Del Monte Pacific - UOB Kay Hian 2015-12-11: The Turnaround Is Here; Upgrade to BUY

DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific (DELM SP) - The Turnaround Is Here; Upgrade to BUY

Net profit for 2QFY16 surged to US$53m from US$185,000 in 2QFY15.
Recurring net income stood at US$18m, reflecting a turnaround after two years of losses, attributable to acquisition and transition-related expenses.
We raise our FY16-17 net profit forecasts by 4-18% as we factor in top-line growth from the US segment and cost savings from higher economies of scale.
Upgrade to BUY as we value Del Monte Pacific at 12x FY17 earnings. Target price: S$0.69.

Del Monte Pacific (DMPL) recorded recurring net profit of US$18m for 2QFY16 and US$6m for 1HFY16 after two years of losses since DMPL purchased Del Monte Foods, Inc (DMFI) in Oct 13.
Total sales were up 20% yoy for 2QFY16 to US$658m with US sales growth up 25%. Revenue from the US accounted for 82% of group sales. There was a yoy improvement in the Group’s gross margin from 21% to 23.4% due to better sales mix and cost optimisation.

For 2QFY16, DMPL booked a one-off retirement plan amendment of a positive US$39.4m. This was due to DMFI amending one of its post employment benefits replacing its retiree medical and dental benefits to contributions to a Health Reimbursement Account, which required recognition in the profit and loss statement as one-off income.
Management indicates that even without this one-off item, recurring EBITDA would have been US$53.4m and recurring net income would be US$7.7m, a turnaround from 1QFY16’s losses.

Walmart has expanded the distribution of College Inn from 25% to 67% of its total stores in the last six months. In addition, new shelf arrangements in Walmart stores have made it easier for shoppers to find College Inn products due to “brand blocking”. College Inn has a gross margin of 45%, which is the highest-margin product for DMPL.

DMPL has had plans to issue perpetual securities since the end of 2014 but held off due to weak market conditions. The company has provided some updates on the progress of its debt reduction initiatives.
DMPL intends to issue US dollar-denominated perpetual preference shares to be listed on the Philippine Stock Exchange. It expects the launch to be in 1Q16, subject to regulatory approval and market conditions. The company intends to raise US$350m to pay down its leveraged buyout (LBO) bridging loan with BDO Unibank, Inc.
The Securities Exchange Commission in Philippines has confirmed that DMPL has filed applications to register and list the securities as of 27 Nov 15.

We expect 2HFY16 revenue to come in more than 14% stronger than 1HFY16’s due to the festive seasonality in sales as management has indicated that 2H sales usually account for about 55% of total sales.
For FY17, we expect even stronger sales translating into a 70% increase in net income due to a full fiscal year effect of Sager Creek revenue contribution and the absence of restructuring charges seen in FY16.

We raise our FY16-17 core net profit estimates by 4% and 18% respectively. Our estimates are 15% and 24% above consensus forecast.
Key risks include:
1. continued delay in issuance of perpetual securities due to poor market conditions or regulatory barriers,
2. interest rates rising faster than anticipated, and
3. slowdown in US sales growth.

Upgrade to BUY with a target price of S$0.69. We apply a 40% discount to FY16 sector PE due to:
1. 10% for smaller size, and
2. 30% for higher gearing for DMPL.
We have also factored in the possibility that the preference share issue may not manifest if market conditions weaken.

Brandon Ng Chenhao CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-12-11

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