Universal Robina Corp. - Credit Suisse
Transcript of Universal Robina Corp. - Credit Suisse
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CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
14 March 2013
Asia Pacific/Philippines
Equity Research
Beverage / Food Products
Universal Robina Corp.
(URC.PS / URC PM) INITIATION
Home sweet home
■ Initiating coverage on URC with an OUTPERFORM rating and a P130 target price, with 33% potential upside. The most exciting aspect of URC’s growth story has returned home to the Philippines where we expect domestic branded operations to generate 55% of top-line growth going
forward versus 31% previously.
■ Business model has evolved to match the consumption resurrection. Operationally and financially, URC is a superior company to what it was in the past. This should be evident not only in the accelerated earnings growth, but also in free cash flow growing 2x earnings and cash returned to shareholders potentially surprising to the upside – net cash is 4% of market cap. The risk-reward ratio has dramatically improved and it is one of the most appealing for
branded food companies in NJA.
■ Consensus estimates are too low. We believe that the market is underestimating the strength of the consumption resurgence in the Philippines and the impact it can have on demand growth for the low-ASP, high-velocity food products that form the core of URC’s product portfolio. Our 12% above-consensus estimates reflect three years of superior PCE
growth versus the region, market share gains by URC and widening margins.
■ Staples in the Philippines are cheap. The 17% premium to the overall market is the lowest among NJA, ASEAN, GEM, developed markets or the global average. With consumption resurgence, an improved earnings visibility, positive earnings revisions over the past six months and declining costs of capital, a further re-rating looks imminent, in our view. URC is the best story to leverage off this, and we expect the stock to re-rate to a conservative 40% premium to the overall market, implying a value of P130/share. This is supported by our DCF-based valuation of P138/share. Risks include macroeconomic, commodity and forex risks.
Share price performance
80
130
180
20
40
60
80
100
Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the
PHILIPPINE SE COMPOSITE INDEX which closed at 6776.56
on 13/03/13
On 13/03/13 the spot exchange rate was P40.59/US$1
Performance Over 1M 3M 12M Absolute (%) 8.3 23.7 63.5 Relative (%) 3.4 6.7 28.1
Financial and valuation metrics
Year 9/12A 9/13E 9/14E 9/15E Revenue (P mn) 71,201.7 83,877.3 94,712.2 106,288.8 EBITDA (P mn) 11,219.6 13,199.0 16,062.7 18,710.3 EBIT (P mn) 7,800.5 9,377.3 11,784.7 13,919.7 Net profit (P mn) 7,735.7 8,314.1 10,210.4 11,935.4 EPS (CS adj.) (P) 3.69 3.97 4.87 5.69 Change from previous EPS (%) n.a. Consensus EPS (P) n.a. 3.83 4.34 4.69 EPS growth (%) 64.2 7.5 22.8 16.9 P/E (x) 26.4 24.6 20.0 17.1 Dividend yield (%) 1.9 2.4 3.2 4.0 EV/EBITDA (x) 18.5 14.7 12.0 10.3 P/B (x) 4.4 4.1 3.8 3.6 ROE (%) 17.7 17.2 19.7 21.5 Net debt/equity (%) 13.4 net cash net cash net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating OUTPERFORM* Price (13 Mar 13, P) 97.50 Target price (P) 130.00¹ Upside/downside (%) 33.3 Mkt cap (P mn) 200,996 (US$ 4,952) Enterprise value (P mn) 194,049 Number of shares (mn) 2,061.50 Free float (%) 37.3 52-week price range 98.2 - 57.8 ADTO - 6M (US$ mn) 3.7
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Karim P. Salamatian, CFA
852 2101 7996
Rebecca Kwee
852 2101 7951
Research Assistant
Aldo Torres, CFA
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 2
Focus charts Figure 1: Once upon a time, the PH consumption story
was lacklustre against its peers… 2007 to 2011 annual private consumption exp. growth
Figure 2: …but times have changed and the frog has
turned into the prince 2011 to 2014f annual private consumption exp. growth
9.26
7.98
6.57
4.99
4.21 4.173.49
2.632.03
1.40
CH IND MY INDO HK SG PH KR TH TW
8.43
6.56
5.475.21
4.40
3.392.85 2.85
2.30
1.49
CH IND MY PH INDO TH KR HK TW SG
Avg. = 4.30
Source: National Statistics Offices Source: Credit Suisse estimates
Figure 3: Low ASP, high velocity food categories will
benefit first and show higher rates of growth…
Figure 4: …which is where URC has its biggest exposure
% of domestic branded consumer food sales
7%
4%
8%7%
15%
-7%
5% 5%
9%
5%
8% 8%
12%
7%6%
8%
2006-2012 CAGR
2012-2016E CAGR
Snacks 27%
Biscuits 9%
Confect.
