, in line with its urbanised population, indicating a vast, untapped, growth potential in the longer term.

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Consumer sentiment. Due to the Covid-19 pandemic, consumer sentiment had taken a dive in April 2020 after the Indonesian Government declared a national health emergency on March 31 2020 and ordered the implementation of large-scale social distancing. A ban on mudik (traditional Ramadan exodus of workers back to their hometowns), also further depressed April’s consumer sentiments, close to levels only seen previously during the Global Financial Crisis. Bank Indonesia’s consumer sentiment survey involves three segments:

1. Consumer Expectation Index (CEI): Consumer expectations for economic conditions and consumer confidence in the next 6 months;

2. Consumer Confidence Index (CCI): Consumer sentiment in the current economic conditions); and

3. Current Economic Condition Index (CECI): Consumer perception of the current economic condition as compared to the previous 6 months.

However, recovery from GFC troughs took an estimated 8-12 months to return to pre-crisis levels, and we expect the same strength of rebound post Covid-19, if not just slightly slower at 12-18 months for complete recovery. We note that the plunge in consumer sentiment during the GFC was not mirrored in household expenditure per capita during the same period (Figure 8), and private consumption may have supported the recovery.

Figure 8: Indonesia Growing GDP per capita (LHS, Column) & Household

expenditure per capital (RHS, Line), 2000-2018

Source: Statistics Indonesia (Badan Pusat Statistik; BPS), CEIC Data, World Bank, Statista (Forecasts), KGI Research

Figure 9: Indonesia, Philippines, Malaysia and Singapore: Exports as a

percentage of GDP, 2000-2018

Source: Statistics Indonesia (Badan Pusat Statistik; BPS), CEIC Data, World Bank, Statista (Forecasts), KGI Research

Figure 10: Indonesia, Philippines and Malaysia: GDP per capita (current

US$) (LHS, Column) & GDP per capita growth (% Annual) (RHS, Line),

2000-2018

Source: Statistics Indonesia (Badan Pusat Statistik; BPS), World Bank, KGI Research

Figure 11: Indonesia, Philippines and Malaysia: Urban population (% of

total) (LHS, Column) & Urban population growth (% Annual) (RHS, Line),

2000-2018

Source: Statistics Indonesia (Badan Pusat Statistik; BPS), World Bank, KGI Research

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We believe that consumer spending may see a similar story this time around, as CEI remains significantly higher, above 100 points – indicating that consumers have expectations for the economy to return to ‘normal’ sooner than later. This is crucial as it ensures that consumers continue spending, albeit more conservative.

Further, given that Delfi remains a consumer staple, consumption for snacks and chocolates should not wane as much as other consumer categories such as apparels, electronics and appliances. According to a recent McKinsey survey1, Indonesians intend and are expecting to spend more on groceries and snacks, along with personal care and household supplies, while staying home.

1 McKinsey & Company Covid-19 Indonesia Consumer Pulse Survey, 25/4-26/4/2020

Figure 12: Indonesia: Consumer Expectation Index; Consumer Confidence Index; Current Economic Condition Index

Source: Bank Indonesia, KGI Research

Figure 13: Consumers plan to increase spending for groceries, snacks, entertainment, personal care, and household and child supplies

Source: McKinsey & Company Covid-19 Indonesia Consumer Pulse Survey April 2020, KGI Research

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Key Risks

Longer than expected recovery from COVID-19 disruptions.

The world's fourth most populous nation risks a deep recession from what the IMF has termed “The Great Lockdown." Even in the best-case scenario, the IMF has revised downward, significantly, Indonesia’s growth projections in 2020 to 0.5% - particularly because the economy relies heavily on the export of commodities rather than finished goods. In addition, emerging market and developing economies face mounting challenges – reversing capital flows as global risk appetite wanes, currency pressures, weaker health systems, and more limited fiscal space to provide support to its economies.

Figure 14: The Great Lockdown – Worst Economic Downturn since the Great Depression

Source: IMF World Economic Outlook (WEO), KGI Research

Indonesia represents more than 70% of Delfi’s revenues, and should the pandemic not subside in the second half of this year, we expect an additional punitive impact on domestic demand in 2H20 as more will likely see their income affected. Also given the limited policy-easing room left, the recovery from three quarters of significant weakness will inevitably be prolonged. As of 25th May 2020, the virus has spread to all of the country’s 34 provinces, bringing Indonesia’s total cases to 22,750, with a fatality rate of c6.1%.

