Delfi Limited has a rich history of delighting generations of chocolate lovers in the region for over 50 years. Delfi was found by the Chuang family in the 1950s as a chocolate manufacturer in Indonesia. Since then, Delfi has evolved into a regional consumer powerhouse with a strong presence in its core markets of Indonesia and Philippines.
Delfi has an established portfolio of chocolate confectionery brands, including 10 master brands including Silver Queen, Ceres, and Delfi. The company has business operations Singapore, Malaysia, Thailand, and the Philippines, and is the market leader for branded chocolate confectionery products in Indonesia with a 45% market share.
I attended Delfi’s recent AGM to find out more about the company’s performance during a pandemic and its future growth prospects. Here are the seven things I learned from the 2021 Delfi AGM.
1. Revenue fell 12.6% year-on-year to US$385.1 million in FY2020 from US$440.7 million in FY2019. Delfi was affected by large-scale social and business restrictions instituted by countries due to the pandemic.
However, recovery momentum picked up in 4Q2020 with revenue at US$104.4 million — which was 25% higher quarter-on-quarter and only 3.7% lower year-on-year. This was a significant improvement from the financial performance seen in the second and third quarters of FY2020.
Over the long term, the Asia-Pacific chocolate market is expected to grow 6.3% annually from 2020 to 2025 to US$32.0 billion.
2. Gross profit fell 17.3% year-on-year to US$110.1 million in FY2020 from US$133.1 million in FY2019. Gross profit margin fell 1.6 percentage points to 28.6% in FY2020 from 30.2% in FY2019. The dip in margin was due to the impact of COVID-19 arising from lower sales and higher trade promotion expenses.
3. Earnings before interest, tax, depreciation, and amortization (EBITDA) fell 26.4% year-on-year to US$43.9 million for FY2020 from US$59.6 million in FY2019. Similarly, net income fell 38.1% year-on-year to US$17.5 million from US$28.5 million in FY2019.
The pandemic has shifted consumer behavior as consumers have shifted to online shopping and making shorter trips to physical stores to stay safe. More people are also staying home to eat and cook which saw an increased demand for Delfi’s breakfast, snacking, and baking categories.
Delfi still believes that the purchase of chocolate confectionery through grocery, supermarkets and retail stores will remain relevant and will account for a sizable proportion of total sales in the short to medium term. At the same time, the company will slowly move away from traditional advertising and focus more on digital advertising and social media.
4. Indonesia comprised over 66.3% of FY2020 revenue, with the remaining 33.7% in regional markets such as Singapore, Malaysia, Thailand, and the Philippines. Delfi was majorly impacted by the pandemic when Indonesia implemented Pembatasan Sosial Berskala Besar (PSBB or large-scale social restrictions) from April to June 2020. However, with strong momentum carrying from 4Q2020, the management believes FY2021 will be a much better year for the company.
5. Delfi maintained its FY2020 dividend at 2.35 cents per share, the same as FY2019. The company doesn’t have a fixed dividend policy but aims to pay at least 50% of net profit as dividend. Over the last 10 years, Delfi has returned US$260.1 million to its shareholders and paid an increasing dividend since 2017. Based on Delfi’s share price of 96 cents (as at 21 June 2021), its dividend yield works out to 2.4%.
6. Despite lower profits, Delfi Limited actually increased its free cash flow to US$38.7 million in FY2020 from US$22.1 million in FY2019. This was achieved by controlling costs, collections, and capital spending. The strong free cash flow enabled the company to maintain its dividend despite a drop in profit during a challenging year.
7. Delfi Limited rejuvenated its Silver Queen brand by coming out with new packaging to increase its ‘connection’ with consumers, especially among Gen Z and millennials. Delfi also launched new formulation and product lines relevant with the trend towards healthier ingredients catering to younger audiences with flavors such as Berry Yoghurt and Green Tea Matcha. The management also expects tastes to shift toward chocolate that have a higher cocoa content, and less sugar and milk.
The fifth perspective
The management expects FY2021 to be a better year for Delfi as the pandemic eases. Delfi has also been a consistent dividend stock that pays a steady dividend every year.
However, one key risk investing in Delfi is the weakening of the operating currencies (i.e., the Indonesian rupiah, Philippine peso, Malaysian ringgit) of its regional businesses over the last few years which has impacted Delfi’s financials which are reported in U.S. dollars.
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