Del Monte Pacific

UOBKayhian on 19 June 2014

VALUATION

• Del Monte Pacific (Del Monte) is trading at a Dec-end 2013 PE of 36x. Based on Bloomberg consensus, the 12-month target price for the stock is S$0.64, which translates to a 14% potential upside from the current level.

INVESTMENT HIGHLIGHTS

• Apr-end FY15 to be a transition year for Del Monte as it integrates recently acquired Del Monte Foods, Inc (DMFI). The group has targeted the current fiscal year to implement immediate changes within DMFI such as a) migration of IT system to SAP that will increase functionality and generate cost savings, and b) shifting to an old and proven strategy of value pricing and mass volume. With these, the group expects DMFI to return to its historical performance trend by FY16.
• Operational synergies and better positioning to enter new markets and channels. Management sees potential commercial synergies in the vertical integration of its pineapple business and in cross-selling between the US and Asia. It intends to pursue cost-saving initiatives for its raw materials and packaging, and is considering the possibility of outsourcing. Del Monte is also developing a range of products for the ethnic markets and is looking to build its presence in South and Central America. With the US market posting flat to low single-digit growth in the last five years, we view opportunities to come from these synergies and new initiatives to drive revenue growth and enhance profitability.
• Revalued inventory to impact FY15 net profit. DMFI restated its assets and liabilities to fair market values as required by purchase accounting standards, which resulted in higher cost of goods sold for the transition results period Jan-Apr 14. With majority of the revalued inventory meant to be sold in FY15, we expect this year’s margins and net profit to be impacted quite substantially. New inventory produced in the current fiscal year will not be subject to revaluation.
• Healthy cash flow reduced DMFI’s working capital loan by 41%. The group registered an operating cash flow of US$88m in the 10-week transition period, compared to an outflow of US$24m in the prior year, mainly as a result of the consolidation of DMFI. This allowed the latter to reduce its US$184m revolving working capital facility by US$75m. Management expects cash flow generation will continue to be strong in FY15 but dividend payout will be lowered as it prioritises paring down its debt. The group will launch its preference shares issuance within the next six months followed by the rights offering to refinance its bridge loan.

Del Monte Pacific

DBS Group Research, June 18

AFTER Del Monte Pacific (DMPL) reported its results for the transition period January-April 2014 and change of its full-year end to April, we revised our forecasts and the consolidation of recently acquired Del Monte Food Inc (DMFI).

We project that FY15F will still register losses of about US$40 million, including preference share dividends) from the US$43 million loss registered for January-April 2014, before jumping to a net profit of US$50 million in FY16F, as DMFI targets a reversion to its historical performance trend (sales revenue of US$1.8 billion).

DMPL is looking to issue preference shares (to raise US$350 million) within the next six months, subject to Philippine authorities' regulatory approvals. A further US$180 million is to be financed by new common shares/rights issue, while US$100 million will be financed by medium-term loans.

We have assumed a 10-for-4 rights shares to raise US$180 million. Following the exercise, we estimate that net debt to equity should drop to 1.8 times and 1.6 times by end FY15F/16F respectively.

While we see the longer-term stability and potential of the enlarged entity, we expect a meaningful turnaround only in FY16F. Our target price is revised to S$0.62, based on 18 times FY16F earnings from a discounted cash flow-based methodology previously.

At this juncture, we believe the upside to its share price could be limited in the near term, and the counter could appeal instead to investors with mid- to longer-term horizons. Downgrade to "hold".

HOLD

Del Monte Pacific

Kim Eng on 3 Mar 2014

• We hosted Del Monte Pacific (DMP) for post-result NDR. Interest level remains high as the company completes its USD1.675b bid to acquire Del Monte Foods (DMF). We digest the FY13 results and revise our acquisition scenario analysis.
• 4QFY13 results minor disappointment as competition in the Philippines heats up. Losses at Indian JV continue to narrow, but break-even likely to be behind earlier schedule.
• Latest financial details from Del Monte Foods US are lower than our earlier assumptions. Despite several quick wins for synergies, the more meaningful ones will be several years down the road. We maintain BUY with lower TP of SGD0.85.

 NDR take-aways
With the entry of strategic investors (USD75m), funding requirements are complete and there will be no dilutive equity exercises. Immediate cost savings for DMF include non-working marketing costs and IT rationalization which should yield around USD20m a year. In terms of personnel, a highly capable and newly-motivated team has remained on board. Key plans to execute over the next few years include 1) Entry into fruit beverages; 2) Entry into South America; and 3) Expansion of product range. Management targets to bring EBITDA from USD164m to USD260m, (DMF’s record year in 2011), over the next 3-4 years.

What’s Our View
We still believe this is a long-term positive deal, though investors will have to be patient. Key risks are execution and interest rates. Even assuming a bear case, the stock only trades at a post-transaction P/E of 12.6x versus global peers of 15.3x. Our new TP of SGD0.85 (previously SGD1.00) remains pegged to 12.5x FY15E base case EPS.

Del Monte Pacific

UOBKayhian on 13 Jan 2014

VALUATION

• Del Monte Pacific (Del Monte) is trading at an FY14F and FY15F PE of 16x and 10x respectively. Based on Bloomberg consensus, the 12-month target price for the stock is S$0.98, which translates to a 52% potential upside from the current level.

