Del Monte Pacific

Maybank Kim Eng Research, Jan 9

DEL Monte Pacific's (DMPL) share price has corrected sharply by 25 per cent in the past two months after the company announced a US$1.675 billion deal to acquire the consumer business of Del Monte Foods (DMF).

We believe the slide can be attributed to the overhang of impending equity-raising exercises. Fresh financing details disclosed suggest that share dilution may be steeper than earlier expected. Even so, the correction is overdone in our view, considering the deal is still earnings accretive.

We understand that the transaction is progressing well and an EGM is expected to be held next month. This means the accounts would be consolidated from Q2-14.

We expect financing to be carried out in two stages, with the second stage occurring 3-6 months after the purchase transaction closes.

The positive news is the lower-than-expected debt cost, with the major syndicated loan portion now upsized to US$970 million on strong subscription (from US$930 million). This is a testament to the level of confidence in DMF's consumer business, a market leader in the US.

The negative news is there is now likely to be a rights issue in the second stage of the transaction, representing some dilution to earnings.

Management is guiding for higher transaction-related expenses, and we factor this into our forecasts. On the business front, we are lowering our FY13E-14E earnings estimates by 2 per cent to account for slightly lower-than-expected domestic sales growth, though we believe it would still be healthy at 11-12 per cent y-o-y. Following the transaction, dividend payout may also slide to the minimum of 33 per cent (from 75 per cent historically).

Overall, we view the deal positively and expect meaningful earnings accretion to ensue. With the new developments, we lower our TP to S$1.00, pegged at 12.5 times FY15E post-deal EPS, a 20 per cent discount to its global peers on account of higher gearing and execution risk.

DMPL's share price is likely to be more constructive after the successful conclusion of the transaction.

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