Del Monte Pacific - DBS Research 2017-07-03: Still Needs More Time For Cultivation

Del Monte Pacific - DBS Vickers 2017-07-03: Still Needs More Time For Cultivation DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific - Still Needs More Time For Cultivation

  • 4Q17 core results within expectations, though headline profit impacted by one-offs (US$14.3m).
  • Gearing reduced to 2.9x post US$200m pref shares issuance.
  • Still in investment mode, cut FY18/19F earnings by 38%/43%.
  • Maintain HOLD, Target Price reduced to S$0.32.



Maintain HOLD, more time needed for cultivation. 

  • We maintain our HOLD recommendation on Del Monte Pacific (DMPL) with a revised Target Price of S$0.32. 
  • Given the headwinds facing Del Monte Foods Inc. (DMFI) and the planned higher investments behind innovation and current core operations, we believe it could take longer than earlier anticipated for DMFI to show substantial contributions. As a result, we have cut our revenue and gross profit projections, particularly for its US operations (DMFI), coupled with higher opex. 
  • We have cut our FY18/19F earnings by 38%/ 43%, and accordingly reduced our Target Price.


WHAT’S NEW


Still needs time for cultivation 4Q17 core profit in line. 

  • DMPL’s 4Q17 core profit was within our expectations even though it reported an 87.4% plunge in headline profit to US$2.9m. The slump in headline net profit arose largely from: 
    1. one-off US$6m severance and other expenses; 
    2. write-off of deferred tax assets US$11.5m; and 
    3. one-off gain of US$15m recognised last year in 4Q16.
    Else, revenue and gross profit were within our expectations.
  • 4Q17 revenue was up by 3.9% y-o-y to US$524.6m, helped by higher revenue in the US and S&W Asia sales. 
  • Philippines saw a 4% y-o-y decline in revenue (in local currency terms), which management attributed to trade loading in prior quarters. On a full year basis, Philippines recorded revenue growth of 6% (in peso terms). 
  • In 4Q17, the group posted a gross profit growth of 10.7% y-o-y to US$127.1m.

On full year basis, DMPL (ex-DMFI) performed well, negated by DMFI (US subsidiary). 

  • On a full year basis, DMPL (excluding Del Monte Foods Inc [DMFI], its US operations) performed well with net profit of US$58.9m, driven by higher sales (+9.2% yo-y) and margins. 
  • On the other hand, performance from DMFI (US ops) was lacklustre with revenue down by 4.6% y-o-y to US$1.7bn due to loss of contracts from USDA and unfavourable pricing in non-retail channels. 
  • DMFI’s earnings was further exacerbated by higher interest expenses due to the conversion of loans to fixed rate, from floating, coupled with higher debt to fund working capital. As a result, DMFI posted a larger loss of US$21.4m, up from a loss of US$6.1m in FY16.

Dividend of 0.61 US cts proposed. 

  • A first and final dividend of 0.61 US cts was proposed, equating to a payout ratio of c.50% of net profit. This compares against 1.33 US cts declared for FY16 (c.50% payout).

Preference shares of US$200m issued. 

  • Earlier in the year, the group had concluded its preference shares issuance amounting to US$200m at a coupon of 6.625%. The proceeds were used to partly refinance its US$350m BDO Unibank loan. 
  • This reduced the group’s leverage to 2.9x. It has a balance of US$150m issuance within 3 years.

Announced JVs with Fresh Del Monte Produce. 

  • A day prior to its full year results announcement, the group announced on 28 June 2017 that it has entered into several JVs with Fresh Del Monte Produce (FDMP) to expand its refrigerated offerings across all distribution and sales channels, and to develop a new retail food and beverage concept. The initiative will focus on the US market, and subsequent expansion into other territories in which the companies’ businesses complement each other. 
  • In addition, the full and final settlement of all active litigation between Del Monte Pacific Limited including its subsidiary, DMFI, and Fresh Del Monte Produce Inc has also helped to facilitate the formation of the JVs.
  • In our view, as shared in a short note on the same day, (Del Monte Pacific: JVs signed with Fresh Del Monte Produce), we shared that this is a step in the right direction but financial impact limited. One positive near term financial benefit is in terms of costs savings from litigation between the two parties, which we believe could amount to a couple of million dollars for DMPL.


Forecasts and valuation 


Outlook: Much work to do; in investment mode.

  • Management indicated that it expects the group to remain profitable in FY18, but cited that it will continue to invest in brands, innovation and digital strategy. Thus, its operating expenses could still remain elevated. 
  • While the group has made headways in reversing its losses since the leveraged acquisition of the US operations, bottomline growth may still be lackluster, in our view.

Still needs more time for cultivation, cut forecasts by 38%/43%.

  • Looking ahead, we believe the group should remain profitable, but the pace of growth is likely to be lower than our earlier expectations. 
  • Given the headwinds facing DMFI and the planned higher investments behind innovation and current core operations, we believe it could take longer for DMFI to show substantial contributions. As a result, we tuned down our revenue and gross profit projections, particularly for its US operations (DMFI), coupled with higher opex. 
  • Our forecasts are reduced by 38%/ 43% for FY18F/ 19F.

Target Price trimmed to S$0.32, maintain HOLD. 

  • As a result of our cut in forecasts, our Target Price is lowered to S$0.32 (from S$0.36 previously), based on 15x FY18F/19F PE (post pref shares coupon). 
  • We have raised our valuation peg to 15x, from 12x previously, given the lower gearing post its pref shares offering. 
  • We still believe a 20% discount (from 40% previously) to regional and US peers is warranted given its relatively high gearing, and higher investments cum time period for a more tangible results from DMFI.


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/ 2017-07-03
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.320 Down 0.360



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