Truly Sweet (20)16?
▊ We stated in our initiation report in Mar 2013 that the key re-rating catalyst of earnings growth driven by the favourable changes in 2015 would lead to stronger earnings for Del Monte Pacific (DMPL) in FY15. The ambitious proposal to acquire Del Monte Foods (DMF) in the US, if successful, could result in a truly sweet (20)16 for the company. In this note, we provide an update on DMPL’s operations and the proposed acquisition’s financing structure. We keep our target price of S$1.14, based on 17.5x CY15 P/E (6-year average). The upcoming circular on the proposed acquisition will provide clarity. The re-rating catalysts are: 1) the completion of the acquisition by end-Feb, 2) confirmed financing details, and 3) a clearer business strategy.
Financing almost secured
Our latest discussion with management revealed that DMPL has secured the debt portion of the US$1.675bn required for the proposed US acquisition. Thus, DMPL has the leeway to lower its new equity issuance to US$35.5m, instead of the initial US$150m proposed. However, the concerns about the dilution have shifted from the new share issuance to the possible rights issue (that maybe more dilutive) for the refinancing of the shareholder loan (see Figure 5 for the financing structure). However, the possible rights issue would at least allow for the participation of the existing shareholders.
Details on synergies
DMPL plans to enter the fruit juice market in the US via selected key accounts and cities. It also plans to relaunch its “fruit cup” product under the S&W brand. DMPL believes that DMF’s recent rebranding efforts could support an estimated 5% sales growth going forward. DMPL also believes that 13% is a sustainable EBITDA margin for DMF (current 9.7%). The acquisition’s potential cost savings are estimated at US$30m, of which US$25m would come from savings in general expenses and another US$5m would come from the outsourcing of the US unit’s IT needs to the Philippines.
Look past the headlines
Transaction costs for the DMF acquisition have risen since our last update. We now expect a US$6.3m charge in 4Q13 earnings. Given that 1Q is a seasonally slow quarter and the transaction cost has risen to US$20m (previous: US$16m), we expect a headline loss in 1QFY14.
Publish date: 21/01/14