13%RTD Tea
12%
Coffee 21%
Grocery
14%
Packaging 5%
BCFG PH FY13E Revenue: PHP 42.2bn
or 50% of total sales
Source: Euromonitor Source: Credit Suisse estimates *BCFG=Branded Consumer Food Group
Figure 5: Cannot find other staples that trade lower
relative to the market… Consumer staples 12M fwd P/E relative to the overall market
Figure 6: …and positive surprises at URC will lead to the
relative multiple widening to 1.4x or 27x Credit Suisse estimates vs. consensus
0.83
x
1.17
x
1.22
x
1.22
x
1.26
x
1.30
x
1.31
x
1.35
x
1.37
x
1.41
x 1.60
x
1.66
x
1.79
x 2.03
x 2.28
x
5%4% 3% 3%
6%
10%12% 12%13%
25%
30%
21%
Revenue EBITDA EBIT EPS
F2013E F2014E F2015E
Source: Credit Suisse estimates Source: IBES, Credit Suisse estimates
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 3
Home sweet home The most exciting aspect of URC’s growth story has returned home to the Philippines.
With a resurgence in consumption trends domestically, the catalysts to earnings growth
now reside where the company has a dominant market share, 60 years of operating
experience, the broadest distribution network and excess capacity. Home is where
operating and financial risks are the lowest, growth is more visible and incremental
earnings are the greatest. This shift back home warrants a higher valuation.
Consumption resurrection
What was once a lacklustre domestic consumption story that grew at ~60% of its regional
peers has now transformed into a vibrant, above-peers’ consumption growth story. We
expect private consumption expenditure (PCE) growth over the next two years to be the
fourth-highest in NJA and to grow 20% faster than the regional average. This is a
structural change driven by record-high consumer confidence, historically high wealth
growth that will likely further accelerate, low household debt, record high remittances, new
direct and indirect BPO job creation, rising urbanisation (not just in Metro Manila) and low
food inflation. The right pieces are in place for a multi-year structural improvement in
domestic consumption. The propensity to spend by Filipinos is on the rise and sustainable.
URC’s portfolio is in the ‘sweet spot’
Over the next four years, stronger underlying demand growth should lead to 300-400 bp
annual improvement in growth across URC’s key domestic categories. Rising category
growth coupled with continued market share gains is expected to lead to acceleration in
overall branded revenue growth from 12% pa over the past four years to 16% p.a. over the
next four. Domestic branded consumer goods are expected to contribute 52% of revenue
growth from FY12 through FY16. Growth at home has reinvigorated the story.
Strengthened business model
Operationally and financially, URC’s business model should more appealing than it was in
the past. URC is a branded consumer goods company on the verge of accelerating top-
line growth and moderating input costs, which combined should lead to three years of
strong earnings growth, unseen in the past decade. The long-term shareholder value will
be driven by brand value growth. On a recurring basis (excluding investment gains/losses)
forward EPS growth of 24% p.a. will be dramatically outpaced by free cash flow growth of
53% p.a. We conservatively expect cash returned to shareholders to grow moderately
faster at 28% annually, but with FY13E net cash on the balance sheet equal to 3.5% of
market cap, upside surprise potential exists.
