Del Monte Pacific - DBS Research 2016-09-09: Positioning for subsequent quarters

Del Monte Pacific (DELM SP) - DBS Vickers 2016-09-09: Positioning for subsequent quarters DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific (DELM SP) - Positioning for subsequent quarters

  • 1Q17 results in line, driven by Asia Pacific business.
  • Stronger sales growth and margins from Philippines/Asia Pacific offset higher operating losses in America.
  • Preference share issue imminent.
  • Maintain HOLD and S$0.37 TP.

What’s New 

1Q17 within expectations as stronger Asia Pacific business offsets higher losses in America. 

  • Losses were US$8.7m, which is lower than US$10.7m last year (+18.3% y-o-y). EBIT improved from US$2.6m to US$6.8m (+156% y-o-y). This is despite a 3% y-o-y decline in sales to US$646m. 
  • While the Americas operating losses widened to US$9.3m (+46% y-o-y), this was made up by Asia Pacific’s operating profit which grew 74% y-o-y to US$15m.

Positioning US business for Thanksgiving and Christmas.

  • Headline revenue was dragged by the Americas which recorded -6.3% y-o-y decline in sales. The decline was largely attributed to reduced sales in non-branded products in private labels, food service and volume sales reduction in loss of US Department of Agriculture business. 
  • Gross margins were lower at 16.1% vs 19.2% last year due to higher trade promotional spend ahead of Thanksgiving and Christmas. As a result, market share for packaged fruit and vegetables has increased. 
  • There was also higher marketing expense of US$4m in preparation for the upcoming holiday season.

Strong Asia Pacific led by more robust sales and margins. 

  • Asia Pacific business’s revenue rose 11% y-o-y to US$111m, while the Philippines market and the S&W branded business grew by 8.7% and 12% respectively through increase in sales of key accounts and through convenience stores. 
  • Gross margins increased by 2.3ppt to 32.2%, boosted by culinary products, productivity, better pricing and lower packaging costs. As a result, operating margins for Asia Pacific business increased to 13.6% from 8.7% in 1Q16.

On track to meet estimates. 

  • We view the current results as a mixed bag. While there were increased losses in the Americas business, this was largely due to higher marketing and promotional expenses ahead of the holiday season, with the intent of boosting volume sales in the upcoming quarters.
  • Assuming market share reaches a desirable level, less aggressive promotional and marketing activities would essentially improve profitability. In addition, 1Q is typically a seasonally low quarter where production is being ramped up for holiday season sales in the upcoming quarters.
  • Performance of the subsequent quarters would therefore be more reflective of earnings traction for FY17F. 

Strategy to drive growth from cost and top-line perspective in place. 

  • As part of its growth strategy, Del Monte will continue to optimise its cost structure by restructuring and streamlining operations. 
  • Focus on top-line growth will also be on new products, expansion of S&W brand, investment in College Inn, and expanding distribution in Asia and Middle East.

Preference share issue by end-2016 on track. 

  • Del Monte had been planning its preference share offering on the Philippines Stock Exchange as early as end-2014. Developments for the preference share issue is now on track for launch by end- 2016, subject to regulatory approvals. We have already factored in the initial tranche of US$250m into our FY17F numbers.

Maintain HOLD and S$0.37 TP. 

  • We keep our earnings estimates unchanged. 
  • Our TP based on 12x blended FY17-18F earnings is kept at S$0.37. 
  • Maintain HOLD.

Alfie Yeo DBS Vickers | http://www.dbsvickers.com/ 2016-09-09
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.37 Same 0.370