Wednesday, December 11, 2013

Del Monte Pacific : Overzealous selling breeds buying opportunity (DBSV)

Del Monte Pacific
BUY S$0.60
STI : 3,081.72
(Upgrade from HOLD)
Price Target: 12-Month S$0.82 (Prev S$0.96)
Overzealous selling breeds buying opportunity

• Recent sell down looks overdone; may have more than priced in uncertainty of proposed acquisition
• US$970m of LIBOR-based loans firmed up at lowerthan- expected interest rates
• Upgrade to BUY, TP revised to S$0.82 factoring in higher risk profile
• Risks: Rise in interest rates, higher-than-expected equity raising, performance of acquired entity

Recent weakness looks overdone; opportunity to accumulate. Since our recommendation downgrade on 25 Oct, DMPL’s share price has dropped by >30%, possibly arising from the market’s concern on its proposed US$1.675bn acquisition of Del Monte Food’s Consumer Food Business (DMF-CFB). We believe the drop is overdone, and may present investors a window of opportunity to accumulate.

Higher loan quantum but at lower rates. According to media reports, DMF-CFB has raised US$970m in LIBOR-based loans, which is higher than the US$930m previously indicated. Average blended interest rates, at this juncture, are at c.5.6%, lower than the 7.5% rate we had previously anticipated. The higher loan quantum also points to a lower amount of equity funds needed of US$110m (from US$150m). Based on our FY15F forecasts, we estimate that the acquisition should provide 12% EPS accretion to common equity holders.

Upgrade to BUY, revised TP at S$0.82. We lowered our FY14F forecasts by 26%, taking into account an estimated one-off transaction cost relating to the acquisition, but have not factored in potential contribution from CFB. Our DCF-backed TP is lowered to S$0.82, with a higher WACC to factor in a higher level of uncertainty arising from the acquisition. That said, we believe the recent sell-off has more than priced in the uncertainty. At its current price, we estimate the implied FY15F PE of the combined entity is at an attractive 9x. Upgrade to BUY for c.37% upside potential.

Risks. Higher interest rates, integration and performance of combined entity, and potential dilution from equity issuance.

Oversold with  > 30% share price drop; opportunity to BUY
Opportunity with recent sell down; upgrade to BUY. Del Monte Pacific’s shares have suffered a rough period since late Oct’13 with price falling by more than 30%, possibly due to the market’s concern of its US$1.675bn proposed acquisition of Del Monte Foods’ Consumer Food Business (DMF-CFB). We believe the selling is overdone and see a window of opportunity now. We upgrade to BUY, with a revised TP of S$0.82, presenting a potential upside of c.37%.

Recent drop could have more than priced in uncertainty of proposed acquisition. In our last report on 25 Oct 2013, “Taking a grounded view”, we estimate that the proposed acquisition to be only marginally accretive to common equity holders for FY14F, assuming DMF’s CFB business stays flat as per its last reported results for FYE Apr’13. With the > 30% drop in DMPL’s share price, we believe this may have more than priced in the uncertainty of the proposed acquisition. Looking at FY15F, our revised projections indicate that the accretion should be slightly higher, at c.12%. Higher loan quantum secured at lower-than-expected rates

... Since the proposed acquisition was first announced in Oct, more details on financing for the proposed deal have been released. According to a Thomson Reuters article on 7 Nov and Moody’s announcement on 20 Nov, we understand that the leverage taken by DMF’s CFB has increased to US$970, up by US$40m from US$930m, on the back of two tranches of 7.5-year loans. The cost of financing currently averages at c.5.6%, down from 7.5% we previously assumed. The higher leverage implies that the level of equity raised is likely to be lowered by US$40m to US$110m, from US$150m previously announced.

… implying lower expected equity financing. As a result of higher loans, we now expect a correspondingly lower equity fund-raising. Previously, DMPL was expected to raise US$150m from potential new share issuance. With a higher loan amount, this is expected to correspondingly lower the equity fund raising to US$110m. However, we note that the potential share dilution may still be similar, given the lower share price recently.

Estimate EPS accretion of c.12% in FY15F with acquisition. In our preliminary estimates, we forecast the proposed acquisition to see more traction by FY15F, and aid in EPS accretion of c.12%, assuming CFB’s financials remain unchanged from its FYE Apr’13 results. We are now basing our assumptions on FYE Dec’15 instead of FY14F, as we believe that this may be a better reflection and will not be distorted by potential transaction costs relating to the acquisition.

Other updates
Minimal impact from Typhoon Haiyan. Based on our understanding, the impact from Typhoon Haiyan is minimal on DMPL. Sales in affected areas usually accounts for 3-4% of total sales in the Philippines, and should not materially affect earnings. In addition, the impact is likely to be oneoff, rather than recurring.

Trim FY14F forecasts on transaction costs; proposed acquisition’s contribution, potential synergies not factored in. We have yet to factor in the proposed acquisition of Del Monte Food’s Consumer Food Business, due to lack of detailed financial information. We have also not included any potential synergies from the acquisition, particularly from purchasing. That said, we have taken into account the potential remaining transaction costs that are likely to be realised in FY14F. As such, we lowered our FY14F forecasts by 26% and our estimates are below consensus after this revision.

Upgrade to BUY, revised TP to S$0.82. We believe the recent >30% drop in share price has been overdone, and presents investors a window of opportunity. While we were neutral on the proposed acquisition, the drop in share price surprised us. We believe there is an opportunity to accumulate in view of the recent correction, particularly with lower costs of financing by the acquired CFB.

Implied FY15F PE of combined entity at c.9x. At its current price, the implied PE on FY15F looks attractive at c.9x, though we note that this is based on our preliminary estimates. We have based this on our current DMPL and CFB forecasts as per FYE Apr’13, and after factoring in interest costs pertaining to the loans undertaken. This is also assuming the US$110m equity is raised via a share issuance at current market price of S$0.60 per share.

Our DCF-backed TP is, however, lowered to S$0.82 after taking into account lower FY14F profits (arising from one-off transaction costs) and a higher WACC of 9.2% to factor in a higher level of uncertainty arising from the acquisition. That said, we believe the recent sell-off has more than priced in the uncertainty. Upgrade to BUY for c.37% upside potential.

Key Risks
Key risks to our recommendation includes:
• Higher-than-expected dilution from equity issuance. As per the initial announcement by the company, there are expectations for equity financing by DMPL to fund the proposed acquisition. If the equity issuance is higher than expected, or if share price continues falling, this could impinge on the fund-raising via equity and may cause a higher dilution.

• Rise in interest rates. Post-acquisition and proposed financing, DMPL will still be relatively highly geared, with an estimated net debt/equity of c.2x, from 3Q13’s 0.69x. Furthermore, the term loans are based on LIBOR and a spike in interest rates will raise costs and lower the profitability of the Group as a whole.

• Performance of newly acquired CFB and integration challenges. We have previously highlighted that the new combined entity will be highly sensitive to the performance of CFB going forward, given its significantly larger size. If DMPL is unable to arrest the decline in profits, this would be detrimental to DMPL’s overall financial performance.

Source/Extract/Excerpts/来源/转贴/摘录: DBSV-Research,
Publish date: 11/12/13

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