Del Monte Pacific - CIMB Research 2016-12-08: 2Q17 Industry contraction in the US

DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific - 2Q17 Industry contraction in the US

1H17 core net profit was below expectations at 22% of our FY4/17 forecast due to sales decline in the US and higher-than-expected interest expense.
DMFI contributed 2Q17 net profit of US$8.5m excluding one-off expenses.
DMPL generated net profit of US$12.5m in 2Q17.
Preference share issuance has been postponed again to 1QCY17.

1H17 core net profit was below expectations at 22% of our full-year forecast. During the quarter, the company incurred one-off expenses related to DMFI of US$1.5m (on pretax basis).
The group’s reported net profit in 2Q17 also benefited from a US$6.0m reversal in inventory provision and an exchange gain of US$3.9m.

DMFI accounted for 77.5% of group revenue in 2Q17. Sales declined 9.1% yoy due to lower inventory build-up by customers, weakness in the canned fruit industry and reduced sales to private label and food service customers.
Gross margin was also lower at 19.7% in 2Q17 versus 20.1% in 2Q16. Management highlighted that although the industry is contracting, DMFI increased market share with its customers.

DMPL’s business remains in the pink of health, registering sales growth of 12.8% yoy in 2Q17. Gross margin also improved to 32.1% in 2Q17 from 29.5% in 2Q16.
In 2Q17, DMPL launched the Contadina brand in the Philippines and reintroduced premium products such as Del Monte Extra-Rich Tomato Ketchup and Del Monte Extra-Rich Banana Ketchup.

Del Monte’s proposed preference share issuance of up to US$360m has been delayed to 1QCY17. Depending on demand, the initial tranche may be reduced to US$100m- 150m.
The rising probability of interest rate hikes by the Fed could raise coupon cost for this preference issuance. Net gearing rose to 6.05x at end-2Q17 from 5.32x at end- 1Q17.

DMFI continues to present challenges for the group due to the ongoing industry contraction, changing consumer preferences and excess capacity in the industry. We believe that the group will incur more one-off expenses as it reviews the US business.
However, we note that the Del Monte brand still has strong presence in the US and we believe the group will focus on increasing sales of branded products, which command better margins than private label contracts.

We cut core EPS by 12-40% in FY17-19F as we factor in US sales decline in FY17F and slower sales growth in FY18-19F.
Rolling over to CY18 P/E, our target price is reduced to S$0.36 from S$0.38.
We have ascribed an unchanged target P/E multiple of 11.3x, which is 1 s.d. below the historical average of its US peers.
Upside risk is lower-than expected one-off expenses for DMFI, while downside risks are further deterioration in US sales and larger one-off expenses.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-12-08

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