Del Monte Pacific - CIMB Research 2017-03-14: 3QFY17 DMFI continues to disappoint

DEL MONTE PACIFIC LIMITED D03.SI

Del Monte Pacific - 3QFY17 DMFI continues to disappoint

9MFY17 reported net profit was below expectations at 59% of our FY4/17 forecast due to sales decline in the US and higher-than-expected interest expense.
Gross margin contracted to 14.7% in 3QFY17 due to lower pricing in non-retail channels. DMFI incurred net loss of US$14.6m in 3QFY17 (3Q16: US$17.3m profit).
However, DMPL continued to gain strength with 3QFY17 net profit of US$21.2m, an 81% yoy gain.

Preference share issuance has been postponed again. We estimate the earliest that the issuance will take place is 2QCY17.
Maintain Hold with lower target price of S$0.35.

9MFY17 reported net profit was below expectations at 59% of our full-year forecast.
During the quarter, the company incurred one-off expenses of US$12.4m (on pretax basis) related to DMFI.

DMFI accounted for 75% of group revenue in 3QFY17. Sales declined 2.3% yoy in 3QFY17 due to continued weakness in the canned fruit industry and lower sales to private labels. Gross margin was also lower at 14.7% in 3QFY17 versus 15.5% in 3QFY16.
In 3QFY17, DMFI retained its number one position in terms of market share for packaged vegetables and packaged fruit.

DMPL’s business is still in the pink of health, registering sales growth of 3.2% yoy in 3QFY17. S&W continued to make inroads with double-digit sales growth in the Asia Pacific region, driven by fresh pineapple and packaged products.
The Asia Pacific region (DMPL + S&W brand) achieved gross margin of 33% in 3QFY17.

Del Monte’s proposed preference share issuance of up to US$360m has been postponed again to 2QCY17. Depending on demand, management guided for an initial tranche of US$250m, with the balance issuable within the following three years.
We deem the coupon cost that the group could be comfortable with at 6.5-7.0%.
Net gearing fell to 5.48x at end-3QFY17 (2QFY17: 6.05x, 1QFY17: 5.32x).

DMFI continues to present challenges to the group due to the ongoing industry contraction, changing consumer preferences and excess capacity in the industry.
We believe that the group will have a clearer strategy in FY18F as the consultants would have presented their findings by then. We still expect the US business to incur one-off expenses in FY18F. The Del Monte brand still has strong presence in the US and we believe the group will focus on increasing sales of higher-margin branded products.

We cut FY17-19F core EPS by 3-6% as we factor in the delay of preference share issuance to FY18F. We assume that the preference shares will be issued in an initial tranche of US$250m in FY18F, followed by two tranches of US$40m each in FY19-20F.
Still based on P/E multiple of 11.3x (1 s.d. below the historical average of US peers), our target price is S$0.35.
Upside risk is lower-than expected one-off expenses incurred by DMFI, while downside risks are deterioration in US sales and larger one-off expenses.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-03-14

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.350 Down 0.360