FREE Stock in Focus: FB (17 Sept 2018) by RCBC Securities

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Summary of Broker’s Recommendation
RCBC Securities BUY 165.80 17 Sept 2018


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Stock Rankings: All Stocks

Our Partner Broker’s Recommendation

In terms of FB’s Target Price, we set a tentative Target Price at PHP 165.80 based on our estimated 12-month forward Earnings per Share (EPS) of PHP 5.93. From entry at FB’s follow-on offering (FOO), the total potential return is at 18.4% while composite return is 20.0%, given forecasted 2019 dividend yield of 1.5%.

At FB’s initial FOO price of PHP 140.00, we estimate Price-Earnings (PE) ratio at 25.2x, below URC’s PE of 31.3x, even though FB had better results vs URC and is forecasted to deliver triple our forecasted net income for URC.

On this basis, we believe that FB’s indicative FOO price of PHP 140 is justifiable; hence, we recommend to SUBSCRIBE even at the indicative FOO price.

Although we acknowledge that FB’s current market price is lower than the FOO price and that investors wanting exposure in the counter would be better off buying on the board, this may not be practical for big institutional investors, notably passive funds, considering the current limited liquidity.


Our Partner Broker’s Detailed Analysis

San Miguel Food & Beverage to conduct follow-on offering (FOO)

On June 29, 2018, San Miguel Pure Foods Co., Inc. acquired San Miguel Corp.’s (SMC) full stake in its beverage businesses, i.e., San Miguel Brewery, Inc. (SMB) and Ginebra San Miguel, Inc. (GSMI), paying 71.8% stake of its shares to SMC. Subsequently, San Miguel Pure Foods merged these companies into itself, renamed to San Miguel Food and Beverage, Inc. (FB), and created what is now the biggest listed Philippine food and beverage company.

The payment of shares to SMC reduced FB’s public float to 4.12%, falling below the PSE’s allowable floor of 10%. To increase its public float, FB filed for a follow-on offering (FOO) with the SEC involving the sale of 1.02 billion secondary common shares indicatively priced at PHP 140.00 per share, implying a deal size of PHP 142.8 billion.

The merger would likely result in an F&B company unrivalled in terms of absolute revenues, profits, market capitalization, and free-float market capitalization. The latter would likely result in high liquidity and would make it a shoo-in for inclusion as a component in major benchmark indices such as the PSEi and the MSCI, making it a must-buy among passive investors.


Beer and food as SMFBI’s growth pillars

San Miguel Food and Beverage, Inc. (FB) reported 1H 2018 net income of PHP 9.3 billion, up 17% year-on-year (yoy), on robust sales growth of 15% to PHP 137 billion, fuelled by an 18% growth in beer sales to PHP 62.5 billion on 10% volume growth and price increases as well as a 12% increase in food sales to PHP 63 billion on strong volume growth from feeds (+15%), fresh meats (+8%), and branded food (+13%).

EBIT rose 20% to PHP 22.9 billion as operating expenses rose only 10%, while price increases and efficiencies in distillery costs offset higher input costs and excise taxes. EBIT margin widened to 16.7% from the year-ago’s 16.0%.

The 1H results sustained FB’s robust sales and net income CAGR of 11% and 26%, respectively, from 2015 to 2017. FB attributes its growth to its strategy of i) leveraging its powerful brands to capture value in attractive product categories, ii) widening its multi-channel distribution network, and iii) locating production facilities near customers and raw material sources.

Based on the results, FB’s 2018 net income could hit PHP 32 billion, 20% higher, given that 55% of FB’s FY net income typically comes in the 2nd Half of the year, based on the seasonal pattern.


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RCBC Securities
RCBC Securities

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