Staples in the Philippines are cheap
Relative valuation to the market for consumer staples in the Philippines is the cheapest in
NJA. The 17% premium to the overall market is low considering the consumption
resurgence, positive consensus revisions on the back of improved earnings visibility and
declining costs of capital (debt and equity). The Philippines is the only market in NJA
where there have been positive earnings revisions to both 2013 and 2014 consensus
expectations over the past six months. Staples in GEM, NJA and ASEAN trade at
premiums of 35%, 66% and 37%, respectively. Based on recent precedents in ASEAN,
relative valuations of staples expand faster than improvements in consumer confidence
after 1yr of a resurgence – Philippines is at that juncture and rerating is likely to continue.
URC is the best way to benefit from the rerating in Philippine staples, in our view, because
compared to ten similarly sized branded food companies regionally, it trades at the lowest
premium valuation despite having superior forward earnings growth and stronger ROE
expansion, and consensus expectations are too low, which should lead to strong positive
revisions. We believe URC’s relative 12-month forward P/E premium will widen from 24%
to 40%, which implies a PE multiple of 27x, which we use for our target price of Ps130.
Growth catalysts have
returned to URC’s home
market where operating
prowess is the strongest
What was once a lacklustre
domestic consumption story
regionally, is now expected
to grow 20% ahead of peer
markets going forward
The resurgence in
consumption, coupled with
low income levels, sets the
stage for higher growth in
low-ASP, high velocity food
products
The most alluring aspect of
URC’s forward growth is
that both free cash flow and
dividend growth are stronger
than earnings growth and
ROIC is on the rise
Among all NJA, GEM and
developed markets, the 17%
premium valuation for
consumer staples relative to
the overall market in the
Philippines is the lowest
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 4
Universal Robina Corp. URC.PS / URC PM Price (13 Mar 13): P97.50, Rating: OUTPERFORM, Target Price: P130.00, Analyst: Karim Salamatian
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside 167.00 71.28 Raw material prices -8% in 2014, higher than expected growth in snackfoods segment of 15%
Central Case 130.00 33.33 Raw material prices -4.7% in 2014, healthy beverage sales growth of 28%
Downside 78.00 (20.00) Raw material prices flat YoY, lower than expected 2014 beverage sales growth of 15%
Key earnings drivers 9/12A 9/13E 9/14E 9/15E
Average ASP growth 0% 1% -1% 1% BCFG volume growth n.a. 14% 11% 10% BCFG domestic market share 43% 47% 50% 53% Raw materials basket YoY change -3% -1% -5% 0% BCFG intl revenue growth 5% 22% 19% 16%
Income statement (P mn) 9/12A 9/13E 9/14E 9/15E
Sales revenue 71,202 83,877 94,712 106,289 Cost of goods sold 52,731 61,273 67,949 75,520 SG&A 10,671 13,227 14,978 16,849 Other operating exp./(inc.) (3,419) (3,822) (4,278) (4,791) EBITDA 11,220 13,199 16,063 18,710 Depreciation & amortisation 3,419 3,822 4,278 4,791 EBIT 7,801 9,377 11,785 13,920 Net interest expense/(inc.) (546.7) (143.4) (222.2) (120.8) Non-operating inc./(exp.) — — — — Associates/JV 31.2 30.0 30.0 30.0 Recurring PBT 8,378 9,551 12,037 14,071 Exceptionals/extraordinaries 768.9 250.8 — — Taxes 989 980 1,204 1,407 Profit after tax 8,158 8,821 10,833 12,663 Other after tax income — — — — Minority interests 422.2 507.2 622.9 728.1 Preferred dividends — — — — Reported net profit 7,736 8,314 10,210 11,935 Analyst adjustments — — — — Net profit (Credit Suisse) 7,736 8,314 10,210 11,935
