Del Monte Pacific - CIMB Research 2016-07-08: Entering seasonally weak 1Q

Del Monte Pacific - CIMB Research 2016-07-08: Entering seasonally weak 1Q DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific - Entering seasonally weak 1Q

  • We visited Del Monte Pacific recently for an update post its 4Q16 results.
  • DMFI lost US$5.4m on a core basis and was in negative operating cash flow.
  • DMPL continues to gain strength in the Philippines and the S&W brand did well. 
  • 1Q17 could be loss-making as this is a seasonally weak quarter.
  • Still targeting preference share issuance by end 2016



DMFI in the red ...

  • We visited Del Monte Pacific to get a better understanding of its operating environment post FY4/16 results. 
  • On a core earnings basis, DMFI reported a full-year loss of US$5.4m in FY4/16. 
  • Core EBITDA was US$122m and net cash from operations was negative due to excess inventory held on the balance sheet as a result of the loss of the USDA contracts in 2H16.


... but DMPL did well

  • DMPL’s results however hit new records with sales of US$498m, gross profit of US$153m and operating profit of US$63.4m. The Philippines market grew 11.2% in peso terms and 6.4% in US dollar terms driven by an expanded user base and higher household penetration. 
  • S&W branded sales grew 10% yoy. DMPL continues to retain its strength in the Philippines with 91% market share in tomato ketchup, 84% share in canned pineapples, 81% share in tomato sauce and 76% share in canned mixed fruits.


Outlook

  • Del Monte Pacific’s 1Q is seasonally weak. In 1Q15, the company reported a loss of US$12.0m. 
  • We believe 1Q17 will mirror the historical pattern and be loss-making. We opine that DMFI may need another 2 years to realise its full potential. FY17 is likely to see further one-off costs as DMFI continue to determine the appropriate cost structure for its business. 
  • Also, with a long-term strategic review under way, we believe DMFI’s manufacturing footprint may also face a review in FY18.


Debt situation

  • To recap, Del Monte Pacific aims to de-lever the balance sheet with a preference share issuance by end 2016. 
  • We understand that if the preference share issuance does not occur, the bank loan can be rolled over at Libor + 3.5%. Also, the preference share dividends will be cumulative and will be paid out of DMPL cashflow. 
  • With DMPL’s typical capex at US$30m, investors should not hope for a repeat of the 1.33 UScts DPS if the preference share issuance is successfully completed.


Maintain Add

  • We maintain Add on Del Monte Pacific (TP of S$0.38 based on 11.3x CY17 EPS; 1 s.d. below the historical average of US peers. 
  • While the company has done a lot over the 2 years since acquiring DMFI, there remains more work to be done in FY17 and FY18 before the full potential of this acquisition can be realised. Investors should also be mindful of possible share price weakness given the likely loss in 1Q17. 
  • Key risk remains its debt-laden balance sheet.




William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-07-08
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.38 Same 0.38


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