Del Monte Pacific

[specuvestor]

Banks are leveraged business with debt as their widgets and hence not the same thing. Look at comparable operating companies producing widgets instead

[CityFarmer]

If EBITDA stays, the ratio of debt/EBITDA is meaningless. I am taking the debt/EBITDA as an indicator, on the growth needed to clear the debt... The integration is still going-on, and synergy is the hope...

(not vested)

EBITDA can only cover interest expense means debt is not going to be repaid. Hence debt over EBITDA is just a ratio and meaningless. Unless they can swap debt for equity and cut capex it will be brinkmanship for some time, until biz improves

This is an LBO. Group EBITDA of US$21.5m can't even cover interest expense of US$23.9m is indeed worrisome with cash of just US$28.5m. Cash call have to come sooner rather than later.

[CityFarmer]

The company high-debt, yet slowly improving biz, will make its shareholders more nervous, amid the current market outlook.

The company announced the 1Q result, presentation below
http://infopub.sgx.com/FileOpen/DMPL_1QF...eID=368449

Net debt remains the same, but gearing improved, due to higher equity (after the right issue recently). The gearing still staying around 6x. The interest expense is around US$22 mil per quarter, with net debt around US$1.86 billion.

(not vested)

[testwrite]

The company high-debt, yet slowly improving biz, will make its shareholders more nervous, amid the current market outlook.

The company announced the 1Q result, presentation below
http://infopub.sgx.com/FileOpen/DMPL_1QF...eID=368449

Net debt remains the same, but gearing improved, due to higher equity (after the right issue recently). The gearing still staying around 6x. The interest expense is around US$22 mil per quarter, with net debt around US$1.86 billion.

(not vested)

this is definitely a more risky stock then usual, consider the debt 2479 to equity 312
operating profit is 216, but interest expense is (21,665), so net loss, not earning enough to pay their debts

from their operating cashflow, they borrow another 163,156 , that is half their book value, definitely not generating any cashflow

but if anything, the stock market is unpredictable, and positive surprise does happen regularly, but this company finance is one of the extreme

[CityFarmer]

The company high-debt, yet slowly improving biz, will make its shareholders more nervous, amid the current market outlook.

The company announced the 1Q result, presentation below
http://infopub.sgx.com/FileOpen/DMPL_1QF...eID=368449

Net debt remains the same, but gearing improved, due to higher equity (after the right issue recently). The gearing still staying around 6x. The interest expense is around US$22 mil per quarter, with net debt around US$1.86 billion.

(not vested)

this is definitely a more risky stock then usual, consider the debt 2479 to equity 312
operating profit is 216, but interest expense is (21,665), so net loss, not earning enough to pay their debts

from their operating cashflow, they borrow another 163,156 , that is half their book value, definitely not generating any cashflow

but if anything, the stock market is unpredictable, and positive surprise does happen regularly, but this company finance is one of the extreme

It is definitely an extreme case of LBO. ThaiBev was using 1-2x leverage for F&N IIRC, but Del Monte used 8x for the LBO. which is a record, with my exposure.

IIRC, the original game plan was half debt, half equity, which should settled down with 3-4x. Unfortunately, the equity part has mostly converted to debt to date. The integration has also not gone as smooth as expected, and still struggling after more than a year.

(not vested)

[white collar]

Leverage of 1-2x is very low for an LBO. Leverage for an asian LBO is typically 3-4.5x. 

In my own opinion, DMPL looks to be doing OK / as expected, based on their latest results. No big surprises there. Gross margins have improved and net losses are decreasing. Operating cash flow is negative because the company ramped-up on inventories in preparation for the busier seasons up ahead. On an EV/EBITDA basis, the company is not bad actually.  

I remain conservatively hopeful on DMPL's next quarter and the FY2016 "turnaround" story.

[d.o.g.]

On an EV/EBITDA basis, the company is not bad actually.

