PhillipCapital Research analyst Paul Chew has kept a “buy” rating on Del Monte with an unchanged target price of 69 cents, pegged to a 10x FY2022 ended April P/E, a 30% discount to the industry valuation due to its smaller market cap and higher gearing.
This comes on the back of the group’s recent results announcement, which saw losses widened in 1QFY2023 by 266.6% to US$30.5 million ($42.6 million) from US$18.3 million. However, excluding one-off costs (from redemption fees, write-off of deferred financing costs and ticking fees) the group would have recorded earnings of US$19.6 million, 7.2% y-o-y higher than the previous year.
Revenue for the first quarter period came in at US$456.6 million, 1.2% lower y-o-y, driven by lower sales in the Philippines, but partially offset by higher sales in US and higher exports of fresh and packaged pineapples and other products. In the 4QFY2022 period, Del Monte recorded a 14% y-o-y growth.
Chew notes that there was a general de-stocking exercise by US retailers in the quarter, considering how the US growth rate slowed to 1.5% up 25% y-o-y from 4QFY2022.
Cost of sales rose to US$324.9 million for 1QFY2023, a 1.2% increase from US$328.7 million in 1QFY2022.
Overall, Del Monte’s 1QFY2023 results were within Chew’s expectations. “1QFY2023 revenue and Patmi excluding one-offs were at 20% and 19% respectively of our FY2023 forecast,” says Chew.
See also: Test debug host entity
Gross margins were maintained at 28.9%, higher than the analyst’s modelled 25.8% and 4QFY2022’s 25.9%. A combination of higher prices in June 2022 and packaging changes helped support margins. In early Sept, the US operations underwent their third round of phased price increases since May 2021.
Cash and cash equivalents were at US$21.9 million for 1QFY2023, down from US$29.4 million in 1QFY2022.
Additionally, Del Monte’s joint venture in India turned around from a US$600,000 loss to a US$700,000 profit. Earnings benefited from 19% y-o-y growth in revenue together with margin improvement. The project in India has discontinued fresh business and a greater focus on business-to-business (B2B) sales, with additional management changes.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
However, in May, Del Monte refinanced the US$500 million 11.875% per annum (p.a.) 2025 high yield senior secured note with a US$600 million 7-year term loan facility.
The interest on the loan is secured overnight financing rate (SOFR) plus 4.25% or 6.45% at present. The early redemption incurred a US$71.9 million one-off cost (or US$50.2 million post-tax and minority interest). Current savings on the refinancing are around US$27 million p.a.
The Philippines faced several hiccups during the quarter as well, as there was a change in the distributor, which resulted in the de-loading of inventory in May and June such that consumers were shifting away from discretionary and there was some market share loss in ready-to-drink juice to cheaper PET bottled juices.
Another headwind Chew notes was also the 8% decline in the Philippine peso.
On that note, the analyst continues to expect a healthy recovery in the coming quarters.
“In the US, Del Monte Food is riding on the increased dining and preparation of meals in homes,” observes Chew. “In addition, consumers are shifting to more value items in the centre store, away from fresh and frozen.
As such, Chew notes that Del Monte’s trusted brand and value image have allowed it to fend off even cheaper house brands, with around 75% of its products costing less than US$2. Multi-pack offerings are also gaining traction as consumers pantry load with lower unit price points.
For more stories about where money flows, click here for Capital Section
In the Philippines, volumes were up 33% y-o-y in Aug, with a planned price increase in Oct. In addition, the inventory de-loading and transitioning processes to the new distributor are complete.
Chew observes that re-opening measures are supporting the food service and convenience store channels, with the improving macro environment another catalyst to support the recovery. However at the same time, to cope with the consumers’ shrinking wallet size, products are repacked to more value bundles.
Del Monte will also not lower its price point in beverages from the current 20 pesos to 10 pesos, to compete with lower priced PET juices.
To the analyst, Del Monte valuations are attractive at 5x P/E FY2023.
As at 12.55pm, Del Monte is trading flat at 34 cents with a dividend yield of 6.5%.
