As one of Asia’s fastest-growing economies with the possibility that the country could exceed 6% to 7% gross domestic product (GDP) growth this year, investing in stock equities in the Philippines seem to be yet another emerging opportunity.
With this in mind, reviewing a large consumer-oriented company with leading market shares in different local food industries may bear fruit.
On Nov. 11, the Philippines’ largest food company – San Miguel Pure Foods (PHS:PF) – delivered its third quarter fiscal 2016 report. San Miguel Pure Foods delivered 5.2% sales growth to 80.6 billion pesos ($1.61 billion) and an outstanding 28.6% profit growth to 3.75 billion pesos.
As a result, San Miguel Pure Foods’ shares closed flat even after trading with five times the volume compared to the prior trading day while the broader Philippine index, represented in this case by the iShares MSCI Philippines ETF (ARCA:EPHE), closed -2.89%.
Valuations and share price performance
The 38.9 billion pesos food company had a trailing price-earnings (P/E) ratio of 8.7 times (1). The company also had a price-book (P/B) ratio of 0.98. San Miguel Pure Foods also had an annual dividend yield of 2.44%. The iShares MSCI Philippines ETF, meanwhile, had a P/E ratio of 19.3 times.
Despite having a cheap earnings multiple, San Miguel Pure Foods actually outperformed the broader Philippine ETF with 79.69% versus -1.55% year to date.
(Press Release)
San Miguel Pure Foods
San Miguel Pure Foods is a Philippine food company with market-leading positions in many key food products and services (2). The company was incorporated in 1956.
The 38.5 billion-peso company was primarily engaged in business of manufacturing and marketing of processed meat products and later on diversified into other related business operations. These business operations are poultry and livestock operations, feeds and flour milling, dairy and coffee operations, franchising and young animal ration manufacturing and distribution.
In its filing, San Miguel Pure Foods has some of the most recognizable brands in the Philippine food industry, including Magnolia for chicken, ice cream and dairy products, Monterey for fresh and marinated meats, Pure Foods for refrigerated processed meats and canned meats, Star and Dari Crème for margarine, San Mig Coffee for coffee, B-Meg for animal feeds and La Pacita for biscuit and flour-based snacks beginning February 2015.
San Miguel Pure Foods operates its business through several subsidiaries. Some of which are highlighted below (3):
San Miguel Foods Inc.: 99.99%-owned subsidiary. Operates the integrated Feeds, and Poultry and Fresh Meats businesses, the Franchising business, the San Miguel Integrated Sales selling and distribution activities and the Great Food Solutions foodservice business.
San Miguel Pure Foods’ Fresh Meats business is considered the holder of the largest market share in the Philippine hogs industry among the large commercial farms and is regarded as a major player in the highly fragmented domestic pork and beef markets.
San Miguel Mills Inc.: 100%-owned subsidiary. Engages in the manufacture and distribution of flour, flour mixes and bakery ingredients.
San Miguel Mills’ flour business is believed to be the largest producer, seller and distributor of flour in the Philippines. The flour business has the largest market share in the industry and competes on the basis of price, quality, customer service and distribution reach.
Purefoods-Hormel Co. Inc.: 60%-40% joint venture between the San Miguel Pure Foods and Hormel Netherlands B.V., which produces and markets value-added refrigerated processed meats and canned meat products.
Magnolia Inc. is a 100%-owned subsidiary of San Miguel Pure Foods and manufactures and markets butter, margarine, cheese, milk, ice cream, jelly snacks, cooking oils, salad aids, biscuits and powder mixes.
As of 2015, Magnolia trailed Mondelez Philippines in leading market share in the Philippine cheese category. Meanwhile, Magnolia trailed Nestle Philippines in the milk category and Magnolia was the third largest player in the ice cream category.
San Miguel Pure Foods has three business segments: Agro-Industrial, Value-Added Meats and Milling (4).
(San Miguel Pure Foods Sales, 17-Q and 17-A filings)
Agro-Industrial
The Agro-Industrial segment includes the integrated Feeds and Poultry and Fresh Meats operations. These businesses are involved in feeds production and in poultry and livestock farming, processing and selling of poultry and meat products.
In fiscal 2015, the segment contributed the most (67.9% or 72.6 billion pesos) in total San Miguel Pure Foods sales while growing 4.2%. Agro-Industrial had a profit margin of 2.5%. Nine months into fiscal 2016, Agro-Industrial grew 6.8% year on year while delivering a 3.4% profit margin.
Value-Added Meats
The Value-Added Meats segment is engaged in the processing and marketing of value-added refrigerated processed meats and canned meat products.
In fiscal 2015, Value-Added Meats contributed 15.2%, or 16.3 billion pesos in total San Miguel Pure Foods sales, while growing 7.9%. The segment had a profit margin of 5.3%. Nine months into fiscal 2016, Value-Added Meats grew 7.3% year on year while delivering 4.6% profit margin.
Milling segments
The Milling segment is into manufacturing and marketing of flour, flour mixes and bakery ingredients and is engaged in grain terminal handling.
In fiscal 2015, the segment contributed 9.6%, or 10.3 billion pesos in total San Miguel Pure Foods sales while growing 3.4% in the period. The segment also had a profit margin of 14.6% – San Miguel Pure Foods’ most profitable segment. Nine months into fiscal 2016, Value-Added Meats lost 4.4% year on year while delivering a 14.2% profit margin.
