Dual-listed on the Singapore Exchange and Philippine Stock Exchange, Del Monte Pacific Limited (DMPL) produces and markets packaged vegetable and fruit, beverage and culinary products (refer to Appendix 1).
In the US, DMFI is ranked first in canned vegetables and second in canned fruits, as consumers continue to turn to trusted brand names for meal preparation and healthy snacks. DMPI’s dominant market shares in the Philippines of as high as 90% in key categories have continued to rise. Retailers are carrying fewer brands and focused on the largest.
Significant undervaluation of DMPL. DMPL is trading at FY22e P/E of 8.2x, far below the industry average of 16x. The company had been underperforming since the acquisition of US subsidiary DMFI in 2014. Over the years, the new management has turned DMFI 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$1.3bn, resulting in high interest expenses of US$111mn, which we expect to wind down gradually. We apply a 20% discount to the industry average, due to its gearing level which is higher than peers and smaller market capitalization.
Del Monte Foods Inc (DMFI). DMFI is Del Monte’s US subsidiary, under which they have both branded and private retail sales. This segment was acquired in 2014 and is mainly present in the US. It has been accounting for the bulk of DMPL’s revenue, and made up 70% of FY21 revenue, driven by branded retail sales (Figure 2). The majority of sales under the Americas segment are sold under the Del Monte brand but also include products under the Contadina, S&W, College Inn and other brands. This segment also includes sales of private label food products. Sales are distributed in all channels serving retail markets, and to certain export markets, the food services industry and other food processors.
Del Monte Philippines Inc (DMPI). This is DMPL’s second-largest and most profitable subsidiary. In the Philippines, sales are derived from general trade, modern trade and food services. General trade (GT) includes retailing to a network of retailers, wholesalers, and dealers. Modern Trade (MT) includes the distribution of goods to supermarket chains. Food services include selling through restaurants. The GT and MT combined grew by 13.4% in FY21, delivering record sales of US$705.8mn.
DMPI products are also exported to Europe and S&W markets. This includes exports of fresh and packaged pineapples. Sales increased from higher sales of fresh pineapples in China, Japan and South Korea, and packaged pineapple, mixed fruit and juice drinks.
Costs primarily include metal packaging, packaging and raw material costs. DMPL has introduced various cost cutting measures over the years.
DMPL has high levels of borrowing, with net debt of US$1.3bn in FY21. This also comes with interest burden of US$111mn. The company has progressively reduced net debt over the past five financial years. It may take another three years before reduction of interest expenses to below US$100mn, as we expect repayment of some short-term borrowings.
In 2017, DMPL completed the offering and listing of 20mn Series A-1 and 10mn Series A-2 preference shares, both at an offer price of US$10 per share in the Philippines, at a fixed rate of 6.625% and 6.5% per annum. We have factored in assumptions that Series A-1 and A-2 preference shares would be redeemed by FY22 and FY23 respectively.
DMFI generated a gross profit margin of 22.6% in FY21, up from 17.6% in FY20. This was driven by higher sales from branded retail, combined with lower promotional trade spend and cost improvement including lower cash discounts. There were also lower packing costs from the asset light strategy, with production outsourced. Plant closures in FY20 generated savings, in line with DMPL’s asset-light strategy.
We expect DMFI gross margins to climb further in FY22e and FY23e. Levers to raise margins to include reducing overhead and trade spending, and capacity expansion in packaging. To alleviate recent cost pressures, DMFI raised product prices in May and September this year. We believe the strength of the brand will keep volumes resilient despite the higher prices.
DMPL generated an average gross profit margin of 21.8% over the past five financial years, and EBITDA margin of 13.3%, which we expect to remain stable.
Assets. Fixed assets have remained largely stable over the past five financial years from FY17 to FY21, at US$680mn. DMPL has adopted IFRS 16 since 1 May 2019.
Intangible assets and goodwill is the biggest component of DMPL’s assets, consisting of trademarks, including the right to use the “Del Monte” trademarks in connection with the production, manufacturing, sales and distribution of food products, in various markets (Figure 6).
As of 30 April 2021, DMPL carries goodwill of US$203.4mn and indefinite life trademarks of US$408mn, with US$394mn relating to DMFI.
Liabilities. DMPL has been gradually reducing its net debt, to US$1.3bn in FY21 (Figure 8), and gearing was lowered from 2.4x to 2.0x equity.
DMFI issued US$500mn of 11.875% Senior Secured Notes on 15 May 2020. They will mature on 15 May 2025 and are redeemable at the option of DMFI beginning in May 2022. The Notes make up 50.4% of total non-current liabilities (Figure 7). Interest paid under this loan in FY21 was US$29.7mn, accounting for 27% of total interest expense.
Recently, S&P Global Ratings raised credit rating on DMFI to ‘B’ from ‘B-‘, and issue-level rating on its debt to ‘B’ from ‘B-‘. This is on the back of continued deleveraging, with 11% revenue growth and high profitability in 1QFY22, with EBIT margin of 9.3%. This resulted in improvement in leverage from 10x to about 3.5x for 12 months ending 1 August 2021.
Cash flow. DMPL has been generating positive operating and free cash flows from FY17 to FY21. Operating cash flow was lower in FY21 due to higher working capital. Capex has remained relatively stable at an average of US$115mn over the past five financial years (Figure 9).
DMPL’s dividend policy is to distribute a minimum of 33% of net profit. In FY21, DMPL paid 37% of PATMI in FY21, and 50% of PATMI in FY19. In FY20, although it was a loss-incurring financial year due to plant closures resulting in one-off expenses, DMPL declared a special dividend due to the one-off gain generated from the sale of a 13% stake in DMPI. Preferred dividends were also paid.
Del Monte Pacific ranks among the top players in the US (Figure 10) and has a dominant share in the Philippines (Figure 11).
Increasing interest in culinary home meal preparation has accelerated due to Covid-19. As a result, more consumers are looking for quick, convenient and healthy food options, and they are turning to strong brands, including Del Monte.
The personal consumption expenditure on processed fruits and vegetables in the US was recording steady growth until the Covid-19 pandemic hit in early 2020, and spiked in March 2020 (Figure 12). Consumers had to prepare their meals at home during the lockdowns, which led to pantry loading and higher demand for meal preparation products. This has also led to steady growth in the prices of processed foods (Figure 13). DMFI has also raised prices over the year.