INVESTMENT HIGHLIGHTS

• Potential margin uplift from in-house PET bottling for Del Monte Philippines.Currently, the bottling of branded beverages sold in the Philippines is being outsourced at a loss. The contract will terminate in Aug 14 and the group intends to bring the process in-house. Management estimates the segment’s gross margin will improve to 20-25% from the current 9% due to this move.
• S&W brand (S&W) to breakeven in 2013; high double-digit growth from existing and new markets in the near term. Management will continue to focus on growing S&W’s processed and fresh businesses in Asia and the Middle East. For one, it plans to introduce tetra-packed juices in the latter market, where consumers are largely non-alcohol drinkers. S&W’s processed sales rose 47% yoy in 3Q13 driven by China, Korea, Middle East and Indonesia. Fresh sales rose 31% yoy driven by Korea, Japan and China. Management expects S&W to breakeven in 2013 and for an overall annual growth of 20% to be achievable in the near term as the business continues to gain traction.
• Higher profitability in 2015 from better supply contracts. A number of Del Monte’s long-term supply contracts will undergo repricing in 2014-15. The group is intent on negotiating better terms to reverse its loss-making positions. The agreement to supply processed pineapple products to Del Monte USA will terminate in Nov 14, which will allow the group to sell directly into that market at market prices, resulting in better margins. The contract to supply fresh pineapples in Asia will also shift to market pricing beginning Jan 15.
• Indian JV targets to break even in 2016 on better sales and improved scale. As of 9M13, FieldFresh Foods’ equity loss declined to US$3.6m from US5.6m in 2012 and US$9.7m in 2011. Del Monte processed sales under the JV grew 34% yoy in 3Q13. Management expects the improvement to be sustained on the back of better sales mix, improved prices, reduced overhead and tigher control of expenses. 
• Stretching fundraising capacity for US acquisition with plans for the US$1.675b deal to include LBO debt, common equity, preferred share issuances, and a rights offering. We see execution risks and a long, transitional period for the group’s acquisition of US-based Del Monte Foods’ consumer food business.

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.

BUY

Singapore Consumer

DBS Vickers Research, Dec 18

FOLLOWING disappointing Q3 results, we have reduced revenue and net profit growth for consumer companies under our coverage.

We now expect FY2013/14 forecast revenue growth of 4 per cent/7 per cent, from 6 per cent/8 per cent, previously. Coupled with expectations of weaker margins, we project a slower net profit growth of 4 per cent/9 per cent (from 18 per cent/14 per cent), for FY2013 and FY2014, respectively.

Singapore consumer stocks under coverage are not cheap. The sector had re-rated and traded above its historical average mean since early 2012, which in our view was supported by robust topline growth and the market's positive longer- term consumption outlook.

Following concerns of the Fed's tapering and Q3 earnings' disappointment, average valuations have corrected down to +1 SD (standard deviation) above mean, from +2 SD which was seen in early 2013.

Given the lowered growth outlook and slower private consumption growth, de-rating could continue for some stocks should they miss earnings expectations in 2014.

We advocate a selective stance on the Singapore consumer sector for 2014. Amid expectations of slower private consumption growth in 2014, we look to pick stocks for company-specific factors, to outperform within the Singapore consumer space.

We have selected stocks with: 1) stronger fundamentals and better resilience to softening revenue and margin compression; 2) oversold companies at attractive valuations; and 3) stable earnings and dividend payout.

We like OSIM ("buy", target price or TP: S$2.60) for its growth profile and exposure to the North Asia market, Courts ("buy", TP: S$0.77) on expectations of recovery in 2014, and Del Monte ("buy", TP: S$0.82) for being oversold and the uncertainty of its proposed acquisition being priced in. We also like Sheng Siong ("buy", TP: S$0.80) for its defensive traits and yield profile.

Del Monte Pacific

Maybank Kim Eng Research, Aug 19

DESPITE muted headline numbers, recent Q2 2013 results were positive, and we remain of the view that growth trends are affirmative and structural margin improvements forthcoming.

We believe the relatively low 8 per cent year-on-year growth for the branded consumer segment is a temporary blip and remain comfortable with our expectation of 17 per cent growth for the full-year.

We make minor upward adjustments to our estimates and correspondingly increase our target price to $1.05. Our target price remains pegged to 25 times FY2014 estimate.

BUY

Del Monte Pacific

Kim Eng on 7 Dec 2012

Look to 2014. Since Nutri-Asia of Philippines purchased an 85% stake in Del Monte Pacific (DPML) in 2006, it has been quietly diversifying its business streams and fixing a few legacy issues. In 2011, it renegotiated a previously loss-making supply contract, which resulted in the revival of its sales and earnings growth in Europe. We expect its next earnings boost to occur in 2014, as two more loss-making contracts come to an end.

Multiple growth drivers in place. While DPML has a strangle hold in its home market, the Philippines, with its Del Monte brand, it has been endeavouring to break into new markets with two pillars in place – S&W and FieldFresh. Due to regulatory limitations on the Del Monte brand, DPML has been grooming the S&W brand to break into new markets. At the same time, DPML is looking to replicate its home market success in India with its FieldFresh brand. DPML holds a 46% equity stake in FieldFresh; Bharti Group is the other stakeholder. However, FieldFresh is currently incurring losses due to high start-up fees in distribution outlets and fixed costs from a newly-opened plant. FieldFresh expects to break even by 2015 at the earliest.

Processed beverages to lead. DMPL has enjoyed healthy growth over the past two years. In particular, the Beverage segment has registered sales and operating profit growth of 26% and 487.8% YoY, respectively, in 2011. Main contributors to its performance were improved sales in the fruit juice segment and a jump in concentrate prices to new highs of USD2,000/tonne. Since then, concentrate prices has nearly halved to USD1,100-1,200/tonne. The Group has now shifted focus from concentrates to building new beverage brands, in order to reduce its risk in commodity prices.

Earnings growth coupled with dividend safeguard. While DPML has a minimum dividend payment policy of 33%, it has generously paid out 75% of its earnings over the past 7 years. It is currently trading at its historical FY11 P/E of 14.9x; with 9M12 earnings growth of 33.7% YoY. Its fourth quarter is typically the strongest, as larger shipments of pineapples will be made then.