Figure 15: COVID-19 in Indonesia, last updated on May 25 2020

Source: The Jakarta Post, KGI Research

Indonesia's capital city Jakarta has extended its large-scale social restrictions (PSBB) until June 4, maintaining restrictions that limits public transportation and gatherings in a bid to contain the spread of the virus. This came despite the central government's plans to ease restrictions in quick successions and allow businesses to

Indonesia is Delfi’s main market, making up 70% of revenues.



resume operations as quickly as possible, after Indonesia’s GDP grew slower than expected at 2.97% YoY (from 5.07% in 2019) in the first quarter. This was weaker than the government’s, central bank’s, and economists’ projections of about 4%; given that 1Q figures do not fully reflect the impact of the pandemic as the PSBB was only implemented at the end of the first quarter, this suggests an imminent recession if the relaxed fiscal policies turn out still to be insufficient to bolster the significant economic weakness. IHS Markit’s Indonesia Manufacturing PMI plunged to an all-time low in April – to 27.5 from 45.3 in March, the steepest decline in the survey’s 9-year history. Output and new orders collapsed, while spare capacity and unemployment surged, as a result of imposed factory closures and slumping global demand. Topping it off, input costs had also rose sharply as a result of a weakening rupiah and global supply shortages.

Figure 16: IHS Markit’s Indonesia Manufacturing PMI

Source: IHS Markit, KGI Research

In April, Fitch Solutions revised its outlook on Indonesia, and has forecast GDP to contract by 1.3% this year, as compared to 2.8% economic growth in its previous projection. Fitch is also expecting household spending to contract by 1.5% in 2020, down from a previous growth forecast of 1.2%, as employment conditions continue to worsen. The IMF has projected that the country’s unemployment rate will rise to 7.5% this year from last year’s 5.3%, as the pandemic continues to upend supply chains, forcing companies to lay off employees and crushing demand for goods as consumers stay at home. Household spending grew sluggishly by 2.8% YoY (2019: 5.02%) in 1Q, as millions lost their jobs due to the pandemic. Indonesian Finance Minister Sri Mulyani Indrawati has also added that 2Q would be hardest quarter this year as economic growth could fall to 0.3% or in the worst case, contract by 2.6%. According to a survey quoted by BeritaSatu, 77% of Indonesians reported that the Covid-19 disruptions, as a result of the measures undertaken by the Government, have impacted their incomes. Even more worryingly, the survey, conducted by Saiful Mujani Research & Consulting (SMRC)2, found that close to 25% of Indonesians (or 50 million adults), are no longer able to fulfill their daily needs without taking on a loan, and 15% only have savings enough to last a week. The Indonesian authorities have also conservatively estimated that at least 3 million Indonesians will fall into poverty amid the pandemic, on top of the existing 24 million living under the poverty line – negating all of the Government’s efforts in 2019 in lifting more than 800,000 Indonesians out of poverty.

2 SMRC: Mayoritas Warga Anggap Covid-19 Ancam Penghasilan - 9/4-12/4/2020. 1,200 respondents were randomly selected from 86% of the population who owned a personal phone, and interviewed over the phone.

As of April 2020, close to 50 million adults were no longer able to fulfill their

daily needs without taking on a loan.



However, that said, the IMF expects an exceptional recovery in Indonesia in 2021, as it estimates that the country’s economy may expand by 8.2%, which would be the highest rate seen since 1995, during former President Soeharto's regime.

Figure 17: Indonesia’s 2021 GDP growth projected at 8.2%

Source: IMF WEO, KGI Research

Our house view echoes the IMF’s, as we see that emerging markets (EMs) tend to recover much quicker than developed markets (DM). The typical pattern of EMs recovering ahead of DMs have held true despite weaker global economic momentum. Further, given that Indonesia is among the more domestic-demand-oriented economies, it will be less exposed to the external demand impact from a global recession.

Figure 18: Indonesia’s 2021 GDP growth projected at 8.2%

Source: IHS Markit, KGI Research

Foreign currency risks

A key risk to the outlook for Indonesia also stems from a material depreciation in the Indonesian Rupiah (IDR), given that the currency has depreciated more than 60% from its 10-year peak in August 2011. The majority of Delfi’s sales are also derived from Indonesia, and the depreciation will inevitably weigh on its sales and profits, as its reporting currency is in USD. However, its raw materials are priced and hedged in USD, up to 18 months in advance, providing better visibility to costs. The USD/IDR spiked in March 2020, reaching an all-time high of 16,575 before slightly recovering to 14,760 towards the end of May.

