Del Monte Pacific Ltd: A turn around story?

Turn around seen from 3Q06. Del Monte Pacific Limited (DELM) reported
its 1Q07 results recently with topline growth of 2.4% YoY to US$47.9m but net
profit sky rocketed 50.1% YoY to S$5.1m, primarily due to better manufacturing
cost controls and stronger selling prices. 1Q07 net margins improved to 10.6%,
up from 7.3% in 1Q06. This was a continuation of the strong turn around in
2H06 when turnover grew 19% YoY to US$142.8m and net profit grew 66%
YoY to US$14m as compared to a 31% YoY fall in net profit in 1H06 to US$7.1m.
Test of effective execution. In FY06, 50% and 70% of its revenue and net
profit respectively came from the Philippines and we continue to expect this
market to be its main contributor. However, newly negotiated long term contracts
in EU and US are currently being executed and it remains to be seen if various
cost control measures and yearly price increases by DELM will yield better
margins from these two markets. In China, DELM is starting to market apple
related products and is scaling up to increase market share domestically.
Metal prices and weather hazards. DELM's biggest contributor, pineapple
processed products in tin cans, may come under margin pressure as tin prices
have escalated, rising by 51% since 3Q06. It remains to be seen what the net
effect of passing tin costs on to customers, better operational efficiency and
better long term contracts will yield for DELM. As with all crop related
businesses, unpredictable weather hazards can also pose a problem.
Key initiatives. Management's dual initiatives in FY06 for cost reduction and
volume generation has yielded good fruits and we expect better operational
efficiencies in FY07. We are also hopeful that new alternatives to tin cans like
PET and Tetra packs will mitigate the rise in tin costs.
Growth strategies. DELM will capitalise on its newly negotiated contract terms
to be able to bypass current distributors to privately market its products. It will
also be focusing on growing and shipping its premium "Gold pineapples" to
obtain better selling prices. We do not have a rating for DELM.