Understanding Del Monte Pacific Limited from an Investor’s View

Del Monte Pacific Limited (SGX: D03) is a global branded food and beverage company. The company has a few brands under its wings, including Del Monte, S &W, Contadina, Sager Creek, College Inn, Fruit Naturals, Orchard Select and SunFresh. The last five brands were additions to the company portfolio following its acquisition of Del Monte Foods, a U.S.-based firm, in 2013.

Del Monte Pacific’s main products are packaged fruits and vegetables. It also carries a wide range of other products in sauces, condiments, pasta, broth, and juices.

Let’s have a look at Del Monte Pacific’s financial statements to get a good understanding of how the company is doing. We will get help from four metrics for this: The price to earnings (P/E) ratio, price to book (P/B) ratio, gearing, and dividend yield.

Based on Del Monte Pacific’s second-quarter earnings for the fiscal year ending 30 April 2016 (FY2016), the company reported a six-month profit of US$0.0212. With its earnings in the last six months of FY2015, Del Monte Pacific will have a trailing EPS of US$0.0146. This would translate to S$0.0204 based on an exchange rate of US$1 to S$1.40.

Del Monte Pacific is currently trading at a price of S$0.375, which implies a P/E ratio of 18.4. This is higher than the P/E ratio of the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking the Straits Times Index (SGX: ^STI) – which stands at 11.65.

The company has a Net Asset Value (NAV) of US$0.1891 per share, which translates to S$0.265 based on the exchange rate mentioned above. This would mean that the company has a P/B ratio of 1.41. What this means in practical terms is that you are paying S$1.41 for something that has a worth of S$1.

Del Monte Pacific has an astoundingly high gearing of 550%. While management has quoted in its latest earnings report that it intends to issue perpetual preference shares to deleverage the balance sheet, I find this surprising.

As investors, we have to be aware of that fact that even if the company raises funds via preference shares, it still constitutes as debt for the company. That’s because a company will still have to pay mandatory dividends on its preferred shares, much like how interest payments have to be made to service debt. This would mean that the total debt level of Del Monte Pacific has not been reduced for practical purposes;  it’s just reclassified.

Looking at the cash flow statement of Del Monte Pacific’s recent results, investors should notice that although the company was profitable, it had negative operating cash flows. This could explain why the company has not declared a half yearly dividend. It is probably important to bring to investors’ attention now that the company has not paid out any dividends for the past two years.

It looks like value investors probably need to have a very good reason to invest in the company should they decide too.

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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 Esjay does not own shares in any companies mentioned.