Delfi shares is probably one of the worst performers on SGX.
Shares have plunged over 68% since 2015. At one point, it reached a low 67 cents per share.
Yet, Delfi bullies Indonesia’s chocolate confectionary market. Somewhat like this other Singapore dividend grower.
At just S$850 million, Delfi is Indonesia’s biggest chocolate maker – dominating a 45% market share.
Tough competition — but a strong tailwind for Delfi
Indonesia’s chocolate market is highly fragmented. And very hard to break in.
Big giants like Nestle, even Ferrero, have tried for years but found it tough to fight in the narrow alley against local players, like Delfi.
The thing is, global players tend to have higher operating cost, which makes profit margins lower.
For instance, local chocolate makers use a lot of cocoa powder. This is usually two to three times cheaper than what global players normally use, which is cocoa butter.
Naturally, when it comes to food, customers are concerned about prices — paying the cheapest of the same product as long as they can afford.
This makes global players tough to compete in Indonesia.
What’s more, it’s hard to distribute products across the country’s archipelago — infrastructure is also run-down, and retail are largely dominated by “mom and pop” shops.
Try working with family-owned businesses… it’s never easy.
So… what’s wrong with Delfi shares?
Since 2015, shares have been stuck in the bargain bin and went “under-the-radar” — not many institutional fund managers are willing to buy penny stocks.
However, what I know is, Delfi really got serious in the business ten years ago, when it decided it wants to be an iconic chocolate brand.
The thing is, when an old-fashioned business tries to streamline and improve, there’s many chances its profits could improve…
In 2013, Delfi sold off its cocoa ingredients business.
Then reduced many of its unpopular products.
And focused on growing its profitable, iconic brands…
…brands its customers bought more of, like these below…
In fact, Delfi reduced the number of its products by up to 40% since 2015.
This lowered revenues, but strengthened its profit margins.
The funny thing is… this resulted in Delfi shares to stumble.
Even though it also made it a far more efficient business today.
A quiet fact — improving financials
What I know though is… One of the many quiet facts about Delfi is its improving financials.
And this gives it a great source of strength for a small player in a fragmented market.
Last year, Defi revenues grew 19% to US$483 million, gross margins steadied at 30%.
And it continued to produce a return on equity (ROE) of 18% — mostly from efforts to grow its chocolate brands.
I’d say ROE is the rocket fuel for any good businesses. The higher the ROE, the more efficiency Delfi is.
Despite Delfi in the highly competitive confectionary business, its ROE is still good.
And if it can successfully pull off expansion into Malaysia and Philippines, I’m not surprised if shares to soar.
In fact, its latest 1Q2023 financials showed promising results. Not too bad.
Delfi has a fortress-like balance sheet, with a strong cash pile.
Put it this way, its US$77 million cash more than covers its US$5 million debt.
Plus, a strong balance sheet made it unlikely Delfi has to worry about high interest rates, or be forced out of business during recessions — common for many food confectionaries that are capital intensive.
A strong cash pile also gives Delfi room to pivot, even changing its strategy (if needed) in the face of a stiff competition.
2 things I don’t like about Delfi
First, Delfi is an old-fashioned business — chocolate confectionary and the market is highly competitive.
It doesn’t have strong patents like healthcare…
Or scalable, unique software systems like tech.
Next, Delfi still a big problem — dealing with a volatile Indonesian Rupiah.
In 2022, the Rupiah fell by more than 10%, which posed a big challenge for this tiny company.
I find it hard to protect against emerging market foreign currencies, also a key reason why this Singapore REIT went intro trouble.
And I’ll be lying if I said Delfi lousy share prices weren’t affected by the weak Rupiah.
If the Rupiah (or ringgit and even the peso) weakens, this could affect Delfi shares.
I like this — growing dividends
Having said that, this is where things get interesting.
For a tiny company, Delfi’s dividends started to become more consistent. I mean, it grew dividends consistently from 2.4 US cents in 2017 to 4.8 US cents to 2022 — doubled in just five years.
And expected to pay a 4% yield next year.
Plus, there’s still plenty of room to grow.
Can this dividends be sustained?
Well, let’s see…
In a developed country like the US, the average person eats 4.5kg of chocolates a year. In Japan, that’s 1.2 kg a year. In Indonesia? It’s just 300 grams a year.
Which means, Indonesia is severely under-penetrated — though there’s a fast growing, young consumer crowd.
From the way I see, it looks like a huge runway for Delfi – or any food companies for that matter.
My final thoughts
Delfi’s an old-fashioned business with potential to grow more.
Somewhat like this other Singapore dividend payer.
Delfi sold off its non-core assets, focused on growing iconic chocolate brands, and worked its way into the Malaysia and Philippines market.
What’s more, it grew dividends over the last six years in a row.
For a tiny chocolate maker, it continued to bully the Indonesian market, plus making it tough for global players to compete.
Well, if you can accept the foreign currency weakness and the fact that Delfi is operating in an “old economy”, highly competitive business, perhaps this is one interesting dividend stock that could continue growing.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan