DBS Group Research 2015-07-02: Del Monte Pacific - At earnings inflexion point, Upgrade to BUY with 31% upside to TP of S$0.50

At earnings inflexion point 

  • Upgrade to BUY with 31% upside to TP of S$0.50 
  • Earnings at inflexion point; projecting strong turnaround in FY16 after two years of losses post-DMFI acquisition 
  • Risks exist but low valuation for a well-known brand seems too attractive to ignore 
  • Expect re-rating and valuation discount gap against peers to narrow as performance materialises; currently only pegs to a conservative 12x PE target 

Upgrade to BUY with 31% upside; at earnings inflexion point. 

  • We upgrade DMPL to BUY, from HOLD, with a 31% upside to our TP of S$0.50. 
  • Following the acquisition of US-based Del Monte Foods Inc. (DMFI), DMPL has posted two consecutive years of losses arising from transaction charges, acquisition-related expenses, and high interest expenses amid a softening US business. 
  • These are now behind us and we expect DMPL to post a turnaround in FY16F to register a net profit of US$52m. 

High gearing but more than reflected in share price. 

  • The counter has lost c.60% of its value (after adjusting for recent rights issue) since the announcement of its US$1.7bn acquisition back in Oct 2013. 
  • Amongst the reasons, in our view then, were the high leverage, uncertainty over fund raising, post-merger integration work and missed expectations on earnings. 
  • The Group’s gearing peaked at 7.3x as of FYE Apr’14 and has since moderated down to 5x as of FY15. This is still high, but we believe the decline in share price has more than priced it in. 
  • Based on our projected earnings, we expect net debt/ equity to decline to 4.1x/3.3x, and more so if the issuance of the previously proposed preference shares comes to fruition. 

Potential for further upside as profit materialises and confidence builds up; BUY. 

  • Valuations looks undemanding at 10.8x FY16F and only 8.0x FY17F earnings, and particularly so for an established brand. 
  • It is trading at c.50% discount to listed peers in the US and Philippines. 
  • Our current TP is pegged to 12x FY16F/17F PE which we feel is conservative but fair, given the current uncertainties. 
  • We believe there is potential for the counter to re-rate closer to peers. 
  • Assuming 15x FY17F PE, our TP will be S$0.705, implying a c.80% upside
  • Upgrade to BUY.

(Andy SIM, CFA)

Source: http://www.dbsvickers.com/