Del Monte Pacific - CIMB Research 2016-07-01: FY16 results ~ Earnings uptick from one-offs

DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific - FY16 results: Earnings uptick from one-offs

FY4/16 core net profit of US$19.8m (reported net profit of US$51.5m).
Surprise DPS of 1.33 UScts declared. We did not forecast any dividends for FY16.
We expect more one-off expenses to be incurred in FY17.
Still targets end-2016 preference share issuance but initial tranche could be smaller.
Cut forecasts to adjust for slower earnings recovery in the US.

FY16 revenue rose 3.7% yoy, driven by 6.6% increase in Asia Pacific revenue and 3.1% rise in US revenue.
Reported net profit turned around from net loss of US$43.2m in FY15 to net profit of US$51.5m in FY16. Excluding the US$32m one-off gains, FY16 core net profit was US$19.8m.
The two largest components of extraordinary gains were the US$38m working capital adjustment related to the DMFI acquisition and US$39.4m adjustments to the retirement plan in the US.

DMPL surprised with DPS of 1.33 UScts. This represents 50% dividend payout ratio based on the group’s reported net profit in FY16 but balloons to 130% based on core net profit.
The debt covenant on the US operations restricts DMPL from utilising cash from the US for dividend payments if its net debt-to-EBITDA ratio is above 5.25x (this ratio was 7.64x at end-FY16). As such, the dividends are being funded by the Asia Pacific business.

In FY17, DMPL is embarking on “Project Restoration” that will entail a review of its entire operations to improve production efficiency and lower operating costs.
With the group committed to shifting to a leaner organisation model, we believe that more one-off expenses will be incurred in FY17.

High gearing remains the key risk. At end-FY16, DMPL’s net gearing was 4.93x and NTA was negative US$386m. For FY16, DMPL’s times interest earned (TIE) ratio was 1.64x, core EBITDA/cash interest expense was 2.4x and net cash flow from operations/cash interest expense was 0.35x.

The company still targets to issue US$360m preference shares by end-CY16. However, DMPL may issue a smaller initial tranche of US$250m, with the balance to be issued in the following three years.
Coupon rate guidance is still in the 5.5-7.0% range.

We lower FY17-18 EPS by 17-18% to reflect FY16 results and slower margin recovery in the US.
We lower our target price to S$0.38, still based on 11.3x CY17 P/E (1 s.d. below historical average of US peers).
Downside risks are one-off expenses in FY17 (although we have attempted to factor these in with higher operating expenses run rate). DMPL aims to return the historical ~33% payout ratio but we prefer to be conservative and assume zero dividends in FY17-19.
FY19 forecasts are also introduced.

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-07-01

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