DEL MONTE PACIFIC LIMITED
D03.SIDel 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
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http://research.itradecimb.com/
2016-03-17
CIMB Securities
SGX Stock
Analyst Report
0.40
Down
0.49