However, the IMF forecasts Indonesia’s economy in 2021 to grow at its fastest

pace since 1995.



Other than the IDR, Delfi also has transactional currency exposures arising from sales, purchases and operating costs in Philippine Pesos (PHP) and Malaysian Ringgit (MYR). To better manage the multiple currency exposures, Delfi enters into foreign exchange forward contracts for transactions that are denominated in foreign currencies, allowing it to sell or buy currencies at pre-determined forward rates.

Claims associated with the disposal of Delfi Cacau Brazil Ltda On 24 February 2015, Barry Callebaut had notified Delfi of a total of nine claims from the Brazil tax authorities against the former Delfi Cacau Brazil Ltda, which Barry Callebaut purchased as part of the sale of the Cocoa Ingredients business on 30 June 2013 (while the Settlement Agreement fully settled the dispute over the closing price adjustments, Barry Callebaut remained entitled to bring any further claims that may arise under the continuing warranties). These claims totaled BRL 87,002,187 as of 31 December 2016, and in FY2016, the Group recognised an exceptional charge of US$2.0 million pertaining to the claims. In FY2017, FY2018, and FY2019 the Company were not notified of any further claims. At 31 December 2019, Delfi’s total exposure in respect of tax and labour claims in Brazil is BRL 86,998,712 (equivalent to US$21.7 million based on end-December 2019 exchange rate). Management has requested for Barry Callebaut to defend these claims and the cases are proceeding through the Administration and Judicial processes in Brazil. The Board and management believe there are strong grounds to resist these claims and the Company will keep the shareholders updated as to material developments in relation to the Brazilian claims.

Figure 19: USD/IDR

Source: Bloomberg, KGI Research

Figure 20: USD/PHP (LHS) and USD/MYR (RHS)


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Valuation & Peer Comparisons

Our valuations have not taken into account any impact of foreign exchange gains or losses. We completed our forecasts and estimates in USD, as per Delfi’s reporting currency, following which we used the spot USD/SGD rate to arrive at our TP of $0.93. Revenue: Considering the loss of Lebaran sales for the year, and the closure of most Traditional Trade stores during the PSBB, we forecasted for a fairly steep drop in sales for 2020, although gross profit margins continue to be supported by more premium product sales in the Modern Trade channels. We expect 2021 to be a year of recovery for both Indonesia and Delfi, after which we have forecasted for actual organic growth only in 2022, supported by a recovery in demand and consumption along with double-digit sales growth for the newly rejuvenated Van Houten brand. Exceptional items: We have not factored for any exceptional cash outlays, specifically relating to the disposal of Delfi Cacau Brazil Ltda, as management believes that there are grounds to resisting the claims. However, a provision (not amounting to the total exposure) has been made for the claims, should unforeseen circumstances occur. Valuation/Peer Comparisons: We pegged Delfi to a conservative 15.0x P/E in our valuations, in comparison to its peers in the confectionery industry. Its Indonesian confectionery peers are averaging at 24.3x P/E and its global peers at 25.3x for FY20F. Its current P/B of 1.5x is also heavily discounted even if compared to its Indonesian confectionery peers (ex. UNVR IJ) who average at 3.7x.

Figure 21: Peer Comparison


BB ticker P/B (x)

Current FY19 FY20F Current TTM FY20F

DELFI SP Delfi Ltd SGD 0.77 336 11.9 11.8 15.0 1.5 5.6 6.5 1,102 -23.0 -40.3

INDONESIA CONFECTIONERY (Avg) 34,042 25.5 25.8 24.3 11.7 16.5 16.5 40,718,089.0 (6.0) (11.0)

MYOR IJ Mayora Indah Tbk PT IDR 2330.00 3,671 21.2 23.4 22.5 4.9 14.5 14.5 6,509,012 13.7 -9.0

ROTI IJ Nippon Indosari Corpindo Tbk PT IDR 1255.00 547 24.5 21.8 20.2 2.6 13.4 13.4 3,233,165 -3.5 -4.6

ICBP IJ Indofood CBP Sukses Makmur Tbk PT IDR 8575.00 7,046 17.6 18.1 16.6 3.7 10.3 10.3 81,504,590 -23.1 -12.5

