Evaluating a Confectionery Company with growing dividends using 4 Financial Metrics

Article Highlights

• Trailing 12-month revenue fall by 5.2% due to COVID-19

• Interest Coverage Ratio kept stable with low net debt to equity ratio

• Growing dividend payout since FY2017

• Strong growth in free cash flow for FY2019

Headquartered in Singapore and listed on the SGX-ST since 5 November 2004, Delfi Limited ("Delfi") manufactures and/or distributes branded consumer products that are sold in over 17 countries including Indonesia, Singapore, Malaysia, Hong Kong, Australia, Thailand, the Philippines and China.

Delfi has an established portfolio of chocolate confectionery brands which are household names in Indonesia. Its flagship brands in Indonesia include “SilverQueen” and “Ceres” that were introduced in the 1950s and “Delfi” in the 1980s. In addition, the Group also distributes a portfolio of well-known agency brands in Indonesia, Malaysia and the Philippines.

Evaluating Delfi Limited using 4 Financial Metrics

Revenue & Net Profit

For FY2019, Delfi’s revenue came in at S$635.37 million, which is a growth rate of 9.0% year-on-year. The increase in revenue can be seen from a higher sales contribution from its core Agency Brands and Own Brands of Chocolate Confectionary. Delfi’s Own Brands continues to be the major revenue contributor for the Group, representing more than 60% of FY2019’s revenue.

With a slower pace of growth in Delfi’s cost of revenue and a sharp fall in the cost of Exceptional items, Delfi’s profit after tax has jumped by 33.5% year-on-year to S$38.0 million in FY2020.

In terms of its trailing 12-month performance, Delfi’s revenue stands at S$603.96 million, which is a drop of 5.2%. The drop in revenue was due to lower sales achieved in the period as COVID-19 has resulted in lockdown measures being put in place in many countries.

As a result of lower revenue, Delfi’s profit after tax also took a hit, dropping more than 17% to S$32.26 million.

Leverage Ratio

Delfi’s interest coverage ratio has been kept stable for the past 3 years between 12.54 times and 13.71 times. This indicates that Delfi’s profit before interest and taxes can cover 12 to 13 times of its interest expenses. With a high-interest coverage ratio, it shows that Delfi has the capacity to meet its interest obligations and does not run the risk of insolvency in the short run.

In terms of net debt to equity ratio, Delfi was in a net cash position in FY2017, which indicates that the cash on hand exceeds the amount of debts in its balance sheet. In FY2018 and FY2019, its ratio stands at only 0.021 and 0.003 times respectively. This goes to show that Delfi has a healthy balance sheet with a high cash level, which is enough to cover the debts on hand.

Dividend

Delfi’s total dividend per share has been on an uptrend since FY2017. In FY2017, its total dividend per share amounts to 2.42 Singapore cents and has increased by 80% to 4.34 Singapore cents in FY2019. With this growing trend, it shows that Delfi’s management is willing to reward shareholders with higher dividend as the business grows.

As a result, Delfi’s dividend payout ratio has increased from 50% in FY2017 to 70% in FY2019. However, investors should also take note that if the dividend payout hits above 100%, it indicates that the dividend payout will not be sustainable as it exceeds the company’s earning.

Free Cash Flow

Delfi’s free cash flow has seen a strong fluctuation for the past 3 financial years. In FY2017, it has recorded a free cash flow amounts to S$18.7 million. However, in FY2018, despite a slight dip in its net cash from operations, its free cash flow tumbled by more than 75%. This was due to a large negative change in its working capital as Delfi increased its capital expenditure for FY2018.

In FY2019, on the back of a 33% year-on-year growth in its net cash from operations and a smaller amount of capital expenditure, Delfi managed to grow its free cash flow by more than 400% year-on-year to US$24.5 million.

Conclusion and Prospects

The challenging operating environment has resulted in Delfi’s trailing 12-month performance to suffer a drop in revenue and profit after tax.

However, Delfi is in a strong financial position to weather this downturn, as seen from the low net debt to equity ratio and high-interest coverage ratio. Furthermore, Analyst remains bullish over the prospects of Delfi as seen from the high mean target price.

Mr. John Chuang, Delfi’s Chief Executive Officer, said: “The global COVID-19 pandemic has brought about significant changes as well as new challenges. On our part, we immediately took comprehensive measures to protect the safety of our people which was our foremost priority.

Since June 2020, these restrictions are gradually being eased in our regional markets and we are pleased that sales are starting to pick up from the height of the lockdowns, although not back to pre-COVID 19 levels. We have observed the emergence of new trends during these unprecedented times, including an increase in demand for products that are seen to improve consumer health. We plan to speed up innovation to capture these growth opportunities.”