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.