Del Monte Pacific - UOB Kay Hian 2016-06-30: 4QFY16: Strong Quarter And Resumption Of Dividends

Del Monte Pacific - UOB Kay Hian 2016-06-30: 4QFY16: Strong Quarter And Resumption Of Dividends DEL MONTE PACIFIC LIMITED D03.SI 

Del Monte Pacific (DELM SP) - 4QFY16: Strong Quarter And Resumption Of Dividends

  • Net profit improved from a loss of US$43.3m in FY15 to a gain of US$51.5m for FY16. Yoy sales were up 5% due to higher revenue in all markets. 
  • We maintain our BUY recommendation as we value Del Monte Pacific at 11.6x FY18F PE with a higher target price of S$0.47.



RESULTS


Strong performance to cap the year. 

  • Del Monte Pacific (DMPL) recorded a net profit gain of US$51.5m for FY16 vs a US$43.3m loss in FY15. Sales in the US (DMFI) were up 3.1% mainly due to consolidation of Sager Creek. Without Sager Creek, US sales were lower by 4% due to unsuccessful government contract bids. 
  • Even in an increasingly competitive environment in the Philippines, DMPL managed to record an increase in sales from all key categories of packaged fruit, beverages and culinary products.

Group adjusted net profit up from a loss of US$6.7m in FY15 to a gain of US$19.8m in FY16. 

  • DMFI saw an increase in its market share in packaged vegetables and fruit by 1.1% and 0.9% respectively in the US, but canned products recorded a slight decline on the back of changing consumer preferences toward non-BPA, non-GMO, natural and organic products. 
  • DMFI is moving toward a leaner organisation to drive channel growth and further streamlining its operations to bring costs in line with competitors.

Dividends declared. 

  • DMPL has resumed its payment of dividends for FY16 and the board has declared a final dividend of US$0.0133 per share, representing a payout ratio of 50%. 
  • Del Monte has indicated they intend to maintain a minimum 33% payout ratio going forward. We have assumed a dividend payout of 40% for FY17-19.



STOCK IMPACT


Update on deleveraging. 

  • In early-Mar 16, DMPL shareholders approved the mandate with no fixed expiry date to issue preference shares to be listed on the Philippine Stock Exchange (PSE). DMPL has indicated that the preference shares should be issued in 2016 and be priced in the range of 5.5-7.0%. 
  • We expect that DMPL will gain final regulatory approvals by August. The company intends to raise up to US$360m with an initial tranche of up to US$250m and the balance within three years. 
  • We understand that this is the first US dollar-denominated preference share issue listed on the PSE and we expect there to be significant interest given the low yield environment. Upon full completion of the issuance, we expect the debt-to-equity ratio to fall substantially to about 2x. 
  • We have forecasted an initial US$250m issue for FY16 followed by a US$50m issue for FY17 and a final US$50m issue for FY18.

Expectations and outlook. 

  • Barring unforeseen circumstances, the group expects to remain profitable in FY17. In the short term, DMPL intends to focus on strengthening its core business and to further optimise administrative expenses. 
  • The group is exploring e- commerce opportunities to sell its range of products across markets.


EARNINGS REVISION/RISK

  • We have lowered our FY17-18 core net profit forecasts by 4% and 20% respectively. This is mainly due to: 
    1. lower FY17 and FY18 sales forecast in the US operations, 
    2. larger financial expense for FY17-19 as we factor in an initial US$250m perpetual issue vs US$350m for FY17 in our previous forecast and 
    3. higher interest rate on rollover of bridge loan due Feb 17.
  • Key risks include: 
    1. continued delay in issuance of perpetual securities due to poor market conditions or regulatory barriers, and 
    2. further slowdown in US sales.


VALUATION/RECOMMENDATION

  • Maintain BUY with 11.6x PE-based target price of S$0.47 (previous TP: S$0.46). We continue to apply our 40% discount to the peers’ PE ratio of 19.3x.





Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-30
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.47 Up 0.46


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