Del Monte Pacific - Phillip Securities 2022-06-26: Stellar 38% Earnings Growth

DEL MONTE PACIFIC LIMITED (SGX:D03)

Del Monte Pacific - Stellar 38% Earnings Growth

Del Monte Pacific (SGX:D03)'s 4Q22 PATMI jumped 38% y-o-y. The results were better than expected. FY22 revenue and PATMI were 101%/105% of our FY22e forecasts. Despite a one-off US$2mil stock compensation, the 4Q22 earnings beat was from lower operating expenses. Final dividends up 42% y-o-y to 1.70 cents.

Del Monte Pacific's US subsidiary Del Monte Foods Inc (DMFI) registered a 4-fold jump in PATMI in 4Q22 to US$19mil. Gross margins recovered q-o-q from 21% to 25% due to higher selling prices and new products contributing 5% to revenue.
Consumer staples are enjoying a lift in demand as US households dine more at home as food inflation escalates. The Philippines is expected to remain weak with consumers shifting away from less essential canned fruits. EPS will also benefit from lower interest expenses and preference dividends.
We maintain our BUY recommendation on Del Monte Pacific with a higher target price of S$0.69, from S$0.63. Despite a cut in gross margin assumption, our FY23e PATMI forecast for Del Monte Pacific is raised by 9% from lower operating expenses.
Our target price for Del Monte Pacific is pegged to 10x FY22e P/E, a 30% discount to the industry valuation due to its smaller market cap and higher gearing. Del Monte Pacific's valuations are attractive at 5x P/E FY23e and pay a 6% dividend yield.

DMFI revenue jumped 25% y-o-y to US$411mil. Revenue was supported by a surge in packaged vegetable sales as DMFI expands into new channels, including convenience stores, natural food, club stores and food service. Households are looking for value and quality home meals, replacing their spending on restaurants as inflation picks up nationwide.

In April 22, US$200mil 6.625% preference shares were refinanced by Del Monte Pacific with senior fixed-rate debt (3.75%) and floating-rate loan (3.8%). The estimated savings in dividends is around US$6mil.
In May 22, Del Monte Foods Inc (DMFI) raised a US$600mil 7-year term loan at a floating 4.75%. The funds were to refinance US$500mil 11.875% Senior Secured Notes. The early redemption of the high yield notes cost a one-off US$70mil (includes US$45mil cash commitment fee, US$24mil non-cash write-off of deferred financing cost and US$1mil commitment fee), to be incurred in FY23. Annual cash savings is US$20mil-30mil.

Del Monte Pacific's revenue in the Philippines declined 6% y-o-y with earnings dropping a larger 31%. Packaged or mixed fruit suffered the largest drop, a 31% y-o-y fall to US$22mil in the Asia Pacific. Consumers are faced with surging inflation in the Philippines. There is a shift in consumer priorities to essential items, away from special occasion or less-essential food such as canned mixed fruit or packaged fruit.

Free cash flow generated in FY22 was US$66mil, a decline from prior years' US$163mil. A large drain in Del Monte Pacific's operating cash flow was the additional US$135mil in inventory to stock up on raw materials as a hedge from rising prices.
Del Monte Pacific's capex also rose by US$39mil to US$202mil. The higher capex is to expand the planted area for pineapples, increase manufacturing capacity and new packaging capabilities (eg Joyba Bubble Tea multipacks).

We see multiple drivers for earnings growth in Del Monte Foods Inc (DMFI), namely new products, more distribution channels, higher prices, cost optimization and food inflation driving more home dining. DMFI has built a broad pipeline of products to suit consumer preferences for value and wellness.
The recovery in the Philippines will be slower as inflation shifts consumption patterns to more staples. Recovery will come from convenience and food services channels as foot traffic returns with lockdowns being eased.

Our target price for Del Monte Pacific is raised to S$0.69 as we raise FY23e earnings forecast by 9% and roll over P/E valuations to FY23e. We increased our discount to industry valuations from 20% to 30%. We believe this is warranted due to the higher gearing and greater exposure to rising interest rates compared to industry peers.
We find Del Monte Pacific's valuations attractive at 5x P/E FY23e with a 6% dividend yield.
See
A listing of Del Monte Foods Inc (DMFI) would be a re-rating catalyst to de-gear and crystalise higher valuations.

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2022-06-28

SGX Stock Analyst Report BUY MAINTAIN BUY 0.690 UP 0.630