SMC’s brilliant transformation

Manila Times.net

BY TONY LOPEZ



ONE of the most amazing business stories of the first decade of the 21st century is the massive and brilliant transformation of San Miguel Corp.

From a sluggish company with 95 percent of the beer market, San Miguel, founded in 1890, has become a vast conglomerate that is the largest, most diversified, and the most profitable and with stakes in eight new businesses in a big way (power
distribution, oil, power generation, infrastructure, telecom, banking, coal, and mining) on top of four core businesses it had in the past century—beer and beverages, packaging, and property.

In 2000, a year after the FEU-trained engineer Ramon S. Ang took over active management, as vice chairman, San Miguel had sales of just P82.3 billion and income from operations of P7.92 billion. In 2001, sales had leapt 48 percent to P121.58 billion, and income from operations had ballooned 32 percent to P10.48 billion. Ang became concurrent vice chairman, president and chief operating officer in 2002.

In 2009, SMC had sales of P174.2 billion and income from continuing operations of P60.62 billion. Sales nudged up a paltry 3.7 percent from P168 billion in 2008. However, 2009 operating profits exploded by 311 percent or more than four times from P14.67 billion in 2008.

In 2010, San Miguel is expected to chalk up revenues of P232 billion, 33 percent higher than 2009’s P174.2 billion. Operating profits would amount to P30 billion, down 50 percent.

In 2011, expect San Miguel to book the full results of its massive diversification. Revenues would more than double to P500 billion. That’s $11.36 billion at current peso-dollar rate.

Operating profits would be about P60 billion. But profits from companies in which SMC has a significant but not a controlling interest could reach P30 billion to bring total yearly profits to nearly P90 billion.

With revenues of P500 billion and profits of P90 billion, San Miguel would be the largest company in the Philippines, bar none—in both sales and net income.

Ang would have increased SMC revenues six-fold, from P82 billion in 2000 to P500 billion by 2011, and profits more than 11 times, from P7.9 billion in 2000 to P90 billion. By 2011, San Miguel would have owned 90 percent of Petron Corp., the country’s largest oil refining and marketing company, and thus would have reflected its sales of some P260 billion a year. The same year, SMC would also consolidate the revenues from its power plants.

From its three main revenue sources alone—the original four core businesses, Petron and power—SMC will be generating $10 billion to $11 billion annually in sales and $2 billion in operating profits.

Add to that the revenues from other businesses—telco, copper and gold mining, coal, tollways, airports (Clark and Boracay), and mass transit (MRT) and you have a conglomerate whose size and scale cannot be matched by any other group in the country today. If San Miguel can parlay that economy of scale, it will be a very profitable and powerful corporate machine.

Now wonder, since early October, San Miguel’s share price has risen steadily and without letup to reach a record high of P151 yesterday.

At P90-billion annual profits and 2.3-billion shares outstanding, San Miguel is selling at less than three times earnings per share. Assuming 10 times EPS, San Miguel should be worth P380 per share, 2.5 times its current market price. (Note: I don’t own San Miguel stocks).

Ang, vice chairman and president of San Miguel, has captured nearly everything he has set his sight on—90 percent of Petron, the largest petroleum refining and marketing company which has 38 percent of the market; 73 percent of Luzon’s power generating capacity—7,300 megawatts out of 10,000 MW; 37 percent of Meralco, Luzon’s electricity distribution monopoly; management of the country’s two premier new airports—Clark (DMIA) and Caticlan (Boracay); two major expressways linking Manila to eastern northern Luzon and a major mass transit railway line, plus becoming the fourth major wireless telco operator.

Abroad, Ang makes frequent trips by private jet in search of business partners, new projects and businesses, including oil and gas fields, coal mines and other mining properties, in places like Sudan, Iraq, Kazakhstan, Ukraine, Cambodia, China and Russia.

Now that the United States has discovered vast reserves of natural gas, expect San Miguel to join the bidding to develop those energy assets.

“SMC will go where there are opportunities without having to play politics,” he told me in an interview last November. Return on equity from oil and gas fields, he estimates, “can be as high as 50 percent per year.
They are dirt cheap.”

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