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Can Del Monte Pacific Limited Return To Profitability?

Del Monte Pacific Limited (SGX: D03) has taken the gamble of its lifetime, by purchasing Del Monte Foods, Inc earlier this year for US$1.675 billion. Now the company is laden with debt, the operations are not profitable, and it has been losing market share in some of its products. The trouble for Del Monte Pacific Limited seems endless, thus making it the perfect candidate for my type of investment; a possible turnaround. So, the question now is, can Del Monte Pacific Limited ever return to profitability?

Debt

The main issue here is the debt the company has taken on for the acquisition. From its latest quarterly report on 31st July 2014, the company has total net debt of US$1.83 billion compared to US$168.9 last year. That is an increase of more than 1000%. Its net debt to equity ratio increased from 0.73 times to 11.1 times from July 2013 to July 2014. Due to the large increase, Del Monte is seeing its interest expense jumped more than 10 times from last year.

Fighting for market share

The management also commented that it has been adjusting the prices of its products downwards to retake lost market share. If the company has to go into a price war to defend its market share, it tells us that the economic moat of its products are not as strong as the company would like it to be. Lowering the price would mean that the company might be experiencing lower gross margin going forward, which is not a good thing to happen when the company is struggling with excess debt.

What can we hope for?

The company needs to accomplished many things in order to be successful again. We need to hope that the synergies between the two merged companies do pan out and there are many opportunities to cut cost and to leverage on each other’s distribution network and product line. We need to hope that the company has a good cash management team to navigate through the huge debt loan effectively without falling into bankruptcy risk. If the company is able to do that, there might be a chance that the business would regain its growth path.

Foolish Summary

Del Monte Pacific Limited is definitely not in an ideal situation right now. The company does have a chance to regain its profitability. However, the question for an investor to ask him or herself is “Is it worth the risk to invest in such a company?”

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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 contributor Stanley Lim does not own any companies mentioned.