Del Monte Pacific

[d.o.g.]

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

The price of any asset is made up of two components: investment value, as defined by the underlying cashflows generated (which are either paid out or reinvested and paid out later), and speculative value, as defined by the possibility of resale at a profit.

At a low price, there is a large investment value component present, and the investor is paying little or nothing for the speculative value. However, an asset that has high investment value usually has good speculative prospects as well, a point noted by Benjamin Graham in The Intelligent Investor. So it is a case of "buy one get one free".

At a high price, the underlying investment value has not changed, instead the investor is paying a large premium for the speculative value. If the investor is wrong about the speculative prospects, he will suffer badly as he will be dependent on the underlying investment value, for which he has paid too much.

In the case of Del Monte Pacific, the EV/EBITDA analysis is predicated upon the underlying cashflows and hence refers to the investment value component. Based on 7x EV/normalized EBITDA, the appropriate investment value of the shares is negative.

However the speculative value of the shares is not zero for as long as the shares exist, which is why they have option value. The shares have no expiry date, hence they are effectively perpetual call options.

Since it is too early to tell whether the management is doing a good job, it is very difficult to put a number on the speculative value of the shares. As a speculation, they are definitely not worth zero, but beyond this, it is hard to say.

Personally I would place this in the "too hard" category and move on.

EV/EBITDA is normally used for conventional operating businesses e.g. manufacturing, logistics etc. It is a proxy to gauge how quickly an owner can take back his investment cost. It frowns on excessive debt because a downturn can result in serious cash flow problems leading to default and bankruptcy. Hence, the 5-7x rule of thumb.

Because of thin spreads and high regulatory costs, banks require very high levels of leverage to operate profitably, usually 10x or more. But the main risk to banks is not a downturn causing the bank to default on its debts (which are actually the deposits of its customers). The main risk is a downturn causing borrowers to default on their debts (which are actually the assets of the bank).

Investors in banks usually study the non-performing loan ratio, the bad debt provisioning and so on. If they are not sure they will usually demand a haircut on the value of the bank's equity, on the basis that the equity will sooner or later be impaired by the bad debts. So P/B is a more common metric when analyzing banks. P/E is also used when the investor is confident that the bank will survive its current troubles and return to its former profitability.

As usual, YMMV.

[brattzz]

too complicated... so avoid lah...

only know Del Monte's bananas and tomato ketchups,

[CityFarmer]

Let me share a view. 

First of all, there are good reasons to believe, "1+1>2" in the acquisition. Next, will the company achieve it, soon enough, before the creditors' confidence run out?

There are huge synergy between the two companies, both in sales expansion and cost reduction. For e.g. DMPL is able to enhance its US market share, by leveraging the newly acquired DMFI. The cost reductions can be achieved by economic of sales, and optimization of processes.

What is the "gain", to justify the acquisition? Let's estimate.

The acquisition shouldn't destroy shareholder value. A good reference of shareholder value, is the reference price of the recent right issue, which has partly funded the acquisition. The reference price is the theoretical ex-right price, after taking into considerations of the raised proceed, and volume-weighted average market price. The reference price is S$0.409 per share, thus market cap of S$815 million, or US$573 million. The current net debt is US$1859 million. By a simplified formula of EV = MC + net debt

At EV/EBITDA = 10, EBITDA = US$243 million
At EV/EBITDA = 07, EBITDA = US$347 million

The combined EBITDA, (based on Mr. d.o.g's post) is US$225 million, and the current adjusted EBITDA is US$139 million.

Is the estimated EBITDAs, a mission impossible for the company?

IMO, the EBITDAs should be feasible, but definitely not "done-deal" targets, especially with the current global market uncertainties. I am more concern on the survival, due to the debt, before the targets are achieved.

(not vested, and unlikely to invest due to the leverage)

[white collar]

The assumption is that DEL will remain as a going concern with strong market position that is not easily replicated. DEL generates sustainable cash flow, and has pricing power. Interest rate is low. Forex in their favor. On this basis, value per share can be derived from enterprise value directly, not equity value, with confidence that debt will be repaid. Using the 7x EV/EBITDA assumption, each share is worth 35 cents. At 9x EV/EBITDA, it is about 45 cents.

[GreedandFear]

The assumption is that DEL will remain as a going concern with strong market position that is not easily replicated. DEL generates sustainable cash flow, and has pricing power. Interest rate is low. Forex in their favor. On this basis, value per share can be derived from enterprise value directly, not equity value, with confidence that debt will be repaid. Using the 7x EV/EBITDA assumption, each share is worth 35 cents. At 9x EV/EBITDA, it is about 45 cents.

