Del Monte Pacific Limited - Strong growth momentum in the US

17 Dec 2021

2Q22 results exceeded expectations. 2Q22 revenue and PATMI at 29%/41% of our FY22 forecasts. Revenue from Americas exceeded expectations.
US subsidiary DMFI branded retail sales grew 11% YoY, with strong momentum from core vegetable business and shipments in preparation for holiday promotional activity.
DMPI international sales increased 18% YoY on robust sales of packaged fruit and beverages in US and Europe and S&W packaged pineapple and mixed fruit in North Asia.
Maintain BUY with a higher TP of S$0.62 from S$0.60. Our FY22e PATMI has been raised slightly by 2% to US$88.2mn, as we increase our sales forecasts for Americas, but lower our sales forecasts for Asia Pacific, in line with lower revenue in 2Q22 from the Philippines, due to a high base from impact of the pandemic in 2Q21.

The Positives

+ US subsidiary Del Monte Foods Inc (DMFI) sales in 2Q22 increased 7% YoY. Branded retail sales grew 11% YoY, with strong momentum from core vegetable business and shipments in preparation for Thanksgiving holiday promotional activity. DMFI’s highest margin canned vegetable continues to hold the largest market share of 20.2% in its segment. DMFI continued to expand distribution of new products launched, which contributed to 5.3% of DMFI’s total sales in 2Q22. Profitability increased with a better sales mix and price increases. Compared to April 2021, prices have increased about 10%. More consumers are turning to trusted brands like Del Monte for meal preparation options of better quality.

+ Del Monte Philippines Inc (DMPI) in 2Q22 supported by international sales. DMPI’s sales in the international market increased 18% YoY to US$69.7mn in 2Q22. This was driven by strong sales of packaged fruit and beverages in the USA and Europe, and S&W packaged pineapple and mixed fruit in North Asia. Sales of S&W packaged pineapple products in 2Q22 rose 58.4% YoY, but that of fresh pineapples declined by 17.2% YoY, due to lower supply attributed to timing of the harvest. This is expected for 2Q22 only.

The Negatives

– Lower sales from Philippines. In US dollar terms, 2Q22 sales in the Philippines decreased 5.8% YoY to US$100.2mn due to a high base in 2Q21. The packaged fruit and new products saw growth, which was offset by a reduction in culinary and beverage categories.

– FieldFresh joint venture in India still suffering. DMPL’s share in the JV in India suffered a loss of US$0.5mn in 2Q22, compared with a US$0.2mn loss in 2Q21. B2B business and e-commerce sales grew, but were offset by the decline in fresh sales.

Other updates

Improving cost of debt. DMPL has successfully priced an aggregate principal amount of US$90mn 3-year unrated Senior Notes with a fixed coupon rate of 3.75%, payable semi-annually. The Notes were priced with a yield of 4% at a reoffer price of 99.3%. Approval in-principle has been received for the listing of the Notes on the SGX-ST. This would be for the partial refinancing of the preference shares. A total of US$300mn of preference shares were listed in 2017 at fixed rate of 6.625% and 6.5% per annum for Series A-1 and A-2 respectively.

DMFI issued US$500mn of 11.875% Senior Secured Notes on 15 May 2020. They will mature on 15 May 2025 and are redeemable at option of DMFI beginning in May 2022. Interest paid under this loan in FY21 was US$29.7mn, accounting for 27% of total interest expense.

In October 2021, S&P Global Ratings raised the credit rating on DMFI to ‘B’ from ‘B-‘, and issue-level rating on its debt to ‘B’ from ‘B-‘. We expect DMFI to issue debt at a lower cost.

Maintain BUY with a higher TP of S$0.62, from S$0.60.

We have a higher TP of S$0.62, up from S$0.60. We raise FY22e PATMI slightly by 2%, to US$88.2mn. We raise sales forecasts for the Americas by 5% to US$1.62bn, but lower sales forecasts for Asia Pacific by 4% to US$690mn, in line with lower revenue in 2Q22 from the Philippines, due to a high base from impact of the pandemic in 2Q21.

Our TP remains pegged to 13x FY22e P/E, as we apply a 20% discount to the industry valuation which remained unchanged, due to comparatively higher leverage.