Cash flow (P mn) 9/12A 9/13E 9/14E 9/15E
EBIT 7,801 9,377 11,785 13,920 Net interest 422.9 143.4 222.2 120.8 Tax paid (899) (980) (1,204) (1,407) Working capital 2,178 (1,378) (801) (761) Other cash & non-cash items 3,444 3,822 4,278 4,791 Operating cash flow 12,947 10,984 14,280 16,663 Capex (5,129) (6,150) (6,150) (7,000) Free cash flow to the firm 7,818 4,834 8,130 9,663 Disposals of fixed assets — — — — Acquisitions (9,177) — — — Divestments 3,673 15,129 — — Associate investments — — — — Other investment/(outflows) 25.0 30.0 30.0 30.0 Investing cash flow (10,608) 9,009 (6,120) (6,970) Equity raised 7,345 — — — Dividends paid (3,917) (4,895) (6,500) (8,231) Net borrowings (5,010) (13,240) — — Other financing cash flow — — — — Financing cash flow (1,582) (18,135) (6,500) (8,231) Total cash flow 756 1,858 1,660 1,462 Adjustments — — — — Net change in cash 756 1,858 1,660 1,462
Balance sheet (P mn) 9/12A 9/13E 9/14E 9/15E
Cash & cash equivalents 5,346 6,947 7,985 8,719 Current receivables 7,461 8,829 9,866 10,958 Inventories 9,759 11,141 12,134 13,249 Other current assets 17,121 2,045 2,101 2,159 Current assets 39,688 28,962 32,085 35,084 Property, plant & equip. 27,919 30,247 32,119 34,328 Investments — — — — Intangibles 1,274 1,274 1,274 1,274 Other non-current assets 1,107 1,107 1,107 1,107 Total assets 69,987 61,590 66,585 71,794 Accounts payable 7,587 9,011 10,295 11,800 Short-term debt 8,589 — — — Current provisions — — — — Other current liabilities 3,893 2,231 2,231 2,231 Current liabilities 20,068 11,242 12,526 14,031 Long-term debt 2,990 — — — Non-current provisions — — — — Other non-current liab. 312.4 312.4 312.4 312.4 Total liabilities 23,371 11,554 12,839 14,343 Shareholders' equity 46,580 49,999 53,710 57,414 Minority interests 36.6 36.6 36.6 36.6 Total liabilities & equity 69,987 61,590 66,585 71,794
Per share data 9/12A 9/13E 9/14E 9/15E
Shares (wtd avg.) (mn) 2,097 2,097 2,097 2,097 EPS (Credit Suisse) (P) 3.69 3.97 4.87 5.69 DPS (P) 1.87 2.33 3.10 3.93 BVPS (P) 22.2 23.8 25.6 27.4 Operating CFPS (P) 6.18 5.24 6.81 7.95
Key ratios and valuation
9/12A 9/13E 9/14E 9/15E
Growth(%) Sales revenue 6.0 17.8 12.9 12.2 EBIT 13.2 20.2 25.7 18.1 Net profit 66.9 7.5 22.8 16.9 EPS 64.2 7.5 22.8 16.9 Margins (%) EBITDA 15.8 15.7 17.0 17.6 EBIT 11.0 11.2 12.4 13.1 Pre-tax profit 11.8 11.4 12.7 13.2 Net profit 10.9 9.9 10.8 11.2 Valuation metrics (x) P/E 26.4 24.6 20.0 17.1 P/B 4.39 4.09 3.81 3.56 Dividend yield (%) 1.92 2.39 3.18 4.03 P/CF 15.8 18.6 14.3 12.3 EV/sales 2.91 2.31 2.04 1.81 EV/EBITDA 18.5 14.7 12.0 10.3 EV/EBIT 26.6 20.7 16.4 13.8 ROE analysis (%) ROE 17.7 17.2 19.7 21.5 ROIC 14.0 17.6 23.9 26.5 Asset turnover (x) 1.02 1.36 1.42 1.48 Interest burden (x) 1.07 1.02 1.02 1.01 Tax burden (x) 0.89 0.90 0.90 0.90 Financial leverage (x) 1.50 1.23 1.24 1.25 Credit ratios Net debt/equity (%) 13.4 (13.9) (14.9) (15.2) Net debt/EBITDA (x) 0.56 (0.53) (0.50) (0.47) Interest cover (x) (14) (65) (53) (115)
Source: Company data, Thomson Reuters, Credit Suisse estimates.
