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The Man From Del Monte Says….

DelMonteLogoEver since I was knee-high to a grasshopper, Del Monte Pacific (SGX: D03) has always symbolised the best fruits, the best vegetables and the best juices you could buy. That might explain why Del Monte has always been able to charge a premium for the produce that it sells.

In the second quarter, Del Monte posted a small 2% rise in profits. The bottom line would have been plumper if not for some one-off expenses. If the costs associated with the listing of its shares on the Philippine Stock Exchange and foreign exchange losses were excluded, its earnings would have grown some 13%.

That, however, would have been the very least that earnings had to grow to justify its valuation. Currently, with the shares at S$0.88, the S$1.2b company is valued at almost 29 times earnings. That said, second-quarter revenues rose 11% to US$121m, thanks to a good performance from both its branded and non-branded products.

A further justification of its valuation may be found from the company’s efficient use of shareholder equity. In 2010, its Return on Equity (ROE) was a respectable 8%. That improved to 12% in 2011, and last year, the RoE was an even juicier 14%.

Clearly, Del Monte Pacific is performing well. Its Net Income Margin has improved over the last three years as a result of better cost control and selling higher margin products. Its leverage ratio has also risen. It nearly ticks all the boxes but its valuation still makes me say hmmm…., and that could be a decision I may live to regret.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.