Deep-dive 2021-7: Delfi Ltd
Delfi Ltd (DELFI SP) is a Singapore-listed chocolate producer with a major presence in Indonesia as well as other Southeast Asian countries such as the Philippines and Malaysia.
Delfi’s market share in Indonesia is 45%, far ahead of competitor Mayorah Indah’s 25%. Its brand names 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 a country that does not have proper cold-storage logistics. A manager at Nestlé said the following about Delfi:
“It’s like David fighting Goliath… [Delfi is] very big and has huge power, while we are small even though we are a multinational.”
Chocolate is a growth business. Global chocolate consumption has grown at a 3% CAGR over the past century and continues to grow - especially in Asia. 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. Indonesia’s population is young with an average age of just 30. And it has a population of 280 million that has yet to fully embrace Western dietary habits.
Delfi’s management team has a decent reputation. The company has paid very generous dividends over the past few decades with a dividend pay-out ratio of over 60%.
Delfi’s valuation multiple remains at a discount to global peers at just 0.73x sales. The market cap remains low at 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.
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. Indonesia’s overall consumer confidence remains weak.
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%. Since many of the factors are temporary, it would be natural to assume that the growth trajectory will resume once the pandemic is over.
Acquisitions within the sector have been made at much higher multiples of around 20-30x PE. Delfi has been approached by potential buyers several times. Given that CEO John Chuang’s children are not involved in the business and he’s now in his 70s, there is a non-zero probability that Delfi will eventually be acquired by a multinational.
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Thanks for the write up. Just to chip in a bit of situation in Indonesia. I believe that there are a lot of fundamental shift in the distribution system in Indonesia. This has weakened a lot of FMCG's distribution. While existing brand works well when put side-by-side with weaker brand, there are places where there is not much option for brand. And a lot of the distribution network's owner will want to carry local brand that gives them higher margin. That is why, the return that they get will be lower in future.
Good write up and summary of the main thesis. Have you considered why the Brand value or the distribution strength doesn't show up in the Return on Capital metrics? How are you thinking about the erosion of market share over the last 5-6 years?