I just had a brief discussion with someone about this. LBO operators usually try to buy at 5-7x EV/EBITDA.

10x has become more common given the current low interest rates, but in general anyone paying double digit multiples rarely does well, firstly because of the lower margin of safety, and secondly because such high prices usually occur at the top of the cycle, and the subsequent downturn results in operating deleverage making it harder to pay off debts.

When the deal was announced, the multiple was 10x EV/EBITDA, based on US$1.7bn for US$164m of EBITDA. This would be considered a little high, with success obviously predicated on stable cash flows, as well as the buyer being able to lower costs, raise revenues etc.

For FY15 the Group had EBITDA of US$96m, adjusting for one-off expenses EBITDA was US$156m. However, there was a gain on bargain purchase of US$27m. Adjusting for this, underlying EBITDA was US$139m.

The pre-deal Del Monte reported EBITDA of US$65m in 2013, and Del Monte US had EBITDA of US$160m in FY13. On a simple "1+1=2" basis the combined company should have approximately US$225m of EBITDA. In fact, for FY15 EBITDA was nearly 40% lower after adjusting for one-off items.

In revenue terms, Del Monte had US$492m of sales in 2013, and Del Monte US had US$1.8bn in sales for FY13. Again, on a simple additive basis the combined company should have US$2.3bn in sales. Instead, for FY15 it reported US$2.16bn in sales, about 6% lower. So it seems operating deleverage was a contributing factor.

How much of it is from past damage by KKR (as implied by the FY15 annual report commentary) and how much of it is from post-takeover mismanagement is not clear. But what is clear right now is that 1+1 is less than 2.

Can Del Monte rescue the US business? If it manages to fix the business, combined EBITDA could conceivably go back to "normal" i.e. US$225m. But at this normal level the valuation would be 10x EV/EBITDA. An investor who wants some margin of safety should try not to pay more than 7x adjusted EBITDA.

7x EV/EBITDA for Del Monte would imply EV of $1.58bn assuming EBITDA returns to US$225m. Since net debt is currently US$1.86bn, for an adequate margin of safety the investor should be paying negative US$284m, or about minus S$0.20 per share. Actually, since Del Monte might not succeed in fixing the US business, the price paid should be lower still to take into account this risk.

That said the shares are not completely worthless, since they do have option value. Essentially, in the current situation the shares are effectively perpetual call options.

As usual, YMMV.

[CityFarmer]

Leverage of 1-2x is very low for an LBO. Leverage for an asian LBO is typically 3-4.5x. 

In my own opinion, DMPL looks to be doing OK / as expected, based on their latest results. No big surprises there. Gross margins have improved and net losses are decreasing. Operating cash flow is negative because the company ramped-up on inventories in preparation for the busier seasons up ahead. On an EV/EBITDA basis, the company is not bad actually.  

I remain conservatively hopeful on DMPL's next quarter and the FY2016 "turnaround" story.

I reckon you will agree with us, an prolonged gearing of 6x, is definitely very stressful to the company.

Based on the initial presentation on the acquisition, the leverage should settle down to 4x, with half of the leverage, supported by equity. Up-to-date, only the right issue was materialized. The intention of the right issue, was $180 mil, but downed to $150 mil, due to poor market sentiment. The $360 mil preferential share offering was postponed due to same reason. Up-to-date gearing of the company, is about 6x, after the right issue.

I wish the company, has sufficient MOS in the LBO, to cushion both the poorer investor sentiment, as well as the current unexpected poorer global business outlook.

(not vested)

[white collar]

Leverage of 1-2x is very low for an LBO. Leverage for an asian LBO is typically 3-4.5x. 

In my own opinion, DMPL looks to be doing OK / as expected, based on their latest results. No big surprises there. Gross margins have improved and net losses are decreasing. Operating cash flow is negative because the company ramped-up on inventories in preparation for the busier seasons up ahead. On an EV/EBITDA basis, the company is not bad actually.  

