Continue to 'buy' dual-listed Del Monte after record margins in 2QFY2023: PhillipCapital

2QFY2023 earnings jumped 38% y-o-y to US$49.5 million ($67.09 million) supported by revenue growth, up 7%.

Owing to price increases, food and beverage consumer company Del Monte posted record margins for 2QFY2023 ended October. With 1HFY2023 revenue and patmi at 49% and 67% of FY2023 forecasts, PhillipCapital’s head of research Paul Chew says the company is performing “better than expected”.

2QFY2023 earnings jumped 38% y-o-y to US$49.5 million ($67.09 million) supported by revenue growth, up 7%. The continued push towards branded products drove gross margins to 29%, and is ahead of Chew’s modelled 26% from increases in selling price.

Chew raised his FY2023 earnings forecast by 19% to an adjusted US$123 million. In a Dec 12 note, Chew maintained “buy” on Del Monte but with a lower target price of 67 cents from 69 cents previously, with a “huge 50% discount” to the industry valuation due to its smaller market cap and higher gearing.

“Del Monte valuations are attractive at 4x P/E FY2023 and an 8% dividend yield. Multiple rounds of price increases and new products have supported gross margin expansion despite cost pressures. The drive towards more branded and new products in the US continues to bear fruit,” writes Chew.

Del Monte Pacific is dual-listed on the Singapore Exchange (SGX) Mainboard and the Philippine Stock Exchange.

PhillipCapital had initiated “buy” on Del Monte last October. In January, PhillipCapital replaced Thai Beverage with Del Monte in its Absolute 10 Model Portfolio. For analyst Vivian Ye, her pick of Del Monte Pacific is based on how the consumer foodstuff maker took a turn for the better as the result of a restructuring exercise.

Back in 2014, Del Monte Pacific acquired its current US subsidiary, which focused mainly on producing low-margin canned food for the likes of Walmart or Costco. In 2018, a new management team chose to transform the business. They closed down loss-making operations and significant restructuring costs had to be booked till FY2020.

However, as the company shifts towards a higher-margin business of selling products under its own brand and introduces new products catering to modern lifestyles such as healthy snacks, Del Monte’s overall earnings have improved “tremendously”.

For its 1HFY2022 ended Oct 31, 2021, it reported earnings of US$30 million ($40.5 million), almost twice that of the whole FY2021.

Sharp rebound in Philippines

Sales in the Philippines and International (DMPI) segment recovered strongly in 2QFY2023, notes Chew, surging 22% y-o-y in peso terms to PHP11.3 billion ($0.28 billion).

However, revenue in US dollar terms only improved by 5% due to the weakness in the Philippine peso, adds Chew. “Growth stemmed from the transition to new distributors in the last quarter and a rebound in food service, up 21% y-o-y, and convenience stores, up 48% y-o-y, as the lockdowns ease.”

That said, Chew notes a rise in net debt by US$505 million to US$2 billion.

Net debt to ebitda climbed from 4.3x to 5.6x over the past six months. Driving up debt levels were a US$366 million increase to US$1.25 billion, and US$70 million for the purchase of Kitchen Basics.

On Aug 3, Del Monte Foods announced that it completed the acquisition of Kitchen Basics, a line of ready-to-use stocks and broths from McCormick & Company.

Meanwhile, a 40% y-o-y jump in inventory was due to higher cost of materials, which Chew believes was in preparation for a strong holiday season. “We expect debt to remain elevated due to the redemption of 6.5% US$100 million preference shares in December. Around 15%-20% of total debt is on fixed rates.”

2023 outlook

Chew expects sales momentum to continue into 2HFY2023.

For its US operations, cost pressure remains in raw materials, utilities and labour. However, DMFI will ride on the price increase implemented in September, and a more selective increase in February 2023, notes Chew.

Around 75% of the products sold in the US are priced less than US$2. “It is an affordable and value option for households especially in the current inflationary environment,” says Chew.

Other growth drivers are the “relentless” rollout of new products that represent around 5% of sales, says Chew. “New launches include specialty vegetable canned and bottled products plus the Take Root Organics organic range of canned tomatoes. These products will benefit from the trend of US consumers shifting away from restaurants to meals prepared at home to cope with rising inflation.”

Aside, Chew also notes plans to list the US subsidiary DMFI.

Meanwhile, the Philippines and International business should see revenue recovery as inflationary pressures gradually ease, notes Chew. “Key growth drivers include will be the planned price increase in January 2023, continued penetration into China of fresh pineapples, introduction of more dairy products, and new distribution network and recovery in food service and convenience store channels as lockdowns ease.”

As at 12.27am, shares in Del Monte are trading 0.5 cents higher, or 1.59% up, at 32 cents.

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