PhillipCapital’s head of research Paul Chew has maintained his “buy” rating and raised his target price on Del Monte to 69 cents, up from his previous figure of 63 cents.
Del Monte’s patmi for the 4QFY2022 ended April, which jumped 38% y-o-y to US$20.0 million ($27.7 million), surpassed Chew’s expectations.
The 4QFY2022 earnings beat was from lower operating expenses, despite a one-off stock compensation of US$2 million. Del Monte’s final dividend was also up 42% y-o-y to 1.7 US cents.
In the FY2022, the company’s revenue came in at US$2.34 billion, with patmi at US$100 million, which stood at 101% and 105% of Chew’s FY2022 forecasts.
Notably, US subsidiary DMFI registered a 4-fold jump in patmi in 4QFY2022 to US$19 million, with revenue also rising 25% y-o-y to US$411 million.
Gross margins for DMFI also recovered q-o-q from 21% to 25% due to higher selling prices and new products contributing 5% to revenue.
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Chew says consumer staples are enjoying a lift in demand as US households dine more at home as food inflation escalates.
“Households are looking for value and quality home meals, replacing their spending on restaurants as inflation picks up nationwide,” he adds.
As such, revenue for DMFI was supported by a surge in packaged vegetable sales as it expanded into new channels, including convenience stores, natural food, club stores and food service.
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On the other hand, he expects the demand in the Philippines to remain weak with revenue dropping 6% y-o-y and earnings sliding 31%.
Chew observes that there is a shift in consumer priorities to essential items, away from less-essential food such as canned mixed fruit or packaged fruit.
As such, the segment suffered the most significant drop, a 31% y-o-y fall to US$22 million in the Asia Pacific region.
Overall, free cash flow generated in FY2022 fell to US$66 million, compared to US$163 million in the year before, with Chew explaining that a large drain in operating cash flow was an additional US$135 million in inventory to stock up on raw materials as a hedge from rising prices.
Capex for Del Monte also rose by US$39 million to US$202 million in FY2022, used for expanding the planted area for pineapples, increasing manufacturing capacity, as well as new packaging capabilities.
Reducing interest payments
On its balance sheet, Del Monte has refinanced expensive preferential shares and high yield debt, replacing US$200 million worth of 6.625% preference shares with senior fixed-rate debt of 3.75% and a floating-rate loan at 3.8%. The move has resulted in dividend savings of around US$6 million.
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Furthermore, in May, DMFI raised a US$600 million 7-year term loan at a floating 4.75%, refinancing US$500 million of senior secured notes that had a rate of 11.875%.
The early redemption of the high yield notes cost a one-off US$70 million, but will result in annual cash savings of about US$20 million to US$30 million.
Chew sees “multiple drivers for earnings growth” in DMFI, namely new products, more distribution channels, higher prices, cost optimization and food inflation driving more home dining.”
However, the recovery in the Philippines will be slower as inflation shifts consumption patterns to more staples.
Recovery will only come from convenience and food services channels as foot traffic returns with lockdowns being eased.
Further to his report, Chew has also raised his earnings estimates for the FY2023 by 9% despite a cut in gross margin assumptions. His P/E valuations has also been rolled over to the FY2023.
“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,” the analyst writes.
Chew says, “we find Del Monte valuations attractive at a FY2023 P/E of 5x, with a 6% dividend yield,” adding that a listing of DMFI would be a re-rating catalyst to de-gear and crystalise higher valuations.
As of 2.54 pm, shares of Del Monte traded at 37.5 cents, with a FY2023 P/E ratio of 5.4 and dividend yield of 6.5%
