By: Doris C. Dumlao
Philippine Daily InquirerThe 120-year-old San Miguel Corp. is starting to reap the fruits of its diversification into a conglomerate that no longer relies on its steady but maturing traditional businesses of food and beverage production, analysts said.
SMC, which is holding its annual stockholders’ meeting Tuesday, is now getting more coverage from foreign equity researchers for the first time since its entry into new businesses—power, oil refining, infrastructure, mining, banking and telecommunications—three years ago. Its shares have become more actively traded at the local stock exchange compared with the last two years when many investors were uncertain about its corporate strategy.
With its transformation, Goldman Sachs said in a May 31 report that SMC was now “well-placed” to benefit from the strong growth of its new businesses, citing its strong position in oil refining, power generation and electricity distribution (with its stake in Meralco).
“We believe SMC’s transformation is yet to be fully completed (oil refinery upgrade to be fully completed in end-2013 and material infrastructure contribution starts only in 2016), and see more potential upside from current levels,” Goldman Sachs added.
In a separate report dated June 1, Credit Suisse said SMC’s expansion was “paying off” and would likely provide the conglomerate with a compounded annual increase in cash flow of 35 percent, outperforming the comparative market average of about 14 percent.
“Its traditional businesses consist of iconic, market-leading food and beverage brands that have weathered competition and volatile economic cycles for decades,” Credit Suisse said. It noted that the conglomerate had used its stable cash flow from these traditional businesses to take advantage of rare privatization opportunities over the past three years to invest in strategic companies in the energy, power-generation and infrastructure sectors.
Both Goldman Sachs and Credit Suisse have just started their coverage on SMC. Both houses had also taken part as arrangers of a recent public offering of secondary shares that widened SMC’s public float to 14 percent, making it compliant with the listing requirement of the Philippine Stock Exchange.
Goldman Sachs initiated its coverage with a “buy” recommendation and a 12-month target price of P125 compared with Monday’s closing price of P116.50 per share.
“We believe SMC offers a unique Philippines asset mix—leveraged to high-growth industries such as oil refining/power and backed by a stable food and beverage business—post a three-year transformation from a pure F&B company to a conglomerate,” Goldman Sachs said.
The catalysts for its rating, the investment bank said, were SMC’s strong quarterly results, more clarity on corporate strategy over the next 12 months, new project wins in its high-growth businesses such as power and infrastructure over the medium term and potential de-leveraging of the balance sheet.
The key risks in this recommendation, however, would be changes in alcohol tax system, rise in raw material prices/cost inflation, lower-than-expected power demand and weak refining margins.
Credit Suisse’s target price for SMC was at P135. It said SMC was currently trading at 14.3x its expected earnings per share (EPS) for 2011, at par with market valuations, notwithstanding better-than-expected EPS growth of 31 percent for 2011 and 36 percent for 2012.
“Note that SMC is among the top-five Philippine stocks by market cap but currently has zero weighting in the Philippine MSCI index. This should change going forward, as both free float and share liquidity have significantly improved after the 5 May fund raising,” Credit Suisse said.
SMC had sold interests in Coca-Cola Bottlers Philippines, Del Monte Pacific and Nihon Yamamura Glass and reinvested the cash into new industries. By end-2010 and into this year, Goldman Sachs said its earnings profile has thus shifted significantly toward these new businesses.
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