GOOD IJ Garudafood Putra Putri Jaya Tbk PT IDR 1285.00 668 22.7 - - 3.6 - - 265,978 -14.9 -21.2

UNVR IJ Unilever Indonesia Tbk PT IDR 8225.00 22,110 41.8 40.1 37.9 43.5 27.9 27.9 112,077,700 -2.1 -7.6

GLOBAL//REGIONAL CONFECTIONERY (Avg) 476,756 26.1 45.9 25.3 8.0 15.6 15.6 7,411,402.0 (5.8) (1.2)

NESN SW Nestle SA CHF 103.86 321,531 24.1 24.2 22.6 5.7 17.0 17.0 790,614 -0.9 3.5

BARN SW Barry Callebaut AG CHF 1929.00 11,014 27.9 29.5 25.8 4.4 15.5 15.5 26,960 -9.8 -1.1

LISN SW Chocoladefabriken Lindt & Spruengli AG CHF 85600.00 21,287 39.7 42.6 37.4 4.5 22.8 22.8 19,066 1.4 11.5

HSY US Hershey Co/The USD 134.22 27,919 23.0 23.3 21.5 16.7 17.2 17.2 166,788 -8.7 -1.3

MDLZ US Mondelez International Inc USD 52.09 74,357 20.8 20.5 19.0 2.9 19.1 19.1 422,160 -5.4 -1.6

HOTC LN Hotel Chocolat Group PLC GBP 320.00 504 28.0 213.3 - 5.9 16.1 16.1 32,850 -28.1 -3.0

001800 KS Orion Holdings Corp KRW 14700.00 756 15.2 - - 0.5 4.4 4.4 1,829,610 -17.4 -8.7

2269 JP MEIJI Holdings Co Ltd JPY 8180.00 11,458 17.6 17.9 17.3 2.1 9.1 9.1 4,111,389 10.8 8.6

NESZ MK Nestle Malaysia Bhd MYR 140.20 7,688 52.7 51.1 47.7 38.3 32.7 32.7 11,637 -4.6 -4.9

APOF MK Apollo Food Holdings MYR 3.25 61 18.6 19.1 19.1 1.1 5.3 5.3 32 -9.7 -17.7HSI MK Hup Seng Industries Bhd MYR 0.98 182 19.0 17.7 17.1 5.4 12.3 12.3 295 8.3 2.1

6M Average daily

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Company NameLast Price

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P/E (x) EV/EBITDA (x)



Company Overview

History and background

History. Delfi Limited (formerly known as Petra Foods Limited) markets and distributes its Own Brand of chocolate confectionery products in its core markets of Indonesia, Philippines, Singapore and Malaysia. Its portfolio is also distributed and sold in over 10 other countries including Thailand, Brunei, India, South Korea and Vietnam. The Group's confectionery business is currently supported by two manufacturing facilities, one in Indonesia and another in the Philippines. In the late 1980s, the Group also ventured into the Cocoa Ingredients Business, with cocoa processing plants in the Philippines, Mexico, Brazil and Europe. Delfi quickly grew successful and became the largest bean grinder in Asia and the fourth largest in the world after ADM, Cargill and Barry Callebaut. The business involved providing cocoa ingredients to companies in over 60 countries, such as Nestle, Cadbury and Mars. However, in 2013, the Cocoa Ingredients Business was sold to Barry Callebaut as part of a strategic move to allow the Group to focus on growing its regional Branded Consumer Business – which is now the sole focus of Delfi Limited.

Traditional trade and modern trade channels. Through well- established routes-to-market and a broad spectrum of retail and distribution partners — from convenience stores, supermarkets and hypermarkets to small retailers and traditional warung (mom-and-pop) stores — Delfi’s distribution web ensures full and continued access to different market segments and geographies. Traditional trade channels, such as warung stores, do still dominate the retail landscape in Indonesia as c.45% of the population is still living in rural areas according to World Bank. However, due to less developed infrastructures, rural areas are not only costly and difficult to access, but are also less open to new distribution channels, allowing Delfi a sort of exclusive access to the vast rural population. Even though only value products are sold through traditional trade channels, the sheer volume of sales ultimately helps to compensate for the smaller margins.

