Here's what will drive Delfi's growth

Margins have already improved to 32.6% in 1H16.

OCBC Investment Research notes that Delfi’s performance had generally improved in 1H16, as management had in place cost containment initiatives, and implemented price adjustments and product rightsizing while also discontinuing some slow-moving SKUs. In addition, it has seen a smaller impact from currency depreciation. Moving forward, it expects Delfi's own brand's sales to continue driving growth.

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Recall that overall Own Brands sales growth in local currency terms was at 7.5% for the first half of this year, which was mainly driven by higher sales of premium products. Sales in Indonesia in local currency terms had also increased by 4.8% for 1H16. Notably, margins have also improved to 32.6% for 1H16 vs. 29.8% in 1H15 with better profitability.

Looking ahead

The group had previously highlighted that their agency brands’ sales were lower, partly due to the cessation of the distribution business in Singapore since 31 Aug-15, as well as lower sales in Indonesia due to changes in regulatory standards. Nonetheless, we do not expect major issues here. Own Brands sales have been the major contributor to the group’s business (~60% of total revenue), and we believe this segment’s sales growth momentum in local currency terms can maintain as the group continues to invest in channel expansion and brand building. That said, this also means selling and distribution costs may remain high as a percentage of sales.