Correction overdone. Del Monte Pacific’s (DMPL) share price has corrected sharply by 25% in the past two months after the company announced a USD1.675b deal to acquire the consumer business of Del Monte Foods (DMF). We believe the slide can be attributed to the overhang of impending equity-raising exercises. Fresh financing details disclosed suggest that share dilution may be steeper than earlier expected. Even so, the correction is overdone in our view, considering the deal is still earnings accretive.

Deal expected to close by 1Q14. We understand that the transaction is progressing well and an EGM is expected to be held next month. This means the accounts would be consolidated from 2Q14 onwards. We expect financing to be carried out in two stages, with the second stage occurring 3-6 months after the purchase transaction closes.

More concrete financing details. The positive news is the lower-thanexpected debt cost, with the major syndicated loan portion now upsized to USD970m on strong subscription (from USD930m). This is a testament to the level of confidence in DMF’s consumer business, a market leader in the US. The negative news is there will now likely be a rights issue in the second stage of the transaction, representing some dilution to earnings.

4Q13 may see higher one-off expenses. Management is guiding for higher transaction-related expenses, and we factor this into our forecasts. On the business front, we are lowering our FY13E-14E earnings estimates by 2% to account for slightly lower-than-expected domestic sales growth, though we believe it would still be healthy at 11- 12% YoY. Following the transaction, dividend payout may also slide to the minimum of 33% (from 75% historically).

Buy into weakness. Overall, we view the deal positively and expect meaningful earnings accretion to ensue. With the new developments, we lower our TP to SGD1.00, pegged at 12.5x FY15E post-deal EPS, a 20% discount to its global peers on account of higher gearing and execution risk. DMPL’s share price is likely to be more constructive after the successful conclusion of the transaction

Source: Maybank Kim Eng Research - 9 Jan 2014