Brokers' take: Phillip Securities initiates Del Monte with 'buy', S$0.60 target price

PHILLIP Securities initiated a "buy" call for canned food brand Del Monte Pacific D03 with a target price of S$0.60, after US subsidiary Del Monte Foods turned profitable for FY2021. In a research report on Monday (Oct 25), the brokerage also noted growth opportunities from a new dairy product line, expanding distribution points and the export of fresh pineapples into China.

Research analyst Vivian Ye noted Del Monte Foods had been reporting losses since it was acquired by Del Monte Pacific in 2014 for US$1.7 billion. But Del Monte Foods has managed a turnaround after closing loss-making factories, exiting low-margin products, introducing new products, raising prices and establishing more distribution channels.

Ye expects gross margins of the US subsidiary to climb further in FY2022 and FY2023. This could come from lower overhead and trade spending as well as capacity expansion, she said.

She also noted that Del Monte Pacific currently trades at 8.2 times her estimates for FY2022 earnings, which is below the industry average of 16 times.

While the undervaluation may have been justified previously, given the poor performance of Del Monte Foods as well as Del Monte Pacific's high debt levels, Ye believes management has been successful in turning things around.

"Over the years, the new management has turned Del Monte Foods around successfully, steering towards innovation to address shifting consumer habits and expanding distribution into key growth areas. We believe another reason for the undervaluation is the debt level of US$1.3 billion, resulting in high interest expenses of US$111 million, which we expect to wind down gradually," said analyst Ye.Separately, Ye noted that Del Monte Pacific enjoys a dominant market share in the Philippines. Its unit Del Monte Philippines generated a record net profit of US$94.5 million in FY2021, up by 40 per cent year on year.

Key risks for the company include an increase in the cost of raw materials in various segments, including tin plating, packaging and shipments, as well as high levels of borrowing, and exchange rate risks with the Philippine peso and the Mexican peso.

Del Monte Pacific has progressively reduced its net debt over the past 5 financial years, Ye said while adding that it may take another 3 years before interest expenses fall below US$100 million.

Read more:

• Del Monte mulls US subsidiary IPO; eyes higher FY22 net profit
• Del Monte swings back into the black in Q1
• Del Monte unit defers Philippine IPO amid Covid-19 surge