Monday, February 17, 2014

Del Monte Pacific- Approved! (CIMB)

Del Monte Pacific
Current S$0.61
Target S$1.14

DMPL’s proposed acquisition of the Consumer Food Business of Del Monte Corporation (DMF) was approved by shareholders. The deal is expected to close on 18 Feb 14. Execution and gearing risks are by now well documented. Once the last of DMPL’s unfavourable contract terminates, investors may baulk at paying double-digit P/Es for this stock. However, the success of this bold move to capture growth opportunities, both geographically and via new product categories, could justify such valuations. Good cashflow generation at DMF buys management time to address its capital structure. Meanwhile, the stage is set for management to prove that it can make this acquisition work. Maintain Add call and target price – still based on 17.5x CY15 P/E (6-year average).

What Happened
DMPL has received shareholders’ stamp of approval to proceed with its acquisition of DMF at an EGM held today. The expected date of the completion of the acquisition is Tuesday, 18 Feb 14. All necessary funding has also been obtained.

What We Think
The deal offers DMPL new market opportunities in the huge US market. With DMF having already spent last year conducting extensive market studies and re-positioning, DMPL is in good stead to capitalise on the Del Monte branding. Execution will be key here. Efforts to reduce net gearing will continue and share issuance (new equity placement and/or rights issues) should be expected. Based on checks made by DMPL, in its history as a business that has been bought and sold by various financial investors via debt financing, DMF has never missed any interest payments (i.e. the business does generate strong cashflow). This could buy DMPL time to issue new equity that is more reflective of the potential of its acquisition.

What You Should Do
We recognise that the stakes at play here are big for DMPL. If DMPL does digest this acquisition, the benefit to earnings should show from CY16 onwards (to be conservative). We believe that the nay-sayers have largely exited this stock. For the yea-sayers, the alarm bells on net gearing have sounded but it might be time to focus on the other side of the coin – what if DMPL succeeds? At its EGM, DMPL has already acknowledged that the alarm bells are ringing and will take the necessary actions to disarm them. Maintain Add.

Rationale for the acquisition of DMF
1) DMF has a strong portfolio of leading brands, with seasoned employees and healthy cashflows.

2) DMF is one of the largest marketers of processed fruits, vegetables and tomatoes in the US, with market shares of 26.6%, 23.9% and 11.3%, respectively, in FY13. Its leading market position in the packaged and branded fruit and vegetable segments provides the group with significant scale and reach, as well as the opportunity to unlock meaningful synergies.

3) Due to the strong awareness of its brands and value-added products, DMF has been able to price its processed fruit, vegetable and tomato products at a premium compared to private label products.

4) The DMF acquisition gives DMPL access to a well-established, attractive and profitable branded consumer business in the world’s leading market, i.e. the US. The group expects to generate significant value-creation opportunities in the US market through the expansion of the Consumer Food Business’s current product offerings to include beverage and culinary products. The Consumer Food Business also provides an attractive platform to offer certain products that would appeal to the large and fast-growing Hispanic and Asian-American populations in the US.

5) DMPL operates one of the largest pineapple plantations in the world and will benefit from much wider access to the processed pineapple business in the US – one of the largest packaged fruit segments in the US market. With greater access for its products, the group expects to realise synergies by leveraging its vertical integration – benefiting from economies of scale, value-added expansions and optimisation of operations over time.

6) In addition to these synergies with the group, DMF expects to build on its core business and market-leading positions in the US across its canned fruit, vegetable, tomato and broth businesses. Its largely untapped South America business also has the potential to expand over time across new markets and product categories.

Future plans
Revenue enhancement and cost efficiency. Over the past two years, DMF has made significant marketing-related investments, particularly in marketing research, packaging, product innovation. Given such investments, it is widely expected that the group will see substantial reductions in marketing development expenses.

Other potential areas of cost savings include the rationalisation of underutilized manufacturing facilities as well as more cost-effective sourcing strategies for services. It is widely expected that DMF's operating overhead expenses will be substantially less relative to previous overhead allocations. All these cost-reduction programmes are intended to be implemented during the first year of operations under the combined entity.

Synergies and coordination within the group. DMF aims to grow its pineapple business in the US with the full support of the group. Currently, while DMF has a 26% market share in canned fruits, its share in the canned pineapple segment is approximately 10%. DMF does not have a significant share in the US$50bn beverage market in the US. DMF will initiate programmes to grow this segment with the support of the group.

It is also the intention of the group to develop the ethnic market for products of both DMF and the group in the US through the former’s marketing and distribution channels. The potential market for the group’s products in Asian grocery stores is significant, given the healthy growth of Asian and other ethnic populations in the US.

Restructure or exit the non-retail/other segment. An obvious candidate for immediate review is the non-retail/other segment which reported a loss of US$39.6m at the operating level for the 12 months ended 23 Dec 12 (US$19.9m loss for the eight months ended 25 Dec 11).

Medium-term plans. The group’s medium-term plans for DMF include the continued growth of culinary, beverage and ethnic products, coupled with the expansion of DMF’s other brands – namely S&W, Contadina and College Inn. These brands have been under-resourced and DMPL believes that there is room for future growth. DMF owns the Del Monte brand in South America – but with the exception of Venezuela, DMF has not pursued other markets in South America aggressively. DMPL intends to explore strategic alliances with potential joint venture partners in South America, where the Del Monte brand is well known.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 12/02/14

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