Last year, margins were further weighed down by a weaker rupiah against the reporting currency, the US dollar, as well as higher spending on promotions.
"With costs now correcting sharply, we expect a lagged but meaningful recovery in gross margins in 2026-27, supporting improved operating leverage and earnings recovery," state Mo and Cheong.
While Singapore listed, Delfi commands half the chocolate market share in Indonesia.
However, the analysts point out that the benefit from lower cocoa prices will not manifest immediately as the company buys up to 18 months ahead.
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Also, rupiah may remain weak and offset lower raw material costs, which are largely denominated in the greenback. As an indication, a 3.9% rupiah depreciation in 2024 contributed to a 1.1ppt decline in gross margin.
"Hence, while the direction of margins is improving, we expect the pace to be gradual rather than immediate," say Mo and Cheong.
They believe that Delfi operates on a shorter product cycle, which means it can pass through differences in costs more quickly than the larger multinationals in the same space. Delfi can manage too by making tweaks in pricing, product sizes, stronger focus on more premium own brands that fetch better margins.
Delfi's own brands products are seen to continue to generate the bulk of its earnings, posting a growth of 4.9% last year, which has helped to offset declines in production on behalf of other brands.
"This reflects strong brand equity and pricing power, particularly in key products such as SilverQueen and Cha Cha. Given that Delfi's own brands typically carry higher margins and allow for greater control over pricing and product mix, this stable revenue base positions Delfi well to capture upside as cocoa prices normalise," reason Mo and Cheong.
Their higher target price of $1.68, up from $1.12, is derived after they raise their valuation multiple from the historical mean of 18x to 25.5x FY2027 earnings, which is 0.5 sd above the historical mean.
"With 2025 marking a margin trough, we see Delfi entering an earnings recovery cycle supported by improving gross margins and operating leverage. Delfi currently trades at 18x 2027F PE, or a 25% discount to global peers," the analysts say.
Similarly, Alfie Yeo of RHB Bank Singapore, citing lower cocoa prices, has raised his target price from $1.20 to $1.33. Still, the benefits for Delfi will only show up more significantly next year, as some of the prices for cocoa to be used this year has already been locked in six to 12 months ahead.
Yeo has raised his gross profit margin assumptions for FY2026 and FY2027 to 28.5% and 30%, in anticipation of better input costs. With this, he is projecting earnings growth of 2% and 4% for FY2026 and FY2027 respectively.
His revised target price is based on 15x blended FY2026 and FY2027 earnings.
Delfi shares closed at $1.22, up 2.52% for the day, extending a year to date gain of 52.5%.
