Worried about Food Inflation? Buy This Consumer Staple Stock

July 13, 2022

There has been concern on food prices as seen by the food inflation globally.

In the US, food price inflation reached 10.1% in May while the Eurozone also saw food prices increased by 8.9% during the same period.

Singapore, which imported 90% of its food supply from other countries, is even more vulnerable to global food inflation which is expected to get worse given the ongoing Russia-Ukraine war.

If you’re looking to hedge against this risk, here is one stock that can benefit from food inflation: Del Monte Pacific Limited (SGX: D03). The company is involved in the production and marketing of packaged vegetables and fruits, beverage and culinary products.

Strong earnings growth in FY2022

In FY2022, Del Monte Pacific’s sales increased by 8% to US$2.3 billion on better performance in the US, as well as its S&W fresh and packaged products.

The company’s US subsidiary, Del Monte Foods Inc (DMFI) generated 12% higher sales to US$1.7 billion and achieved a record market share growth in the core vegetable and fruit categories.

DMFI has successfully expanded into new categories of beverage and frozen food, and accelerated growth in key sales channels of dollar stores, convenience stores, e-commerce and food service.

In line with the higher sales, Del Monte Pacific’s gross profit rose 12% to US$622.7 million while gross margin increased by 90 basis points to 26.6% on favourable sales mix from improved sales of higher-margin retail branded products and selective price adjustments made to counter inflation.

Net profit jumped by 58% to US$100 million in FY2022.

Source: Del Monte Pacific’s 4Q FY2022 Earnings Presentation

Strong US demand likely to continue as households shift towards home-dining options

Del Monte Pacific’s largest markets are the US, Canada and Mexico (Americas region) which contributes about 71% of the company’s revenue.

Source: Del Monte Pacific’s 4Q FY2022 Earnings Presentation

As seen in FY2022, demand in US for canned food products remains strong. Canned vegetables and fruits are some of the key products of Del Monte Pacific.

With a broad range of products that suit consumer preference by focusing on value and wellness, demand should remain robust even as households look for value and quality home meals, replacing their spending on restaurants as food inflation persists.

The long shelf-products will allow consumers to prepare healthy meals at home.

Source: Del Monte Pacific’s 4Q FY2022 Earnings Presentation

Attractive valuation and dividend yield

Another positive takeaway for investors is the attractive valuation of Del Monte Pacific.

With a forward dividend yield of 6.2% and price-earning ratio of only around 7 times, investors should take a second glance at this small cap stock.

The company has a dividend policy of 33% payout and has consistently rewarded its shareholders.

Source: Yahoo Finance, ProsperUs

Positive earnings outlook following successful refinancing of its preference shares and debt

Del Monte Pacific has redeemed US$200 million of its DMPA1 Preference Shares in April 2022, which had a dividend rate of 6.625% per annum.

This was refinanced by a combination of fixed rate Senior Notes at 3.75% per annum and floating rate loans with a much lower current average rate of 3.8% per annum.

In May 2022, the Group also raised US$600 million through a 7-year Term Loan B facility at adjusted Secured Overnight Financing Rate (SOFR), with a floor of 0.5% plus 4.25% per annum, to primarily redeem the US$500 million Senior Secured Notes, which had an interest rate of 11.875% per annum.

The much lower interest rate will result in US$20 to US$30 million interest savings per year going forward but a one-off transaction costs of US$70 million will be booked in FY2023.

Invest in companies that benefit from food inflation

As food inflation is expected to rage on, I believe investors need to protect their portfolio by buying into companies that will benefit from this current macroenvironment.

Given Del Monte’s track record, its established brand in the US and its position as a value-and-wellness products, I believe investing in the company will protect investors from the persistent inflationary environment.

The earnings recovery in Asia will also gradually boost earnings in the longer-term.

During the FY2022 earnings presentation, the management has guided that net profit is expected to improve in FY2023 before taking into account of the one-off US$70 million refinancing expense.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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