Del Monte Pacific - UOB Kay Hian 2016-09-14: 1QFY17 Seasonally Weak Results

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DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific (DELM SP) - 1QFY17: Seasonally Weak Results

• DMPL reported 1QFY17 EBITDA of US$23.7m (1QFY16: US$19.7m), demonstrating the impact of the recent restructuring efforts to streamline the business. 
• Stripping out one-off expenses, EBITDA would have come in 25.4% higher yoy. 
• Maintain BUY with a lower PE-based target price of S$0.41. 
• The group maintains its guidance for a profitable FY17.

RESULTS

Seasonally weak first quarter. 

• Del Monte Pacific (DMPL) recorded a loss of US$8.7m for 1QFY17, an improvement from a loss of US$10.7m for 1QFY16. This is in line with the seasonal effect which the company faces in the first quarter - which is its weakest quarter due to the lack of festivities in that period. We expect a pick-up in 2QFY17 and 3QFY17 due to Thanksgiving and Christmas holidays.

Group revenue fell 2.8% yoy on lower sales from non-branded business and absence of sales from USDA bids. 

• US subsidiary Del Monte Foods Inc accounted for about 75% of total group sales for 1Q17 as Del Monte lost out on the low-margin US Department of Agriculture (USDA) bids and saw lower private label sales. 
• USDA bids tend to be very volatile. The total size of the bids p.a. is typically in the range of US$80- 100m. We expect DMPL to gradually cut its reliance on this segment due to the volatility and unpredictability of its contributions.

Gross margin fell to 16% in 1QFY17 from 19% in 1QFY16. 

• DMPL saw a drop in gross profit margins due to the increase in trade spend and promotions. Due to limited product supply in 1Q16, the group did not engage in aggressive promotions for FY16. 
• Furthermore, DMPL incurred a one-off US$1.5m charge relating to the closure of its North Carolina plant.

STOCK IMPACT

Update on deleveraging. 

• DMPL has received approvals from the Philippine Securities and Exchange Commission (SEC) and from the central bank for the listing of its perpetual preference shares on the Philippine Stock Exchange. 
• DMPL is planning to issue up to US$360m with an initial tranche of US$250m and balance issuable within three years. 
• DMPL is guiding for an issuance in 2016 (calendar year), subject to regulatory approvals and market conditions. 
• Barring unforeseen circumstances or regulatory roadblocks, we believe there will be significant interest in the preference shares as it is the first US dollar- denominated issuance on the Philippine Stock Exchange.

Expectations and outlook. 

• DMPL will continue to optimise its performance by restructuring and streamlining operations which may include further plant closures or one- off expenses if the group decides to completely exit the low-margin USDA contracts and private label business.

EARNINGS REVISION/RISK

• We have lowered our FY17-18 core net profit forecasts by 15% and 10% respectively, mainly due to: 
  1. lower contribution from USDA bids, 
  2. normalisation of trade spend resulting in lower-than-expected gross margins, and 
  3. lower private label sales in the US.
• 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 an 11.5x PE-based target price of S$0.41 (previous target: S$0.47). 
• We continue to apply a 40% discount to peers PE ratio of 19.1x.

Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-14

UOB Kay Hian SGX Stock Analyst Report ADD Maintain BUY 0.41 Down 0.470