Delfi - RHB Invest 2024-04-09: Expect Minimal Margin Pressure; Keep BUY

• Maintain BUY call on Delfi and S$1.33 target price, 45% upside from the current Delfi's share price, ~6% FY24F yield. We retain our call despite the current environment of high cocoa prices and a further reduction of FY25-26F earnings.
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Higher cocoa prices, but slight impact for now.

• Since end-Dec 2023, cocoa prices have surged 122% to over US$9,000/tonne due to supply concerns in Ghana and Ivory Coast. Being a manufacturer of chocolate confectionery, cocoa is one of Delfi (SGX:P34)’s key input ingredients to its cost of sales, and higher cocoa prices would dampen its gross margins with all other factors remaining constant.
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Capable of mitigating margin compression.

• We note that Delfi would already have up to 12 months of inventory locked in at lower prices and therefore, FY24F’s margins should not be significantly impacted due to its forward purchase strategy and existing inventory drawdown.
• Yet, given the recent strong rally in cocoa prices, we do not expect Delfi to load up aggressively on inventory at current lofted prices. Hence, we expect inventory loading to continue, albeit passively.
• We also believe Delfi would respond with both price adjustment and right sizing strategies to defend its margins, especially from FY25F.
• With a three-pronged price adjustment, right sizing, and passive inventory loading strategy in play, we expect FY25F’s margin compression of Delfi to be minimal.

We cut FY25-26F earnings by 2-3%.

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Alfie Yeo RHB Securities Research | https://www.rhbgroup.com/ 2024-04-09 SGinvestors.io

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