Del Monte Pacific Limited

VALUATION
• Del Monte Pacific (Del Monte) is trading at an FY14F and FY15F PE of 16x and 10x respectively. Based on Bloomberg consensus, the 12-month target price for the stock is S$0.98, which translates to a 52% potential upside from the current level.

INVESTMENT HIGHLIGHTS
• Potential margin uplift from in-house PET bottling for Del Monte Philippines. Currently, the bottling of branded beverages sold in the Philippines is being outsourced at a loss. The contract will terminate in Aug 14 and the group intends to bring the process in-house. Management estimates the segment’s gross margin will improve to 20-25% from the current 9% due to this move.

• S&W brand (S&W) to breakeven in 2013; high double-digit growth from
existing and new markets in the near term. Management will continue to focus on growing S&W’s processed and fresh businesses in Asia and the Middle East. For one, it plans to introduce tetra-packed juices in the latter market, where consumers are largely non-alcohol drinkers. S&W’s processed sales rose 47% yoy in 3Q13 driven by China, Korea, Middle East and Indonesia. Fresh sales rose 31% yoy driven by Korea, Japan and China. Management expects S&W to breakeven in 2013 and for an overall annual growth of 20% to be achievable in the near term as the business continues to gain traction.

• Higher profitability in 2015 from better supply contracts. A number of Del Monte’s long-term supply contracts will undergo repricing in 2014-15. The group is intent on negotiating better terms to reverse its loss-making positions. The agreement to supply processed pineapple products to Del Monte USA will terminate in Nov 14, which will allow the group to sell directly into that market at market prices, resulting in better margins. The contract to supply fresh pineapples in Asia will also shift to market pricing beginning Jan 15.

• Indian JV targets to break even in 2016 on better sales and improved scale. As of 9M13, FieldFresh Foods’ equity loss declined to US$3.6m from US5.6m in 2012 and US$9.7m in 2011. Del Monte processed sales under the JV grew 34% yoy in 3Q13. Management expects the improvement to be sustained on the back of better sales mix, improved prices, reduced overhead and tigher control of expenses.

• Stretching fundraising capacity for US acquisition with plans for the US$1.675b deal to include LBO debt, common equity, preferred share issuances, and a rights offering. We see execution risks and a long, transitional period for the group’s acquisition of US-based Del Monte Foods’ consumer food business.