Del Monte Philippines holds firm ground — CreditSights

DEL MONTE Philippines, Inc. (DMPI) remains resilient as its subsidiary considers a US dollar senior perpetual capital securities offering, according to financial research firm CreditSights.

A credit strength of DMPI is its resilience “amid inelastic demand for food,” CreditSights said in its analysis e-mailed to reporters on Monday. DMPI is the Philippine unit of Del Monte Pacific Ltd. (DMPL).

DMPI has a “strong market presence and an established household brand in the Philippines,” the report noted.

“DMPI operates in the food and beverage sector, which is generally more protected against economic downturns that could adversely affect the company’s revenue and profit, though short-term volatility cannot be ruled out due to temporary supply dislocations,” CreditSights said.

The issuer of the contemplated offering will be DMPI’s subsidiary Jubilant Year Investments Ltd.

CreditSights projected that the offering would yield 7.27%.

DMPL said on Feb. 18 that the possible issuance would be guaranteed by DMPI and Philippine Packing Management Service Corp.

The company added that Jubilant Year engaged UBS AG as the sole global coordinator, lead manager, and bookrunner to arrange a series of fixed income investor meetings and calls.

CreditSights said another credit strength for DMPI is its fully integrated operations, which allow for operational efficiencies and economies of scale.

“This allows DMPI to have more control over the production process and be relatively insulated from supply disruptions and unfavorable raw material costs,” it said.

“DMPI has fully integrated its pineapple processing operations in Mindanao, which includes 26,000 hectares of pineapple plantation; pineapple processing facility with production capacity of 700,000 tons of pineapples per annum; frozen fruit processing facility; not-from-concentrate juicing plant; and beverage bottling plant,” it added.

 The key credit risks faced by DMPI is its “precarious liquidity,” the report said.

“DMPI’s liquidity is very thin; unrestricted cash as of Oct. 31 stood at P1 billion, well below its short-term debt of P18.7 billion. The company’s cash to short-term debt ratio has consistently been below 0.1x in the last three years,” it noted.

The credit research company also said that DMPI’s cash outflows could worsen due to “high sticky dividend payouts.”

“DMPI intends to maintain an annual cash dividend payout of between 33% to 75% of the company’s consolidated net income, potentially exacerbating DMPI’s already strained free cash flows,” it said.

Another credit risk is DMPI’s “negative free cash flows amid high capital expenditure”, according to CreditSights.

“DMPI incurs sizable capex from the expansion, development, and maintenance of its plantations and production facilities. In addition, DMPI’s operational costs have been increasing in the past few years, further pressurizing its net operating cash flow,” it said.

CreditSights also mentioned the risk of natural calamities that could affect all or part of DMPI’s plantation.

“DMPI’s pineapple plantation and production facilities are all located in Mindanao, Philippines. A natural calamity such as a wildfire or hurricane could potentially wipe out a part or a substantial portion of its plantation,” it said. 

“While the group has operational insurance for such an event, it is unclear whether the payout will be sufficient to cover the potential damage and economic loss from an inability to operate business as normal,” it added.

On Monday, DMPL shares closed unchanged at P6.15 per share. — Revin Mikhael D. Ochave