Quality-Value Investing

Marc Melendez, CFA

Emerging Market Small and Mid Cap Equities

Reperio Capital

Reperio Capital Research was founded in 2013 with the goal of better serving the investment community with in-depth, high quality, value oriented research.

Reperio means to discover in latin. Using value investing principles, we aim to discover a minimum of 12 investment opportunities per year within the Emerging Markets Small and Mid Cap universe.

We take a business owners perspective with a long term investment horizon. We conduct bottom up, fundamental research. We focus on downside risks and require a significant margin of safety in any investment to prevent the permanent loss of capital. All factors differentiating our research from the short term, trading focus of traditional research providers.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/delfi-ltd" target="_blank" data-smartkarma-citation="entities:19714:1" rel="noopener">Delfi Ltd (DELFI SP)</a>  is the largest branded chocolate company in Indonesia with a 50% market share. The company has a strong competitive position driven by the company’s brands being the standard by which Indonesians compare other chocolates an extensive distribution network. Multinational chocolate companies have been in Indonesia for decades but are unable to gain a strong competitive position. Delfi and <a href="https://www.smartkarma.com/entities/mayora-indah-pt" target="_blank" data-smartkarma-citation="entities:15131:1" rel="noopener">Mayora Indah (MYOR IJ)</a>, a local rival, have a combined market share of 80%.Despite the strength of the company’s competitive position, it trades at 5.2 times 2019 EBITDA. In 2018, Ferrero Rocher acquired Nestle’s US candy business for 20.7 times EBITDA. The US candy market is more mature and growing slower than the Indonesia Chocolate market and Nestle had a much weaker competitive position. Delfi is a very attractive asset to any acquirer. At 20 times 2019 EBITDA, Delfi is worth SGD2.62, 274% above the current share price of SGD0.70.  The Chuang brothers own a majority of Delfi’s shares and are all over 60. John Chuang, the CEO is 71. Joseph Chuang is 68 and William Chuang is 61. There is no family member inline to succeed. The highest position held by the next generation of the Chuang family is the Director of Information Technology. All make a potential for an acquisition over the next 10 years more likely.Assuming no acquisition and valuing the company on its current earnings with the current management team, Delfi’s base case valuation is closer to SGD1.25, 79% above the current share price. There is little downside. Assuming no growth and trough margins into perpetuity, the company’s fair value is SGD0.90, 28% above the current share price. Delfi is attractive at current prices.

Delfi Ltd (DELFI SP)  is the largest branded chocolate company in Indonesia with a 50% market share. The company has a strong competitive position driven by the company’s brands being the standard by which Indonesians compare other chocolates an extensive distribution network. Multinational chocolate companies have been in Indonesia for decades but are unable to gain a strong competitive position. Delfi and Mayora Indah (MYOR IJ), a local rival, have a combined market share of 80%.Despite the strength of the company’s competitive position, it trades at 5.2 times 2019 EBITDA. In 2018, Ferrero Rocher acquired Nestle’s US candy business for 20.7 times EBITDA. The US candy market is more mature and growing slower than the Indonesia Chocolate market and Nestle had a much weaker competitive position. Delfi is a very attractive asset to any acquirer. At 20 times 2019 EBITDA, Delfi is worth SGD2.62, 274% above the current share price of SGD0.70.  The Chuang brothers own a majority of Delfi’s shares and are all over 60. John Chuang, the CEO is 71. Joseph Chuang is 68 and William Chuang is 61. There is no family member inline to succeed. The highest position held by the next generation of the Chuang family is the Director of Information Technology. All make a potential for an acquisition over the next 10 years more likely.Assuming no acquisition and valuing the company on its current earnings with the current management team, Delfi’s base case valuation is closer to SGD1.25, 79% above the current share price. There is little downside. Assuming no growth and trough margins into perpetuity, the company’s fair value is SGD0.90, 28% above the current share price. Delfi is attractive at current prices.

Delfi: Indonesia's Dominant Chocolate Player at Available at 5.2 Times 2019 EBITDA