0
5
10
15
20
25
30
2008 2009 2010 2011 2012 2013
12MF P/E multiple
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2008 2009 2010 2011 2012 2013
12MF P/B multiple
Source: IBES
14 M
arc
h 2
01
3
Un
ivers
al R
ob
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orp
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(UR
C.P
S / U
RC
PM
) 5
Figure 7: Comparable valuation—regional branded food company peers
Price Market Avg
Absolute
Performance
Relative
Performance EPS growth P/E EV/EBITDA DvD Yld ROE P/BV FCF Yld ROIC
NetDebt/
Equity
Regional Peers Ticker CS Local Target Upside cap daily t/o (%) (%) (%) (x) (x) (%) (%) (x) (%) (%) (%)
Rtg Local (%) (USDm) YTD 12m YTD 12m T+1 T+2 T+3 T+1 T+2 T+3 T+1 T+2 T+1
GREATER CHINA
Want Want China Holdings Ltd. 0151.HK N HKD 11.48 12.00 5 19,576 20.9 7 32 8 25 20 18 17 29.4 24.9 21.3 19.7 16.9 2.4 37.1 10.9 2.8 49.3 (28.2)
Tingyi 0322.HK O HKD 21.05 27.00 28 15,178 16.1 (2) (10) (2) (17) 42 22 22 23.8 19.5 16.0 10.7 8.5 2.7 23.8 5.7 3.6 19.8 15.5
Uni-President Enterprises 1216.TW N TWD 59.60 50.80 (15) 9,772 15.6 12 51 8 50 8 7 7 21.6 20.2 19.0 93.4 90.1 2.3 15.3 3.3 2.3 1.7 31.9
China Mengniu Dairy 2319.HK O HKD 21.45 27.00 26 4,925 15.4 (3) 1 (2) (6) 46 19 n.a. 14.4 12.1 10.4 6.1 5.1 2.8 15.3 2.2 3.6 25.6 (34.6)
KOREA
Orion KR 001800.KS NR KRW 1,090,000 n.a. n.a. 5,929 16.3 (1) 39 (1) 40 26 25 10 30.5 24.3 22.0 15.0 9.3 1.3 18.0 5.1 0.0 n.a. n.a.
LOTTE CONFEC 004990.KS NR KRW 1,796,000 n.a. n.a. 2,326 2.3 10 6 10 6 8 16 n.a. 19.4 16.7 n.a. 9.3 8.5 1.3 5.0 0.9 n.a. n.a. n.a.
Hite Jinro 000080.KS U KRW 34,000 25,000 (26) 2,153 6.6 12 42 12 42 23 9 n.a. 17.4 16.0 n.a. 9.4 8.9 4.4 8.9 1.6 2.7 6.8 84.2
Nongshim 004370.KS U KRW 287,500 210,000 (27) 1,594 7.5 6 21 6 21 (7) 11 11 17.3 15.7 14.1 9.6 8.8 1.4 6.2 1.1 0.3 6.6 (32.4)
THAILAND
Charoen Pokphand Foods Public CPF.BK O THB 33.50 45.50 36 8,769 31.7 (1) (9) (14) (47) 27 39 21 13.0 9.4 7.8 11.0 8.5 4.5 17.0 2.2 (2.2) 9.2 105.9
Thai Union Frozen Products PCL TUF.BK O THB 66.00 80.00 21 2,561 7.6 (8) 5 (22) (32) 25 24 25 12.6 10.2 8.1 10.3 8.6 4.0 16.0 1.8 10.7 10.7 69.8
SINGAPORE
Super Group Sg SPGP.SI NR SGD 3.80 n.a. n.a. 1,701 1.8 17 109 13 98 15 13 21 23.2 20.4 16.9 17.3 15.1 2.7 21.5 4.7 7.8 n.a. n.a.
INDONESIA
Indofood CBP ICBP.JK O IDR 8950 8100 (9) 5,385 2.7 15 69 3 48 17 12 14 20.5 18.3 16.1 12.6 11.4 2.1 19.8 4.1 4.6 36.5 (49.6)
Sari Roti ROTI.JK NR IDR 6800 n.a. n.a. 710 0.3 (1) 94 (13) 73 29 36 33 34.0 25.6 n.a. 22.2 16.7 2.3 27.1 8.3 n.a. n.a. n.a.