Figure 22: Company milestones

Source: Delfi, KGI Research



Modern trade channels on the other hand, such as supermarkets and air-conditioned convenience stores, offer a much larger margin on its premium products that are targeted towards the urban population. While traditional trade channels may currently dominate, modern trade channels are also growing rapidly due to the growth of hypermarkets and convenience stores, as well as the continued urbanization efforts by the Indonesian government. Own Brands and Agency Brands. Other than manufacturing and distributing its own brands of chocolate confectionery, such as SilverQueen and Ceres, Delfi is also engaged in the distribution of Agency Brands through its modern trade channels. The distribution of Agency brands are not limited to chocolate confectionery, and may include other essential grocery items such as cereals, pasta and juices. Delfi derives approximately 30-40% of its revenues from the distribution of its Agency brands, which are usually locked in by 2-year renewable contracts.

Management

A strong set of directors and senior management with long proven track records. However, two of the three independent directors have been with the board for more than the limit of 9 years as per SGX listing rules that will be strictly enforced starting 2022. Thus, all future appointments of said independent directors will be subject to a two-tier vote by all shareholders excluding directors, CEO and associates. Another key shortfall in the Board of Directors and senior management is that from an Environmental, Social and Governance (ESG) standpoint, there is a clear lack of gender diversity – there are only two female senior managers: Nancy Florensia (President Director, PT Perusahaan Industri Ceres) and Lim Seok Bee (Chief of Quality Assurance, Food Safety, R&D and Technology).

Figure 23: Board of Directors

Mr Pedro Mata-Bruckmann

Chairman, Independent Director

Pedro began his career at W.R. Grace & Co., in 1968 where he served as President and CEO of several divisions. Through a series of promotions, in 1989, he rose to the

position of CEO of Grace Cocoa, a division of W.R. Grace & Co. Grace Cocoa (subsequently sold to ADM and renamed ADM Cocoa) was the world’s leading and

premier supplier of cocoa ingredients to the confectionery, dairy, bakery and beverage industries globally.

Date of First Appointment as Director: 12 June 2001

Date of Last Re-Election: 30 April 2018

Present Directorships: Delfi Limited; Corporation Lion City – Development SA; Grace Institute Foundation (New York); Mata Global Solutions; Starlux S.A.; MGS Mata

Global Solutions S.A.

Mr Davinder Singh

Non-Executive Non-Independent Director

Davinder is currently the Executive Chairman of Davinder Singh Chambers LLC, and has been a practicing lawyer for over 35 years. He has litigated in almost every area

of the law. He is an arbitrator on the SIAC panel of arbitrators and an accredited mediator with the Singapore Mediation Centre. He is also Vice-Chairman on the ICC

Commission on Corporate Responsibility & Anticorruption.

Date of First Appointment as Director: 12 June 2001


Present Directorships: Davinder Singh Chambers LLC; Delfi Limited; PSA International Pte Ltd; Singapore International Arbitration Centre; Singapore International

Mediation Centre



Mr Anthony Michael Dean

Independent Director

Mike has 40 years of experience in the investment and finance industries with 30 of those years being spent in Asia. Between 1990 and 2000, he was with CLSA, most

latterly as Managing Director of its Singapore merchant bank, where he was responsible for both investment banking and private equity. From 2001 to 2004, he

was a director of the Singapore private equity investment arm of Prudential Plc, after which he was the CFO for the Epic Shipping Group, a global shipping group, till 2013.

Date of First Appointment as Director: 6 May 2005


Present Directorships: Delfi Limited; Consulsis Limited

Professional Qualifications: Fellow of the Institute of Chartered Accountants in England and Wales and Member of its Corporate Finance faculty; Associate of the

Chartered Institute of Taxation; Member of the Singapore Institute of Directors

Mr Koh Poh Tiong


Poh Tiong retired as CEO, Food and Beverage, of Fraser and Neave Limited in 2011, having previously served as CEO of Asia Pacific Breweries Limited from 1993 to 2008.

Noted for his strong civic involvement and longstanding interest in sports and education, he has served on the Singapore Youth Olympic Games Organising

Committee, the Singapore Sports Council, Football Association of Singapore, and on the MBA Advisory Board of NTU. For his contributions to society and business, Poh

Tiong was conferred both the Public Service Medal and the Service to Education Medal in 2007 as well as the Public Service Star Award in 2013.