This one has been on my radar screen for quite awhile, precisely because it is a great brand that should have pricing power. However, unless they dramatically grow sales or margins, all the cash flow gets swallowed up by interest and will not make much of a dent in the debt burden. At some point the debt will have to be refinanced (and in a rising interest rate environment, that gets more difficult) or amortization payments have to be made.....In my opinion, we need to see a major improvement in cash flow or some of the debt needs to be retired with equity before this share becomes a buy.

[d.o.g.]

value per share can be derived from enterprise value directly, not equity value, with confidence that debt will be repaid. Using the 7x EV/EBITDA assumption, each share is worth 35 cents. At 9x EV/EBITDA, it is about 45 cents.

I do not understand how the above valuations are derived.

Based on pre-deal EBITDA of US$225m, 7x EV/EBITDA would give EV of US$1.58bn. However, there is net debt of US$1.86bn, yielding an equity value of negative US$284m, or minus S$0.20 per share.

Using 9x EV/EBITDA, the EV would be US$2.025bn. Subtracting net debt of US$1.86bn we get equity value of US$165m, or S$0.116 per share.

Remember that when you buy the shares you also get the debt. The only time the equity value of the shares is the same as the enterprise value is when net debt is zero i.e. no debt and no cash. Until the debt is actually repaid, you HAVE to take it into account.

[greengiraffe]

I have been a wrong term holder in Del Monte since its listing back long long time ago.

I like their Pineapples.

Unfortunately, I was very confused over their LBO. Personally, I m not surprise of the Sh**-hole they are in.

I do not think that Del Monte is worth spending much time on.

Odd Lots Vested
GG

[CityFarmer]

The very first share-buy-back from the company, after the LBO. Total 225,600 share @S$0.2941 weeks ago.

(not vested)

http://infopub.sgx.com/Apps?A=COW_CorpAn...3dc5e96b8e

[white collar]

value per share can be derived from enterprise value directly, not equity value, with confidence that debt will be repaid. Using the 7x EV/EBITDA assumption, each share is worth 35 cents. At 9x EV/EBITDA, it is about 45 cents.

I do not understand how the above valuations are derived.

Based on pre-deal EBITDA of US$225m, 7x EV/EBITDA would give EV of US$1.58bn. However, there is net debt of US$1.86bn, yielding an equity value of negative US$284m, or minus S$0.20 per share.

Using 9x EV/EBITDA, the EV would be US$2.025bn. Subtracting net debt of US$1.86bn we get equity value of US$165m, or S$0.116 per share.

Remember that when you buy the shares you also get the debt. The only time the equity value of the shares is the same as the enterprise value is when net debt is zero i.e. no debt and no cash. Until the debt is actually repaid, you HAVE to take it into account.

I am quite enjoying this discussion so i am going to continue giving this a go 

Thank you d.o.g. 

I agree that your approach is correct and very sound. But we are just looking at it from two different approaches. I am valuing it in similar form to the P/E approach where I am looking it from an entire firm value standpoint rather than from just the pure equity holders'. This essentially is one of the key weaknesses of P/E ratio but yet it is a common metric used for valuation. The big assumption taken here of course is that the company will continue as a going concern and is able to repay its debt overtime, granted this is the main concern for all buddies here.

[CY09]

Hi White collar,

if you are intending to value it on a P/E approach, you should not be using EV/EBITDA. Instead the metric for P/E approach is baed on net profit and not EBITDA. Given that the enlarged Del Monte Pacific business is loss making, dosent it mean P/E valuation will be negative?

Furthermore, looking at the first year operation of the enlarged Del Monte, the business reported a loss of 43.2 Mil after accounting a financial expense of 99M. This means the interest due to debt is already killing Del Monte's profitability. On a cash flow analysis basis, to start repaying its debts, Del Monte has to stop purchasing PPE (be it maintenance or expansion CAPEX) and acquisition of any subsidiary. This is because in the latest full FY, the business is only capable of generating about 85 Million of operating cash flow before working capital changes, while the interest it has to pay is already 88 Million. Unless Del Monte can re negotiate for a lower interest, it is going to take at least 20 years to pay down even half of its USD 1.685 Billion debt.

On analysis from its latest AR, Del Monte is drawing down on two big term loans which amounts to US 970 million. Both are due to mature in 2021 with interest of 4.25% (floating rate) and 8.25% (fixed rate) respectively. Del Monte will have to generate sufficient capital to repay it in 2021. This means generating USD $150 million consistently over the next 6 years. As of now, the company has not been able to and it is likely we will see cash raising by 2021.