Dairy and others
San Miguel Pure Foods considers this segment its nonreportable segment. Nonetheless, the dairy and others segment contributed 10.4%, or 11.1 billion pesos, in total sales in 2015. The segment also delivered a 5.2% profit margin.
Three quarters into fiscal 2016, dairy and others (nonreportable segment) lost 0.3% and delivered 24.8%.
Overall, San Miguel Pure Foods had three-year sales and profit growth averages of 3.7% and 4.5%.
Cash, debt and book value
As of Sept. 30, San Miguel Pure Foods had 6.79 billion pesos in cash and $4.67 billion pesos in debt (1) representing a debt-equity ratio of 0.12. The company also had 6.57% of its 63.5 billion pesos total assets in goodwill while having a book value of 39.6 billion pesos, compared to 37.3 billion pesos in December 2015.
Cash flow
(17-Q)
San Miguel Pure Foods had a 33.9% loss in its cash flow from operations during the recent nine months compared to last year. As observed, the company had marked cash outflow brought by increases in inventories, biological assets and income taxes paid (5).
The 3.8 billion pesos in capital expenditures were more than the company’s cash flow for the period, therefore providing San Miguel Pure Foods with negative 440 million free cash flow, compared to 4 billion it had in the same time period last year. The consumer goods company, nonetheless, provided 1.5 billion in dividends. The company also had a debt cash flow intake of 1 billion pesos in the period.
On average, San Miguel Pure Foods had allocated 91.5% of its free cash flow in dividends in the past three fiscal years.
Conclusion
Economically, the local authority claimed that government spending would not be affected by the recent Fed hike.
“The domestic economy remains strong and is resilient enough to ride out the initial impact of such an external shock as the Fed hike, more so with its commitment to go full steam ahead on its aggressive infrastructure program that will be a major growth driver on the Duterte (Philippine administration) watch.” – Finance Secretary Carlos G. Dominguez III
Further, the International Monetary Fund identified both the Philippines and Thailand as best placed to withstand further foreign capital outflow given the aforementioned countries’ billion-dollar cash hoards.
(San Miguel Pure Foods share price in one-year time frame, Financial Times)
Meanwhile, San Miguel Pure Foods has been overly resilient in contrast to the broader local market as it outperformed several times year to date.
(San Miguel Pure Foods share price in five-year time frame, Financial Times)
In a five-year time-frame, however, San Miguel Pure Foods seemed to have failed its previous investors. A share price collapse occurred in late 2012, which may or may not have caused losses (substantial) to the company’s previous shareholders.
In late 2012, San Miguel Pure Foods needed to raise its outstanding share count to abide with a capital market reform in the local stock exchange. The company ended up raising its shares outstanding while having to set at a low share price range of 240 to 300 pesos a share, compared to its previous market price of 680 pesos a share.
Zooming into San Miguel Pure Foods’ recent business operations, it appeared that the company had a steady growing business after all. Recent nine-month operations have been impressive.
In review, the local food giant delivered a marked growth in its largest business operations, Agro-Industrial.
The sales growth, as described earlier, was in range of historical performance, but profit grew to 1.9 billion pesos, from 940.8 million pesos, or 101% for its recent nine-month fiscal 2016 operations. As observed, San Miguel Pure Foods recorded fewer expenses related to interest and financing charges, mainly due to its full payment in matured corporate notes back in fiscal 2015.
San Miguel Pure Foods also carried a conservative and healthy balance sheet while unfavorably demonstrating poor cash flow growth in the recent period. Meanwhile, given the company’s bountiful cash, the company can just eliminate its debts and be debt-free moving forward.
Using a conservative valuation, Graham multiplier, and asking a 20% margin from the derived value would provide a valuation of 280 pesos per share.
In summary, San Miguel Pure Foods is a buy, despite its recent year-to-date runup, with a possible 22.5% upside.
Notes
(1) Financial Times data.
(2) Information here moving forward was gathered from San Miguel Pure Foods’ filings, press releases and presentations.
(3) Other San Miguel Pure Foods subsidiaries: PT San Miguel Pure Foods Indonesia – 75% owned. Organized in 1995 for the manufacture and distribution of processed meats in Indonesia.
San Miguel Super Coffeemix Co. Inc. – 70% owned.
San Miguel Pure Foods International, Limited and RealSnacks Mfg. Corp. – 100%-owned subsidiary.
(4) San Miguel Pure Foods’ nonreportable operating segments include dairy-based products, breadfill, desserts, cooking oils, biscuits (beginning February 2015) and powder mixes (beginning October 2015), importation and marketing of coffee and coffee-related products, and foreign operations which include hog farming, feeds production and sale of fresh and processed meats by foreign subsidiaries.
(5) San Miguel Pure Foods’ biological assets are accounts that consisted of current and noncurrent stocks. Current stocks were growing stocks and goods in process, while noncurrent stocks are breeding stocks. Further, growing stocks pertain to growing broilers, hogs and cattle, and goods in process pertain to hatching eggs.
Disclosure: I do not have shares in San Miguel Pure Foods.
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About the author:
Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Value seeker. Long only. Global investing. Long-term investing.