Date of First Appointment as Director: 19 December 2011


Present Directorships: Delfi Limited; Bukit Sembawang Estates Limited; Fraser and Neave Limited; National Kidney Foundation; Raffles Medical Group Ltd; Singapore Kindness Movement; Times Publishing Limited; Yunnan Yulinquan Liquor Company

Limited; Great Eastern Life Assurance (Malaysia) Bhd; Great Eastern General Insurance (Malaysia) Bhd; Saigon Beer Alcohol Beverage Corporation; BeerCo Limited

Mr Doreswamy Nandkishore


Nandu has 37 years of global experience in leadership roles across a diverse set of environments across both emerging and developed global markets. Nandu was an executive board member of Nestlé S.A from 2010 to 2015, responsible before his retirement, for Asia, Oceania and Africa, and earlier as the global CEO for Nestlé Nutrition, in charge of markets all over the world including the USA, Europe and

Latam. Nandu is currently a Professor at the Indian School of Business and a Guest Lecturer at the London Business School.

Date of First Appointment as Director: 3 January 2017


Present Directorships: Delfi Limited; I & N Developmental Investments Ltd

Mr John Chuang Tiong Choon

Group Chief Executive Officer

John has over 30 years of experience in the chocolate, confectionery and cocoa industry. John started his career in 1974 in our predecessor businesses in Indonesia

and Singapore. John established the Company in 1984 and was subsequently appointed CEO. In 2004, Petra Foods Limited (now known as Delfi Limited), was presented the Enterprise Award by the then President of Singapore, the late S.R.

Nathan. Under the Singapore Business Awards, John was awarded the title of Best CEO of 2011; in 2012, he was recognised as Businessman of the Year. In 2015, John

was a recipient of the SG50 Outstanding Chinese Business Pioneers Awards.

Date of First Appointment as Director: 1 November 1989


Present Directorships: Delfi Limited; Alsa Industries, Inc; Aerodrome International



Limited; Berlian Enterprises Limited; Ceres Sime Confectionery Sdn Bhd; Cocoa Specialties Inc; Delfi Marketing, Inc; Delfi Foods, Inc; Delfi Singapore Pte. Ltd.;

McKeeson Investments Pte Ltd; Ceres (International) Marketing Pte Ltd; PT Sederhana Djaja; PT Perusahaan Industri Ceres; PT Nirwana Lestari; PT General

Food Industries; Springbright Investments Limited

Mr Joseph Chuang TIong Liep

Executive Director, Group Chief Growth and Marketing Officer

Joseph was previously President Director, Branded Consumer Division of our Group. He is responsible for the overall management and business development of our

Branded business and has over 30 years of experience in senior management positions within the chocolate, confectionery and cocoa industry. As an integral part of his role, Joseph mentors staff in business development, marketing and sales. He was appointed as the Chief Operating Officer for both PT Perusahaan Industri Ceres

and PT General Food Industries from 1984, and he has served in various senior executive positions within the group since.

Date of First Appointment as Director: 2 March 1999


Present Directorships: Delfi Limited; Brands of Hudsons Sdn Bhd; Ceres Sime Confectionery Sdn Bhd; Ceres Super Pte Ltd; Delfi Marketing Sdn Bhd; Delfi Singapore Pte. Ltd.; Maplegold Assets Ltd; Pavilion View Holdings Limited; Ceres (International)

Marketing Pte Ltd; PT Nirwana Lestari; PT Citra Tunggal Lestari; PT Freyabadi Indotama; PT Perusahaan Industri Ceres; Delfi-Orion Pte Ltd; Delfi Yuraku Pte Ltd;

Freyabadi (Thailand) Co. Ltd

Mr William Chuang Tiong Kie

Executive Director, Business Development Director

William is an Executive Director of Delfi Limited and the Business Development Director of our Group. William was appointed to our Board on 31 May 2001. Being

based largely at the Group’s corporate headquarters in Singapore, William is responsible for the overall business expansion of our business, As an integral part of

his role, he is responsible for the existing joint ventures including DelfiOrion Pte. Ltd., and Delfi Yuraku Pte. Ltd. William has close to 30 years of experience in senior management positions within the chocolate, confectionery and cocoa industry.

Date of First Appointment as Director: 31 May 2001


Present Directorships: Delfi Limited; McKeeson Consultants Private Limited; McKeeson Investment 1 Pte Ltd; PT Delfi-Yuraku Indonesia; PT Freyabadi Indotama; PT General Food Industries; Freyabadi (Thailand) Co., Ltd; Delfi-Orion Pte. Ltd.; Delfi

Yuraku Pte. Ltd.