I remain conservatively hopeful on DMPL's next quarter and the FY2016 "turnaround" story.

I reckon you will agree with us, an prolonged gearing of 6x, is definitely very stressful to the company.

Based on the initial presentation on the acquisition, the leverage should settle down to 4x, with half of the leverage, supported by equity. Up-to-date, only the right issue was materialized. The intention of the right issue, was $180 mil, but downed to $150 mil, due to poor market sentiment. The $360 mil preferential share offering was postponed due to same reason. Up-to-date gearing of the company, is about 6x, after the right issue.

I wish the company, has sufficient MOS in the LBO, to cushion both the poorer investor sentiment, as well as the current unexpected poorer global business outlook.

(not vested)

Agree with you on this.

Having said that, aside from the high gearing / insufficient MOS, I do like that the company has a track record of low earnings volatility and relatively high asset turnover. 
 
(Vested; sitting and waiting)

[testwrite]

On an EV/EBITDA basis, the company is not bad actually.

I just had a brief discussion with someone about this. LBO operators usually try to buy at 5-7x EV/EBITDA.

10x has become more common given the current low interest rates, but in general anyone paying double digit multiples rarely does well, firstly because of the lower margin of safety, and secondly because such high prices usually occur at the top of the cycle, and the subsequent downturn results in operating deleverage making it harder to pay off debts.

When the deal was announced, the multiple was 10x EV/EBITDA, based on US$1.7bn for US$164m of EBITDA. This would be considered a little high, with success obviously predicated on stable cash flows, as well as the buyer being able to lower costs, raise revenues etc.

For FY15 the Group had EBITDA of US$96m, adjusting for one-off expenses EBITDA was US$156m. However, there was a gain on bargain purchase of US$27m. Adjusting for this, underlying EBITDA was US$139m.

The pre-deal Del Monte reported EBITDA of US$65m in 2013, and Del Monte US had EBITDA of US$160m in FY13. On a simple "1+1=2" basis the combined company should have approximately US$225m of EBITDA. In fact, for FY15 EBITDA was nearly 40% lower after adjusting for one-off items.

In revenue terms, Del Monte had US$492m of sales in 2013, and Del Monte US had US$1.8bn in sales for FY13. Again, on a simple additive basis the combined company should have US$2.3bn in sales. Instead, for FY15 it reported US$2.16bn in sales, about 6% lower. So it seems operating deleverage was a contributing factor.

How much of it is from past damage by KKR (as implied by the FY15 annual report commentary) and how much of it is from post-takeover mismanagement is not clear. But what is clear right now is that 1+1 is less than 2.

Can Del Monte rescue the US business? If it manages to fix the business, combined EBITDA could conceivably go back to "normal" i.e. US$225m. But at this normal level the valuation would be 10x EV/EBITDA. An investor who wants some margin of safety should try not to pay more than 7x adjusted EBITDA.

7x EV/EBITDA for Del Monte would imply EV of $1.58bn assuming EBITDA returns to US$225m. Since net debt is currently US$1.86bn, for an adequate margin of safety the investor should be paying negative US$284m, or about minus S$0.20 per share. Actually, since Del Monte might not succeed in fixing the US business, the price paid should be lower still to take into account this risk.

That said the shares are not completely worthless, since they do have option value. Essentially, in the current situation the shares are effectively perpetual call options.

As usual, YMMV.

this analysis is very good, I couldnt have say so well, but i couldnt reconcile

"for an adequate margin of safety the investor should be paying negative US$284m, or about minus S$0.20 per share

That said the shares are not completely worthless, since they do have option value."

so it there value or not? it cannot be in both states

i think the option value answer is good, but impossible to predict future states, so hard to discount back to get option value

"negative US$284m, or about minus S$0.20 per share" is easier to think in term of fundamental analysis, but using 7x adjusted EBITDA, all banks will have negative value also, couldnt reconcile that also