Back to the future

11 Jan 2018



By Raymond Nicky Franco

SAN Miguel Corp. (SMC) is one of the biggest conglomerates in the country by revenue and profits. However, we (at MyTrade/Abacus) don’t have active coverage on the company and, until quite recently, neither did anybody else. Maybe the breadth of its operations makes valuation such a daunting task or that concerns about high leverage have kept investors wary. This is unfortunate because back in the 1990s, analysts would delve into the firm’s quarterly results to get a read on the Philippine economy. In particular, there was a time when SMC’s domestic beer sales performed nearly lock step with gross domestic product (GDP). These days, most equity fund managers are underweight on the stock and, indeed, on the group as a whole.

A resurgence of interest, however, may be just around the corner. Last November, management announced the consolidation of its beer and liquor holdings into Pure Foods (PF) which will then be renamed San Miguel Food and Beverage (SMFB). The transaction was reported to be worth P336 billion which then implies that the merged entity has a valuation of P468 billion.

Using this figure, SMC Chairman Ramon S. Ang (RSA) said SMFB will conduct a follow on offering (FOO) as soon as next month for as much as 30% of the enlarged capital or up to $3.0 billion worth of shares. Investors appear to have taken the FOO news with a few grains of salt. The share price of soon to be renamed Pure Foods has been stuck near P500 which is far below the indicated valuation of nearly P800 per share.

Combining the country’s dominant beer company with the largest processed meat producer and the second-ranked liquor maker is like “going back to the future” for RSA. He is, in effect, reviving the San Miguel of old when it was purely a food company.

Although the new entity will be carved out from the present conglomerate, it would still be a behemoth. Most metrics (sales, operating income, profits, etc.) will show that SMFB will be bigger than Universal Robina Corp. (URC).

On attributable net income alone, we project that it will be around P18 billion for the former while consensus estimates are at P11 billion for the latter.

Another distinction for SMFB, especially since it makes for stark contrast with URC, is that it will not be impacted by the sugar sweetened beverage (SSB) tax included in RA 10963 (TRAIN). In fact, there may be a brief surge in sales for SMFB as those getting tax cuts may splurge on some discretionary items like beer, liquor and meats.

A small float and an even more negligible level of liquidity have kept Pure Foods out of most fund managers’ radars. A bulked up SMFB with a promised float of 30% is likely to command the attention and portfolio allocations that a company of its size should have. Moreover, SMFB would easily rank among the 20 biggest listed companies by market capitalization and would likely be added to the PSE index in due time (maybe as soon as March 2019).

By far, however, the biggest selling point for the stock and RSA’s planned FOO is this: Pure Foods is a better economic bellwether than some of the more popular listed firms. We recently updated our list of stocks that have revenues and profits that are highly correlated to GDP growth. To be included in this list, a company must have a market cap of at least P30 billion, revenue and profit correlation with GDP greater than 0.5 and at least 30 quarters of data available.

The results of our screen show that only nine companies are in the top 20 in terms of revenue and profit correlation to the country’s economic growth.

Based on this analysis, the four firms that appear to be most attuned to GDP should come as no surprise. These are Ayala Land (ALI), Jollibee (JFC), SM Investments (SM), and Ayala Corp. (AC). An equal-weighted portfolio consisting only of these four stocks would have had a cumulative return of 202% in the past 7 years, 105% in the last 5 years and 45% in the last 3 years. These returns compare quite favorably to the PSE Index’s performance during the same time frames (104%, 47%, and 18%) and would have given investors excess returns over the benchmark of 98%, 58%, and 26%, respectively.

Amazingly, the company that is next most correlated to the Philippine economy (still based only on revenues and income) is not SM Prime (the largest mall developer) or BDO Unibank (number one bank by most measures) or Meralco (biggest electricity distributor) or PLDT (most profitable telco). Rather, it is Pure Foods. The stock’s cumulative returns over the past 7, 5, and 3 years were spiked by news of the planned business combination but would have been less than stellar without it. This is probably due to the stock’s lack of liquidity which will be greatly enhanced by its upcoming FOO. And with beer and liquor being folded in, we believe the merged entity’s correlation with the economy will remain or become even higher.

Those who read my missives regularly would know that I’m not positive on the SMC group. I have actually been critical of how the parent and its subsidiaries present quarterly earnings press releases. This time, however, we have to give RSA props.

Reviving the San Miguel of old through the proposed Purefoods-San Miguel-Ginebra merger is what one would call a game changer. Investors looking for another way to play the Philippines’ growth story should seriously look at SMFB.

Views and opinions expressed in this piece are those of the writer’s and do not reflect the policy or position of BusinessWorld. This piece is for information purposes only and should not be construed as a recommendation, an offer, or solicitation for the subscription, purchase, or sale of any of the security(ies) mentioned.

Raymond “Nicky” Franco is a Certified Public Accountant and received his Chartered Financial Analyst (CFA) designation in 2000. He is the Head of Research of Abacus Securities and the head of its online trading arm, MyTrade (