Financial Forecasts

INCOME STATEMENT (USD mn) 2018A 2019A 2020F 2021F 2022F

Revenue 427.0 471.6 428.0 471.6 554.6

Cost of Sales (279.1) (300.9) (271.8) (296.3) (355.6)

Gross Profit 147.9 170.7 156.2 175.3 199.0

Selling, General & Admin Expenses (110.2) (125.5) (116.6) (133.2) (151.0)

Operating Profit 37.8 45.2 39.6 42.1 47.9

Finance Income/(Expenses) (2.9) (3.7) (3.4) (3.7) (3.8)

Share of JV/Associates' Results (0.1) (0.8) 0.0 0.0 0.0

Exceptionals (2.1) (0.3) 0.0 0.0 0.0

Profit Before Tax 36.0 43.6 40.6 43.3 49.8

Income Tax Expenses (15.1) (15.4) (14.2) (15.2) (17.4)

Net Profit After Tax 20.9 28.2 26.4 28.1 32.4

Core PATMI 23.0 28.5 26.4 28.1 32.4

BALANCE SHEET (USD mn) 2018A 2019A 2020F 2021F 2022F

Cash and Cash Equivalents 54.7 57.6 56.8 94.6 92.6

Trade and Other Receivables 72.4 89.8 103.1 97.3 104.9

Inventory 76.2 87.4 109.5 93.8 102.3

Other Current Assets 17.0 20.3 19.3 19.3 19.3

Total Current Assets 220.4 255.0 288.6 305.0 319.1

Property, Plant and Equipment 109.4 117.0 116.2 116.5 118.0

Other Non-Current Assets 31.3 30.3 28.1 27.7 27.4

Total Non-Current Assets 140.7 147.3 144.3 144.2 145.4

Total Assets 361.1 402.3 432.9 449.3 464.5

Short-Term Borrowings 58.8 58.3 60.2 65.0 67.3

Trade and Other Payables 77.9 93.1 81.3 89.2 101.7

Other Current Liabilities 5.5 7.3 6.5 7.1 8.2

Total Current Liabilities 142.2 158.8 148.1 161.3 177.3

Long-Term Borrowings 0.2 0.0 0.0 0.0 0.0

Other Non-Current Liabilities 12.5 15.9 13.8 14.2 15.1

Total Non-Current Liabilities 12.7 15.9 13.8 14.2 15.1

Shareholders' Equity 206.2 227.6 270.9 273.8 272.1

Total Liabilities and Equity 361.1 402.3 432.9 449.3 464.5

CASH FLOW STATEMENT (USD mn) 2018A 2019A 2020F 2021F 2022F

Net Profit Before Tax 20.9 28.2 26.4 28.1 32.4

Depreciation 11.5 13.4 11.9 11.8 11.9

Other Non-Cash Adjustments 6.3 31.8 (19.0) 61.1 23.0

Changes in Working Capital (11.3) (23.2) 13.2 (29.5) (31.7)

Taxes Paid (15.4) (18.2) (16.3) (17.4) (20.0)

Cash from Operations 12.0 32.1 16.1 54.1 15.5

Capital Expenditure (20.8) (10.7) (10.7) (11.8) (13.0)

Other CFI 0.2 0.2 0.0 0.0 0.0

Cash from Investing (20.6) (10.4) (10.7) (11.8) (13.0)

Dividends Paid (10.1) (12.6) (9.2) (10.6) (10.8)

Borrowings Raised / (Repaid) 5.6 14.4 6.8 8.9 10.0

Equity Raised / (Bought Back) 0.0 0.0 0.0 0.0 0.0

Cash from Financing (4.3) (4.8) (4.4) (4.5) (4.5)

FX Effects, Others 0.7 0.6 0.0 0.0 0.0

Net Increase in Cash and Cash Equiv. (12.9) 16.9 1.1 37.9 (2.1)

Beginning Cash 50.4 38.2 55.7 56.8 94.6

Ending Cash 38.2 55.7 56.8 94.6 92.6

KEY RATIOS 2018A 2019A 2020F 2021F 2022F

Core EPS (SGD cents) 4.92 6.09 5.64 6.02 6.92

Core EPS Growth 33.0% 23.8% -7.3% 6.6% 15.0%

DPS (SGD Cents) 2.65 3.29 1.21 1.94 3.71

Dividend Yield 3.5% 4.3% 1.6% 2.5% 4.9%

Profitability

Gross Margin 34.6% 36.2% 36.5% 37.2% 35.9%

EBITDA Margin 12.0% 12.6% 12.3% 11.7% 11.1%

Net Margin 5.4% 6.0% 6.2% 6.0% 5.8%

ROE 11.2% 13.1% 9.7% 6.3% 7.0%

ROA 6.4% 7.1% 6.1% 6.3% 7.0%

Leverage

Total Debt/Equity 22.2% 23.8% 24.7% 25.9% 26.7%

Total Debt/EBITDA (x) 1.15 0.98 1.15 1.18 1.09

Valuation (x)

