Del Monte Pacific could be mulling global consolidation

It will drive value for shareholders.

According to Maybank Kim Eng, signs are pointing to a possible global consolidation strategy for the investment holding company, which the research firm believes will benefit shareholders on the whole.

Here's more from Maybank:

Initiate with BUY and TP of SGD1.00 for 35% upside. We initiate coverage on Del Monte Pacific Limited (DMPL) with a BUY rating and TP of SGD1.00, which implies 35% upside from current levels. DMPL operates under the Del Monte brand in the Philippines, where it is a dominant F&B player, and the S&W brand in other markets. The new management team since 2006 has been reshaping the company and the fruits of their labour would be more evident in the next three years.

Possible M&A consolidation among Del Monte companies. The Del Monte group of companies has had a colourful history of ownership change. We sense that change is in the air again: In the past two years, both Del Monte Canada and Del Monte Foods (US) have been acquired, the former by ConAgra Foods and the latter by a KKR-led consortium. We believe consolidation globally is possible and see this as a value driver for DMPL shareholders.

Structural shift towards higher margins and ROE. DMPL’s regional expansion through the S&W brand can be seen in the light of a change to its business model outside its home market, ie, from being an OEM exporter to a brand owner. We believe this will lead to better, if not more stable margins, especially given DMPL’s vertically integrated business. This should contribute to a significant structural change in ROE profile, from 13% currently to 20% by FY15F.

End of unfavourable long-term supply contracts. DMPL has legacy long-term supply contracts to the other Del Monte companies. Two such major contracts will now be terminated or changed to reflect market pricing by FY15. We estimate this alone would add at least USD3-4m to the bottom line, boosting profit growth further.

Profit growth story with generous dividend. Our TP of SGD1.00 is pegged at 25x FY14F PER. We believe this is justified by a 22% net profit CAGR over the next three years, which is superior to its ASEANlisted peers. We also expect management to maintain the 75% dividend payout during this period, making DMPL one of the highest-yielding consumer stocks in the region. Initiate with BUY.