SINGAPORE (July 4): CIMB Research is keeping its “add” recommendation on Del Monte Pacific (DMPL) with a lower target price of 38 cents from its previous 40-cent price target.

To recap, the food and beverage (F&B) group reported stellar FY16 earnings with a US$51.5 million ($69.2 million) net profit last week – a significant turnaround from its loss of US$43.2 million in FY15 – and a FY16 revenue which grew 3.7% y-o-y.

(See: Del Monte Pacific back in the black with FY16 earnings of US$51.5 mil)

According to analyst William Tng in a Friday report, the research house expects slower margin recovery in the US, and prefers to conservatively assume zero dividends in FY17-19.

CIMB has also lowered FY16-18 EPS by 17-18% to reflect the group’s FY16 results.

This is mainly because:

Surprise dividend funded by DMPL’s Asia Pacific arm
Tng explains that the group’s surprise dividends per share (DPS) of 1.33 US cents represented a 50% dividend payout ratio based on the reported FY16 net profit, but balloons to 130% based on core net profit. DMPL’s 7.64x (at end-FY16) net debt-to-EBITDA ratio restricts the group from utilising cash due to the debt covenant on US operations, such that its dividends are being funded by the Asia Pacific business.

More one-off expenses to be incurred
DMPL’s “extraordinary” US$32 million one-off gains were mainly due to the US$38 million working capital adjustment related to the DMFI acquisition, as well as the US$39.4 million adjustments to the retirement plan in the US, says Tng.

To add on, Tng believes that the group’s US operations need more time to improve. He highlights that DMPL’s upcoming “Project Restoration” in FY17, which entails a review of its entire operations to improve production efficiency and lower operating costs, demonstrates the group’s commitment to shift towards a “leaner organisation model”. This leads him to believe that more one-off expenses will be incurred in FY17.

High gearing a key risk, preference share issuance still pending
According to Tng, high net gearing remains a key risk for DMPL. “At end-FY16, the group’s net gearing was 4.93x and net tangible assets (NTA) was negative US$386 million. For FY16, times interest earned (TIE) ratio was 1.64x, core EBITDA/cash interest expense was 2.4x, and net cash flow from operations/cash interest expense was 0.35x,” he says.

While the company targets to issue US$360 million preference shares by end-CY16, Tng says DMPL may issue a smaller initial tranche of US$250 million, and issue the balance over the following three years.

Shares of DMPL closed at 34 cents on Monday.