Price/Earnings 14.5 11.7 12.6 11.9 10.3

Price/Book 2.3 2.1 1.7 1.7 1.7

EV/EBITDA 6.6 5.6 6.4 5.5 5.0



KGI’s Ratings Rating Definition

Outperform (OP) We take a positive view on the stock. The stock is expected to outperform the expected total return of the KGI coverage universe in the related market over a 12-month investment horizon.

Neutral (N) We take a neutral view on the stock. The stock is expected to perform in line with the expected total return of the KGI coverage universe in the related market over a 12-month investment horizon.

Underperform (U) We take a negative view on the stock. The stock is expected to underperform the expected total return of the KGI coverage universe in the related market over a 12-month investment horizon

Not Rated (NR) The stock is not rated by KGI Securities.

Restricted (R) KGI policy and/or applicable law regulations preclude certain types of communications, including an investment recommendation, during the course of KGI's engagement in an investment banking transaction and in certain other circumstances.

Disclaimer This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal relations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient hereof. You should independently evaluate particular investments and consult an independent financial adviser before dealing in any securities mentioned in this report. This report is confidential. This report may not be published, circulated, reproduced or distributed and/or redistributed in whole or in part by any recipient of this report to any other person without the prior written consent of KGI Securities. This report is not intended for distribution and/or redistribution, publication to or use by any person in any jurisdiction outside Singapore or any other jurisdiction as KGI Securities may determine in its absolute discretion, where the distribution, publication or use of this report would be contrary to applicable law or would subject KGI Securities and its connected persons (as defined in the Financial Advisers Act, Chapter 110 of Singapore) to any registration, licensing or other requirements within such jurisdiction. The information or views in the report (“Information”) has been obtained or derived from sources believed by KGI Securities to be reliable. However, KGI Securities makes no representation as to the accuracy or completeness of such sources or the Information and KGI Securities accepts no liability whatsoever for any loss or damage arising from the use of or reliance on the Information. KGI Securities and its connected persons may have issued other reports expressing views different from the Information and all views expressed in all reports of KGI Securities and its connected persons are subject to change without notice. KGI Securities reserves the right to act upon or use the Information at any time, including before its publication herein. Except as otherwise indicated below, (1) KGI Securities, its connected persons and its officers, employees and representatives may, to the extent permitted by law, transact with, perform or provide broking, underwriting, corporate finance-related or other services for or solicit business from, the subject corporation(s) referred to in this report; (2) KGI Securities, its connected persons and its officers, employees and representatives may also, to the extent permitted by law, transact with, perform or provide broking or other services for or solicit business from, other persons in respect of dealings in the securities referred to in this report or other investments related thereto; and (3) the officers, employees and representatives of KGI Securities may also serve on the board of directors or in trustee positions with the subject corporation(s) referred to in this report. (All of the foregoing is hereafter referred to as the “Subject Business”.) However, as of the date of this report, neither KGI Securities nor its representative(s) who produced this report (each a “research analyst”), has any proprietary position or material interest in, and KGI Securities does not make any market in, the securities which are recommended in this report. Each research analyst of KGI Securities who produced this report hereby certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject corporation(s) and securities in this report; (2) the report was produced independently by him/her; (3) he/she does not carry out, whether for himself/herself or on behalf of KGI Securities or any other person, any of the Subject Business involving any of the subject corporation(s) or securities referred to in this report; and (4) he/she has not received and will not receive any compensation that is directly or indirectly related or linked to the recommendations or views expressed in this report or to any sales, trading, dealing or corporate finance advisory services or transaction in respect of the securities in this report. However, the compensation received by each such research analyst is based upon various factors, including KGI Securities’ total revenues, a portion of which are generated from KGI Securities’ business of dealing in securities. Copyright 2020. KGI Securities (Singapore) Pte. Ltd. All rights reserved.

confectionery & snacks trading data perf. vs sti index ... · figure 1: delfi’s most popular...

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