Del Monte Pacific - DBS Research 2017-03-13: US operations still not up to par

Del Monte Pacific - DBS Vickers 2017-03-13: US operations still not up to par DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific - US operations still not up to par

  • 3Q17 core recurring in line, helped by tax credits.
  • US operations not up to par, mitigated by strong Asia Pacific performance.
  • Preference shares on the cards, possibly March/April.
  • Trimmed forecasts by 18%/15%; maintain HOLD.



Maintain HOLD, improvement in US operations and deleveraging are key catalysts. 

  • We maintain our HOLD recommendation on DMPL with a revised TP of S$0.36. 
  • While its Asia Pacific operations are posting strong growth, we believe firmer performance from its US operations (DMFI) and the fruition of its deleveraging plans are keys to the re-rating of the counter.


3Q17 core earnings in line, helped by tax credits. Del Monte Pacific Limited’s (DMPL) 3Q17 core earnings were within expectations, helped by tax credits. 

  • Headline net profit was at US$8.5m, showing a reversal from loss of US$4.8m last year.
  • Group revenue improved marginally by 0.3% to US$604m, helped by Asia Pacific operations, partially offset by its US operations. EBIT was up by 92% to US$28.4m. 
  • In 3Q16, there was a one-off expense amounting to US$12.4m. Excluding that, recurring EBIT would still have grown by 25% y-o-y. That said, the recurring operating profit was behind our expectations largely arising from a weaker-than-expected performance from its US operations.


Preference shares detailed timeline to be made known. 

  • DMPL’s planned issuance of an initial US$250m tranche of perpetual preference shares has received approval from the relevant authorities. A detailed timeline would be shared in due course, and the launch is projected to be in March/April 2017. 
  • We have factored US$250m (coupon rate of 6.5%) in our forecasts in FY18F (instead of FY17F previously) and estimate this to lower the group’s gearing to 2.2x by end-FY18F.


Valuation

  • Our target price is revised marginally to S$0.36 based on 12x FY18F PE (post preference share coupon). This is at a 40% discount to consumer peers listed in the US and Philippines, given its higher gearing and uncertainty on the pace of its growth, particularly for its US operations.


Key Risks to Our View

  • Turnaround in performance. The main proposition of our recommendation is the turnaround of profit in the absence of non-recurring expenses and better operational performance.




Andy Sim CFA DBS Vickers | Alfie Yeo DBS Vickers | http://www.dbsvickers.com/ 2017-03-13
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.360 Down 0.370



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