Wednesday, December 11, 2013

Del Monte Pacific : Feather in the cap, if they deliver (CIMB)

Del Monte Pacific
Current S$0.67
Target S$1.14
Feather in the cap, if they deliver

Better a brand owner than a commodity supplier. Ever since NutriAsia became the major shareholder, management’s efforts have been focused on growing branded sales. If executed well, the recentlyannounced acquisition of Del Monte Foods’s consumer food business (DMF) could well be the feather in the cap.

Del Monte Pacific (DMP) took a big step forward in realising its ambition of transforming into a global brand in CY13 with its intended acquisition of DMF. Into CY14, the share price will remain weak as more details regarding the proposed acquisition emerge. Under our revised rating structure, our rating changes from Outperform to Add. Our target price is based on 17.5x CY15 earnings (6-year average, post- acquisition).

Truly make or break
DMP‟s proposed acquisition of DMF is truly a transformational make or break event. First, the risks; 1) US$100m break-up fee (subject to certain conditions) if DMP does not complete the deal, 2) proforma net gearing of 1.8x to 4.4x due to debt financing required for this deal, and 3) execution risks. The negatives are by now well-known and appear to be in the price. DMP could well be digesting the deal into CY14 and CY15.

What lies ahead?
Why would DMP management take on so much risk when the existing business is improving at a respectable pace? The answer we believe lies in the huge US market. DMF‟s sales are nearly four times that of DMP while net profit is triple that of DMP. This has been achieved without the advantage of a vertically-integrated
business model and a non-existent beverage segment. Going ahead, we see DMP adding beverages to the US product line up and fine tuning the US operations.

Transaction fee impact for the next two quarters
Core earnings are currently unaffected. However, reported earnings in 4Q13 will be hit by a US$4.3m transaction fee in relation to the proposed acquisition of DMF. The company expects another US$15m-16m in transaction fees from the acquisition to be charged to reported earnings in 1Q14.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 29/11/13

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