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Analysis and Recommendation
New tax measures raise sales volume concerns
According to Finance Secretary Benjamin Diokno, the DOF is pushing for the implementation of a junk food and sweetened beverage tax which is expected to slash junk food consumption of Filipinos by 21%.
The new proposal seeks to impose a P10.00 tax per 100g of “pre-packaged food lacking nutritional value.” Additionally, it also aims to institute a uniform P12.00 excise tax on all beverage sweeteners which will be subject to an annual escalation or adjustment of 4%.
With the projected decline in consumption, we note that the tax measures would further increase costs for FMCG companies which would eat into their net profit margins. The natural price increases that would follow could also push demand away in the short to medium term.
Negative for URC and MONDE
As the two main players when it comes to the domestic snacks market, both Monde Nissin Corp. (MONDE) and Universal Robina Corp. (URC) automatically come to mind when considering the new tax measures.
Over the past three years, MONDE has paid out a higher effective tax rate when compared to URC. Assuming a continuation of this trend, we think that the increased taxes will likely impact the former’s net profits more than the latter. To add, the likely price increases that MONDE may have to implement into its products such as Lucky Me! may lead to some short-term losses in market share, as consumers may shift for the meantime to those value players who opted to absorb the added costs instead.
Over a longer timeframe, however, given the higher inflation base, we do not think that this would be sustainable for many of its competitors, and share is likely to swing back once more into MONDE’s favor.
For URC, while its products are better insulated given that they cater to a more premium market, we note that downtrading and reduced orders are still a risk, albeit much more tempered. Given the foreseen headwinds to profitability, we would advise a HOLD for now on both MONDE and URC as sentiment is likely to be negative for both companies, at least for the short-term.
Retailers and restaurants may also be affected
Retailers and restaurants are also likely to feel the weight of increased taxation impact. Both sectors will be forced to contend with higher prices and some spikes in input costs.
Among retailers, we note that Puregold Price Club Inc. (PGOLD) is likely to be more vulnerable than Robinsons Retail Holdings Inc. (RRHI) given its reluctance to fully pass on increased costs to consumers. For restaurants, while all names should feel some measure of pain from this, we take special note of Figaro Coffee Group Inc. (FCG) given that its business model relies primarily on offering value while keeping costs low. Similar to PGOLD, the company may experience difficulty in maintaining margins. We therefore also recommend a HOLD on both PGOLD and FCG.
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