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

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 earnings below expectations 

  • 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.

Del Monte’s US business (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.

Del Monte’s Philippines business (DMPL) 

  • 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.

Update on debt situation 

  • 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).

Challenging outlook 

  • 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.

Maintain Hold 

  • 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 | 2017-03-14
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.350 Down 0.360