Del Monte Pacific - CIMB Research 2016-03-17: Still digesting DMFI

Del Monte Pacific - CIMB Research 2016-03-17: Still digesting DMFI DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific - Still digesting DMFI 

  • On track for reported net profit turnaround in FY4/16, in our view. 
  • However, 3Q16 results disappointed on lower sales and one-off expenses. 
  • We expect more one-off costs in FY17. 
  • DMPL targets to complete preference share issuance by end-2016. 
  • We lower our target price as we roll over to 11.3x (unchanged) FY17 P/E and assume preference share issuance in FY17, instead of FY18. 

■ Likely to turn positive net profit in FY16 

  • DMPL reported yoy sales decline of 6.8% in 3Q16 but reported net profit turnaround from net loss of US$2.2m in 3Q15 to net profit of US$0.6m in 3Q16. 
  • For 4Q16, we expect a 3.4% yoy decline in sales. However, we think that the group is on track for net profit turnaround in FY16 from net loss of US$38.1m in FY15, aided largely by the US$39.4m reduction in Del Monte Foods’ (DMFI) retirement benefit plans. 

■ However, 3Q16 net profit disappointed 

  • DMFI’s 3Q sales (excluding the Sager Creek acquisition) disappointed, falling 19.3% yoy due to its unsuccessful bid for contracts from the US government and OEM co-pack contracts. 
  • On the cost front, operational issues at Sager Creek’s manufacturing plants led to higher expenses and more SAP software implementation costs in 3Q16. However, DMPL ex-DMFI continued to register strong sales growth of 8% yoy in 3Q16. 

■ Project Restoration to result in more one-offs in FY17 

  • Going into FY17, DMPL is embarking on “Project Restoration”, which will entail a review of its entire operations to improve production efficiency and lower operating costs. 
  • We believe that more one-off expenses will be incurred in FY17. 

■ Preference share issuance by end-2016 (hopefully) 

  • DMPL aims to complete the issuance of US$360m preference shares by end-CY16. This is still pending regulatory approvals in the Philippines and the issuance is subject to market conditions. Current indicative coupon pricing of 6-7% is in line with our assumptions. 

■ Deterioration in debt coverage ratios in 3Q 

  • DMFI’s yoy sales decline in 3Q16 caused cash to be tied-up in inventory and higher one-off expenses led to deterioration in interest coverage ratios. 
  • In 3Q16, times interest earned (TIE) ratio fell to 0.93x, core EBITDA/cash interest expense was 2.1x and net cash flow from operations/cash interest expense was 5.5x. 

■ Maintain Add 

  • We now assume that DMPL’s preference shares will be issued in FY17, instead of FY18, and update our forecasts (from Sep 15) for the slower US sales. 
  • We roll over our target price basis to 11.3x FY17 P/E (1 s.d. below the historical average of its US peers), which lowers our target price to S$0.40. 
  • There is downside risk to our FY17 EPS forecast as there is no clarity on the quantum of one-off costs and how they will be booked. DMPL’s financial plan for FY17 will be submitted to its board in Jun 16.

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-03-17
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.40 Down 0.49