Del Monte Pacific - DBS Research 2016-12-07: Tracking within expectations

DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific - Tracking within expectations

We maintain our HOLD recommendation on DMPL with an unchanged TP of S$0.37.
While its Asia Pacific operations are posting strong growth, we believe firmer performance from its US operations (DMFI) and the fruition of its deleveraging plans are keys to the re-rating of the counter.

2Q17 revenue was US$636m (-4.6% y-o-y) while core recurring net profit ended at US$20m (+33% y-o-y). Revenue decline was dragged by DMFI (its US operations) sales which dropped by 9.3% y-o-y to US$492m, offset partially by Asia Pacific sales which grew 21% y-o-y to US$141m.
Gross margin improved 0.7ppt to 23.1%, while core EBIT was US$54m (+3% y-o-y) stripping out a one-off gain from 2Q16 (US$33.4.m, due to write-back of retirement plan benefits).

DMPL’s planned issuance of an initial US$250m tranche of perpetual preference shares has been deferred from end-2016 to beginning 2017. It is now awaiting approval from the Philippine Stock Exchange. It hopes to launch the preference shares in early CY17 subject to market conditions.
We have factored US$250m (coupon rate of 6.5%) in our forecasts and estimate this to lower the group’s gearing to 2.4x/2.1x by endFY17F/18F.

Our target price is maintained at S$0.37 based on 12x FY17F/18F PE (post preference share coupon). This is at a 40% discount to consumer peers listed in the US and Philippines, given its higher gearing and uncertainty on the pace of its growth, particularly for its US operations.

Turnaround in performance. The main proposition of our recommendation is the turnaround of profit in the absence of non-recurring expenses and better operational performance.
This is also contingent on sales, and in turn consumer sentiment and the broader economy.

Andy Sim CFA DBS Vickers | Alfie Yeo DBS Vickers | http://www.dbsvickers.com/ 2016-12-07

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.370 Same 0.370