PhillipCapital’s Vivian Ye, citing an earnings turnaround, has initiated coverage on Del Monte, famous for its range of pineapples and bananas, with a “buy” call and a target price of 60 cents.
In a 27 Oct report, Ye notes that its US subsidiary Del Monte Foods has turned profitable in FY2021, recording a full year profit of US$15.8 million after suffering losses since the acquisition in 2014.
Loss-making factories were closed, low margin products exited, new products were introduced and more distribution channels were established.
See: Del Monte Pacific sounds 2Q loss warning
New products launched in the past three years accounted for 6% of FY2021 revenue, and Ye expects the continuing introduction of new products and margin expansion to contribute to gross profit growth at a CAGR of 13% over the next two years.
Meanwhile, Del Monte Philippines (DMPI) enjoys a dominant market share as high as 90% in the Philippines. Growth is expected from a new dairy product line, expanding distribution points and exports of fresh pineapples into China.
DMPI is Del Monte’s most profitable subsidiary, generating a record net profit of US$94.5 million in FY2021, up 40%.
Primarily present in the Philippines, the Asia Pacific segment made up 29% of FY2021 revenue, but 49% of operating income. DMPI products are available across the Philippines in more than 100,000 stores, and there are plans to raise this to 200,000 stores in five years.
DMPI has also entered into a joint venture with Vinamilk, the largest dairy manufacturer in Vietnam to expand into the dairy sector in the Philippines.
The JV will import dairy products from Vinamilk under four product lines and distribute them in the Philippines.
Furthermore, Yee notes that Del Monte is trading at FY2022 P/E of 8.2x, far below the industry average of 16x.
One reason is the company’s underperformance since the acquisition of US subsidiary DMFI in 2014, and Ye says that “over the years, the new management has turned Del Monte around successfully, steering towards innovation to address shifting consumer habits and expanding distribution into key growth areas.”
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She also believes that another reason for the undervaluation is the debt level of US$1.3 billion, resulting in high interest expenses of US$111 million, which she expects to wind down gradually.
“We apply a 20% discount to the industry average, due to its gearing level which is higher than peers and smaller market capitalisation,” Ye points out.
Shares of Del Monte closed at 39 cents on Oct 27, down half-cent or 1.27% from its previous close.
