Delfi

Defli is an Indonesian chocolate manufacturer and distributor listed on SGX.  They are by far the largest player, with over 40% market share.  75% of their revenue is from Indonesia, the rest from the Philippines.

The Industry and Competitors

An Oct 2019 DBS report covers this well:

• Delfi's distribution is strong in rural areas ("General Trade"):

• Distributors in General Trade are largely exclusive to Delfi, creating a moat.
• The Modern Trade channel has been growing faster than General Trade, but has recently been slowed due to unhappiness.  New modern outlets can only be set up a certain distance from existing traditional outlets.
• Delfi has the largest market share in Indonesia.  They mainly compete with Mayora in the value segment, while the global brands (Nestle, Cadbury, Mars) compete in the premium segment.

• Indonesia has laws protecting local manufacturers: "Under the Ministry of Trade (MoT) Regulation amendment No. 56/2014 for traditional markets, shopping malls, and modern stores and outlets, at least 80% of sales must come from domestic products, and private labels may account for a maximum of 15% of SKUs."
• Delfi's market share is around 10% in the Philippines.

This article says that Petra and Mayora have a combined market share of 80%.

Financials

Before starting, when looking at historical numbers, note that the company sold its cocoa ingredients division in 2013, but some effects can still be seen on the income statement up to 2015.  Where the results of both divisions - two very different businesses - are merged together.

Around 60-65% of revenue is COGS.  Selling and Administrative costs make up another 20%.  Leaving pre-tax operating margins at 8-9%.

So COGS has the largest impact on profits.  DBS Vickers estimates that cocoa/sugar/milk make up 30%/15%/15% of total costs respectively (p6).  These commodity prices were very low in 2015/16.  Gross margin has varied from 32 to 38.5%:

The other determinant of gross profit margin is the proportion of own-brand products sold:

Clean balance sheet with zero net debt and minimal operating leases (p6).

CFO swings around wildly, due to working capital.

CFO is usually more than CFI.

Inventories and receivables have been steadily rising, which is a bit of a worry:

• In the 2018 and 2019, management stated that increased receivables are because of a greater proportion of sales to Modern Trade customers, who have longer settlement terms.
• In 2018, the group changed to the direct shipment model, where they took over the distribution function form their regional distributors, to their Modern Trade customer.  This caused an increase in inventories
• The spike in 2017 inventories was caused by "a Government-imposed transportation disruption which necessitated the deferment of some deliveries to January 2018."

Macro

If I buy this, I am paying SGD (or USD) to buy an asset in Rupiah (IDR).  And the company is operationally leveraged to IDR/USD exchange rate (product prices in IDR, costs in USD).

In the current part of the economic cycle, where there is a USD shortage, EMs like Indonesia are particularly vulnerable.  May be better to wait for a crisis first.

Conclusion

Good company starting to turnaround.  Good financials, has growth potential after the crisis is over, and seems to have a moat.  Valuation is reasonable, but not cheap yet.

With so many moving parts affecting their profitability (Indonesian consumer demand, exchange rates, raw material prices, proportion of own-brand products), its hard to know how to value it.  The stock price has been falling for 6 long years.  Would I be willing to catch a falling knife?  Maybe at a single digit PE ratio.  6 to 8 times earnings would be SGD 40 to 50c.  Without currency fluctuations.

A better way is to wait till this crisis is over, and EMs start to be back in favour again.  Indonesia is a dirt poor, politically unstable country and we don't know how bad things can get.  You need a different strategy when buying in a place like that. Wait till things are getting less worse - there will still be a lot of time to make money and ride the trend up.  Don't catch a falling knife in a rioting country.

Misc

Starting this year, they no longer report quarterly results.  Next results are for June 2020.

They paid a dividend of SGD 3.22 in 2019 (2.57c in 2018), with a 50% and 55% payout ratios respectively.  This is important, as a way of rewarding shareholders so that the share does not become a "value trap".  I could not find a dividend policy.