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Del Monte Pacific - DBS Research 2016-06-30: Taking a more measured pace

Del Monte Pacific - DBS Research 2016-06-30: Taking a more measured pace DEL MONTE PACIFIC LIMITED D03.SI 

Del Monte Pacific - Taking a more measured pace

  • 4Q16/FY16 core profits within expectations
  • Headline profit boosted by one-offs
  • Final DPS of 1.33 UScts declared; a surprise move noting high gearing and proposed pref shares
  • Revised forecasts to reflect less optimistic assumptions; TP: S$0.37, HOLD



Maintain HOLD; expect continued profitability but not as high as previously envisaged.

  • We maintain our HOLD recommendation on DMPL but with a marginally lower TP of S$0.37 as we reduce our earnings forecasts, offset by rolling valuations forward to FY17F/18F.


4Q/FY16 core results within expectations. 

  • While FY16 headline profit looks robust at US$51.5m, this was boosted by one-off items amounting to US$31.7m. Excluding these, core net profit was US$19.8m, within our expectations. Following on from 3Q, its US operations (DMFI) registered a 6.7% y-o-y drop in 4Q sales due to loss of government and co-pack contract bids. This was offset partially by its Asia Pacific operations, led by Philippines (+5.7%; 11.8% in peso terms).


Pref shares issuance planned; forecasts lowered to reflect more realistic DMFI performance. 

  • The preference shares issuance is still on the cards with an issue size of up to US$360m, with an initial tranche of up to US$250m. We have factored a smaller US$250m in our forecasts and estimate this will lower the group’s gearing to 2.4x/ 2.1x by end FY17F/18F. 
  • We cut our forecasts by 20%/ 29% we believe our previous assumption for the ramp up and growth of DMFI could be too optimistic. We expect to see some sluggishness in margins improvements due to slower sales growth, near term rationalisation of costs as well as from initiatives such as changes into non-BPA packaging.


Valuation:

  • Our target price is revised slightly lower to S$0.37, on the back of our lower earnings forecasts, offset partially as we roll over to the average of FY17F/18F (from FY16F/17F) based on 12x FY16F PE, which is at a 40% discount to consumer peers listed in the US and Philippines.


Key Risks to Our View:

  • Turnaround in performance. The main proposition of our recommendation is the turnaround of profit on the absence of non-recurring expenses and better operational performance. This is also contingent on sales, and in turn consumer sentiment and the broader economy.




Alfie Yeo DBS Vickers | Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2016-06-30
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.37 Down 0.39


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