Del Monte Pacific - Phillip Securities 2021-10-26: Turnaround Underway; Initiate Coverage With BUY


Del Monte Pacific - Turnaround Underway; Initiate Coverage With BUY

  • Del Monte Pacific's US subsidiary Del Monte Foods Inc. (DMFI) turned profitable in FY21. It had been suffering losses since the acquisition in 2014. Loss-making factories were closed, low margin products exited, new products introduced and more distribution channels were established.
  • Del Monte Philippines Inc. (DMPI) enjoys dominant market shares as high as 90% in the Philippines. Growth is expected from a new dairy product line, expanding distribution points and exports of fresh pineapples into China.
  • Initiate coverage on Del Monte Pacific with BUY and target price of S$0.60. Del Monte Pacific's share price is currently trading at 8.2x FY22e, below the industry average of 16x. We apply a 20% discount to industry valuation due to comparatively higher leverage. Stock catalysts expected from turnaround of DMFI and stable growth of DMPI in the Philippines. We peg Del Monte Pacific to 13x FY22e P/E.

Del Monte Pacific - Company Background

  • Dual-listed on the Singapore Exchange and Philippine Stock Exchange, Del Monte Pacific (SGX:D03) produces and markets packaged vegetable and fruit, beverage and culinary products.

Del Monte Pacific's business segments

  • Del Monte Foods Inc (DMFI). DMFI is the US subsidiary of Del Monte Pacific, and major contributor of revenue. In 1QFY22, DMFI generated 64.5% of total sales. They mainly sell canned vegetables, canned fruit, fruit cup snacks. The Del Monte brand continues to be one of the top trusted brand names for meal preparation and healthy snacks.
  • Over the past few years, DMFI has been pushing out a wide variety of new products to the market, to cater to changing consumer preferences, for delicious and healthy products. DMFI’s branded retail and foodservice sales grew by a combined 17% y-o-y in 1QFY22 which more than offsets the decline in low-margin private label sales as planned.
  • Del Monte Philippines Inc (DMPI). The Philippines accounts for approximately two-thirds of DMPI’s sales. The company continues to increase their presence in terms of products such as packaged fruit, tomato and spaghetti sauces in both retail and food services. Culinary and beverage are the major contributors to sales in the Philippines. Under the culinary section, there are packaged tomato-based products including ketchup and pasta sauce. In the mixed fruit section, there are canned fruit mixes and canned pineapples.
  • DMPI entered into a joint venture with Vinamilk, the largest dairy manufacturer in Vietnam to expand into the dairy sector in the Philippines. The JV will import dairy products from Vinamilk, market and distribute them in the Philippines, starting September 2021. This includes 4 product lines, including flavoured yogurt drinks, milk tea, fresh and flavoured milk (Figure 20).
  • S&W Fine Foods International Ltd. S&W is the brand platform for Asia outside the Philippines and the Indian subcontinent. They are the largest fresh pineapple exporter to China with 53% value share, and one of the three biggest fresh pineapple exporters to Japan, South Korea and the Middle East. Other than fresh pineapples, S&W also sells canned fruit beverages, fruit slices, fruit cups, etc. It is also in the food service business.
  • FieldFresh India. Del Monte Pacific ventured into the Indian market, which has still been incurring losses due to higher expected costs in the early years. In 1QFY22, Del Monte Pacific’s share in the FieldFresh joint venture in India was a US$0.7mil loss, unchanged from prior quarter share in losses.
  • Del Monte Pacific’s business is subject to seasonal fluctuations as a result of increased demand during the year end festive season. As such, sales are usually highest from August to December.

Del Monte Pacific - Investment Merits

Turnaround of the US business.

  • Del Monte Foods Inc (DMFI) was acquired in February 2014 for US$1.7bn. In FY21, DMFI generated a net profit of US$15.8mil, reversing years of operating losses. The path to profitability was from the closure of loss-making factories, exit of low margin private label products, new product innovation, raising prices and penetrating new distribution channels including food services.
  • We expect the continuing introduction of new products and margin expansion to contribute to gross profit growth at CAGR of 13% over next two years. New products launched in the past three years accounted for 6% of FY21 revenue.

Del Monte’s dominant market share in the Philippines is expected to continue driving sales.

  • Del Monte Philippines Inc (DMPI) is Del Monte Pacific’s most profitable subsidiary, generating a record net profit of US$94.5mil in FY21, up 40%. Primarily present in the Philippines, the Asia Pacific segment made up 29% of FY21 revenue, but 49% of operating income.
  • DMPI entered into a joint venture with Vinamilk, the largest dairy manufacturer in Vietnam to expand into the dairy sector in the Philippines. The JV will import dairy products from Vinamilk under four product lines and distribute them in the Philippines. DMPI products are available across the Philippines in more than 100,000 stores. There are plans to raise this to 200,000 stores in five years.

Significant undervaluation of Del Monte Pacific.

  • Del Monte Pacific's share price is trading at FY22e P/E of 8.2x, far below the industry average of 16x. Del Monte Pacific had been underperforming since the acquisition of US subsidiary DMFI in 2014. Over the years, the new management has turned DMFI around successfully, steering towards innovation to address shifting consumer habits and expanding distribution into key growth areas.
  • We believe another reason for the undervaluation is the debt level of US$1.3bn, resulting in high interest expenses of US$111mil, which we expect to wind down gradually.
  • We apply a 20% discount to the industry average, due to its gearing level which is higher than peers and smaller market capitalization.

Del Monte Pacific - Valuation

Vivian Ye Phillip Securities Research | https://www.stocksbnb.com/ 2021-10-26
SGX Stock Analyst Report BUY INITIATE BUY 0.60 SAME 0.60