Del Monte Pacific - 3QFY17 DMFI continues to disappoint
- 9MFY17 reported net profit was below expectations at 59% of our FY4/17 forecast due to sales decline in the US and higher-than-expected interest expense.
- Gross margin contracted to 14.7% in 3QFY17 due to lower pricing in non-retail channels. DMFI incurred net loss of US$14.6m in 3QFY17 (3Q16: US$17.3m profit).
- However, DMPL continued to gain strength with 3QFY17 net profit of US$21.2m, an 81% yoy gain.
- Preference share issuance has been postponed again. We estimate the earliest that the issuance will take place is 2QCY17.
- Maintain Hold with lower target price of S$0.35.
9MFY17 earnings below expectations
- 9MFY17 reported net profit was below expectations at 59% of our full-year forecast.
- During the quarter, the company incurred one-off expenses of US$12.4m (on pretax basis) related to DMFI.
Del Monte’s US business (DMFI)
- DMFI accounted for 75% of group revenue in 3QFY17. Sales declined 2.3% yoy in 3QFY17 due to continued weakness in the canned fruit industry and lower sales to private labels. Gross margin was also lower at 14.7% in 3QFY17 versus 15.5% in 3QFY16.
- In 3QFY17, DMFI retained its number one position in terms of market share for packaged vegetables and packaged fruit.
Del Monte’s Philippines business (DMPL)
- DMPL’s business is still in the pink of health, registering sales growth of 3.2% yoy in 3QFY17. S&W continued to make inroads with double-digit sales growth in the Asia Pacific region, driven by fresh pineapple and packaged products.
- The Asia Pacific region (DMPL + S&W brand) achieved gross margin of 33% in 3QFY17.
Update on debt situation
- Del Monte’s proposed preference share issuance of up to US$360m has been postponed again to 2QCY17. Depending on demand, management guided for an initial tranche of US$250m, with the balance issuable within the following three years.
- We deem the coupon cost that the group could be comfortable with at 6.5-7.0%.
- Net gearing fell to 5.48x at end-3QFY17 (2QFY17: 6.05x, 1QFY17: 5.32x).
- DMFI continues to present challenges to the group due to the ongoing industry contraction, changing consumer preferences and excess capacity in the industry.
- We believe that the group will have a clearer strategy in FY18F as the consultants would have presented their findings by then. We still expect the US business to incur one-off expenses in FY18F. The Del Monte brand still has strong presence in the US and we believe the group will focus on increasing sales of higher-margin branded products.
- We cut FY17-19F core EPS by 3-6% as we factor in the delay of preference share issuance to FY18F. We assume that the preference shares will be issued in an initial tranche of US$250m in FY18F, followed by two tranches of US$40m each in FY19-20F.
- Still based on P/E multiple of 11.3x (1 s.d. below the historical average of US peers), our target price is S$0.35.
- Upside risk is lower-than expected one-off expenses incurred by DMFI, while downside risks are deterioration in US sales and larger one-off expenses.