Results at a glance
Source: Company, PSR
The Positives
+ Del Monte Foods Inc (DMFI) rebounds in margins and profitability. DMFI revenue jumped 25% YoY to US$411mn. Revenue was supported by a surge in packaged vegetable sales as DMFI expands into new channels, including convenience stores, natural food, club stores and food service. Households are looking for value and quality home meals, replacing their spending on restaurants as inflation picks up nationwide.
+ Refinancing expensive preferential shares and high yield debt. In April 22, US$200mn 6.625% preference shares were refinanced by Del Monte with senior fixed-rate debt (3.75%) and floating-rate loan (3.8%). The estimated savings in dividends is around US$6mn.
In May 22, DMFI raised a US$600mn 7-year term loan at a floating 4.75%. The funds were to refinance US$500mn 11.875% Senior Secured Notes. The early redemption of the high yield notes cost a one-off US$70mn*, to be incurred in FY23. Annual cash savings is US$20mn-30mn.
*US$45mn cash commitment fee, US$24mn non-cash write-off of deferred financing cost and US$1mn commitment fee
The Negatives
– Weakness in the Philippines. Revenue in the Philippines declined 6% YoY with earnings dropping a larger 31%. Packaged or mixed fruit suffered the largest drop, a 31% YoY fall to US$22mn in the Asia Pacific. Consumers are faced with surging inflation in the Philippines. There is a shift in consumer priorities to essential items, away from special occasion or less-essential food such as canned mixed fruit or packaged fruit.
– Elevated capex. Free cash flow generated in FY22 was US$66mn, a decline from prior years’ US$163mn. A large drain in operating cash flow was the additional US$135mn in inventory to stock up on raw materials as a hedge from rising prices. Capex also rose by US$39mn to US$202mn. The higher capex is to expand the planted area for pineapples, increase manufacturing capacity and new packaging capabilities (eg Joyba Bubble Tea multipacks).
Outlook
We see multiple drivers for earnings growth in DMFI, namely new products, more distribution channels, higher prices, cost optimization and food inflation driving more home dining. DMFI has built a broad pipeline of products to suit consumer preferences for value and wellness (Figure 1). The recovery in the Philippines will be slower as inflation shifts consumption patterns to more staples. Recovery will come from convenience and food services channels as foot traffic returns with lockdowns being eased
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Paul has 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.
He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.
