Del Monte Pacific - CIMB Research 2015-12-09: Sweet 16?

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DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific - Sweet 16? 

• Survived the loss-making FY15 transition year. 
• Expects a turnaround in FY16 even after factoring in the hefty interest expense. 
• Needs to refinance US$350m of debt with preference shares to lower net gearing. We see eventual re-listing of DMFI as way out to recapitalise DMPL. 
• Short-term risks from drought in California and El Nino in the Philippines. 
• Cheap entry if DMFI reverts to historical performance and debt issue is resolved. 

■ Time to deliver the goods 

• Management is guiding for a turnaround in FY16 even with the interest burden factored in. Operationally, DMFI, the Philippines (the key market for the Del Monte brand) and the S&W brand did well in FY15. On a pro-forma same period basis, DMFI sales grew 5% yoy in FY15. The pre-acquisition business continued to do well with the Del Monte branded sales in the Philippines growing 19% yoy, while the S&W brand in Asia and the 

■ Middle East grew 17% yoy. 

• High net gearing still the concern Investors remain concerned over DMPL’s net gearing, which on its equity base was 6.2x as at end-Apr 15. Note that DMPL has US$760m of intangible assets and is therefore in a negative net tangible asset situation. 
• Our analysis suggests that DMPL will be able to meet its debt obligations in the absence of any further one-off charges. 

■ The way out of debt 

• The company has one last outstanding refinancing transaction to switch US$350m of bank debt into preference shares, which will count as equity and thus lower net gearing. 
• We assume that this will occur in FY18. 
• We see the eventual listing of DMFI as the way out to lower the group’s net gearing to below 1.0x in the coming years. 

■ Agricultural risks 

• Short-term concerns are agricultural in nature. In the US, California has been experiencing a bad drought for four years already. Peach harvest (Del Monte has a strong market share in canned peaches) has been somewhat impacted by the lack of water. 
• Over in the Philippines, pineapple output will be affected by the El Niño weather. DMPL’s pineapple estate is solely in the Philippines. 

■ Reiterate Add 

• At 6.1x FY17 entry multiple, this could be a cheap purchase into a well-known brand if DMFI's performance reverts to the historical norm and new initiatives help grow market share in the US. 
• The DMPL business, consisting of the Del Monte brand in the Philippines and S&W brand in Asia/Middle East, continues to do well. 
• We keep our Add call and target price that is based on 11.3x P/E. (S$0.49)

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.49 Same 0.49