Del Monte Pacific Limited - DBS Vickers 2015-09-04: Wait for stronger signs.


Wait for stronger signs 

  • Operations turning profitable but not up to expectations due to higher opex. 
  • Trimmed FY16F/17F by 24%/8%. 
  • Still projecting turnaround to profits in FY16F, though not as strong as previously envisaged. 
  • Prefer to wait for stronger signs of earnings recovery in ensuing quarters; downgrade to HOLD for now, TP revised to S$0.35. 

Operations staged a turned around in 1Q16 but below expectations. 

  • Although Del Monte Pacific (DMPL)’s operations are turning around, 1Q16 results were below expectations, registering a net loss of US$12m (vs loss of US$22m in 1Q15). This was due to higher opex and lower sales growth vis-à-vis our expectations. 
  • Revenue grew by 6% y-o-y to hit US$472.8m, while gross profit surged by 33% to US$93.8m. The higher opex was a surprise, due largely to higher selling and distribution expenses (+16% to US$33.9m) and other operating expenses of US$5m. 
  • DMPL recorded EBITDA of US$17.2m for the quarter, up significantly from US$0.8m a year ago, but just 7% of our full year estimates. 

Trimmed forecasts on the back of 1Q’s performance. 

  • We trimmed our FY16F/17F forecasts by 24%/ 8%, as we revised our revenue growth assumptions and factored in higher operating costs. While we acknowledged that 1Q is the weaker quarter and 2Q and 3Q will sequentially be better, we prefer to adopt a more prudent stance and trim our forecasts. 
  • After the revisions, we still expect the group to turn profitable this year, in line with management’s expectations, though not as much as we had earlier anticipated. 

TP revised down to S$0.35, downgrade to HOLD. 

  • As a result of our revised forecasts, our TP is trimmed to S$0.35 based on 12x FY16F PE. At the current price, the counter is trading at 11x FY16F PE and c.7x FY17F PE based on our revised forecasts. 
  • The valuations look inexpensive but we prefer to see more concrete signs that the earnings recovery is as strong as, if not stronger, than our expectations in the next few quarters before we turn positive again. In the meantime, we cut our rating to HOLD, from BUY.

Low Pei Han | http://www.dbsvickers.com/ DBS Securities 2015-09-04
HOLD Downgrade BUY 0.35 Down 0.50