SINGAPORE (May 11): CIMB Research is maintaining its “hold” recommendation on chocolate confectionery distributor Delfi with an unchanged target price of S$2.30, despite the group’s slow start to FY17F with its 1Q results falling short of the research house’s expectations.

(See also: Delfi 1Q earnings fall 33% to US$5.6 mil)

In a report on Tuesday, analyst Jonathan Seow opines that the group’s 1Q results miss was more of a quarterly blip, rather than reflective of a structural change, which resulted mainly from its sales decline in Indonesia.

CIMB originally anticipated a better 1Q17 showing on expectations of Delfi building on 2016 momentum due to own-brand improvement and better premium product sales, explains Seow — but underestimated the impact of the group’s product rationalisation initiatives, which culled about 30% of stock keeping units (SKUs) in the country since the exercise began in 2H16.

The sales decline in Indonesia was further exacerbated by what the analyst refers to as “timing issues”, whereby sales in 1Q16 factored in higher-than-usual deliveries as trade customers replenished their supply pipelines.

“Going forward, we think the product rationalisation programme will continue to hinder near-term sales,” notes Seow.

“However, we like the company’s strategy of focusing on its core brands and we think this will better position the business in the long term, as well as improve profitability as the company frees up resources on underperforming SKUs.”

CIMB is therefore keeping its FY17-19F earnings estimates for Delfi unchanged, on expectations of an earnings recovery in 2H17, although weaker-than-expected sales remains a key risk to the research house’s view.

As at 11:33am, shares of Delfi were trading flat at S$2.20.