INDIA
Godrej Consumer Products Ltd GOCP.BO O INR 791.15 790.00 (0) 4,973 2.7 10 80 11 69 (4) 34 21 38.6 28.8 23.7 26.5 20.5 0.6 21.1 8.1 2.3 16.5 33.9
United Spirits Ltd. UNSP.BO O INR 1961 2400 22 4,738 103.2 0 254 1 244 77 85 32 72.3 39.0 29.5 24.0 21.6 0.3 6.7 4.9 (0.8) 6.4 162.7
Dabur India DABU.BO U INR 133.20 129.00 (3) 4,288 2.7 3 30 4 20 17 20 17 30.7 25.5 21.9 23.3 19.9 1.4 35.8 11.0 5.1 37.4 (6.9)
Marico Ltd MRCO.BO O INR 217.70 230.00 6 2,592 1.2 (1) 36 (0) 26 24 30 19 33.7 26.0 21.8 22.5 19.0 0.4 20.9 7.1 1.9 16.3 33.8
Emami Ltd EMAM.BO O INR 594.65 710.00 19 1,662 1.3 (1) 53 0 43 24 26 22 27.9 22.2 18.2 25.7 20.2 1.4 36.6 10.2 2.8 41.9 (25.2)
PHILIPPINES Consumer
Puregold Price Club, Inc PGOLD.PS NR PHP 39.50 n.a. n.a. 3,438 3.1 20 85 3 48 29 19 24 27.7 23.3 18.8 20.5 17.1 1.8 15.5 3.5 n.a. n.a. n.a.
Jollibee JFC.PS NR PHP 122.70 n.a. n.a. 3,162 1.9 20 19 4 (17) 14 18 36 30.7 26.1 19.2 13.9 11.7 1.8 19.1 5.5 n.a. n.a. n.a.
NJA Average 6 50 1 37 23 24 21 26.9 21.2 17.9 20.1 17.3 2.1 19.3 5.1 3.0 20.3 25.8
Universal Robina Corp. URC.PS O PHP 97.50 130.00 33 4,952 3.7 16 65 (0) 29 26 27 17 24.6 20.0 17.1 15.7 12.9 2.4 16.6 4.1 2.4 19.6 (13.9)
Relative to average 1,001bp 1,004bp -168bp -550bp 3 pp 2 pp (4 pp) -9% -6% -4% -22% -26% 29bp -227bp -20% -59bp -63bp -3,152bp
**URC EPS growth estimates are recurring
Source: Company data, I/B/E/S, Credit Suisse estimates
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 6
Consumption resurrection The domestic consumption resurgence in the Philippines is only two years new, and what
was once regarded as a lacklustre domestic consumption story relative to the rest of NJA,
has evolved into one where we believe consumption growth will rank as the fourth-highest
in NJA over the coming two years. Structural underpinnings are in place to drive at least
three years of superior consumption growth relative to the rest of NJA.
Once upon a time…
Once upon a time, pre-2011 to be exact, private consumption expenditure (PCE) growth in
the Philippines was 60-90% of what was elsewhere in Asia (Figure 8). The slower growth
was all the evidence needed to support the view that upside contribution to GDP from the
domestic economy was capped and structural improvements to boost consumption were
not apparent.
Additionally, the volatility in domestic consumption growth from 2007 to 2010 was the
second-lowest behind Indonesia which again led investors and other market observers to
conclude that the potential for consumption acceleration was limited, or, quite simply, that
the consumption story was not all that exciting to entice more investment (Figure 9).
Figure 8: PH domestic consumption growth could not
historically match that of its regional peers’… PH PCE growth relative to NJA average
Figure 9: …and investors considered higher growth rates
in China, Indonesia, India and even Malaysia as more
appealing Average PCE YoY growth from 2007 to 2010
0.4x
0.5x
0.6x
0.7x
0.8x
0.9x
1.0x
2007 2008 2009 2010
9.26
7.98
6.57
4.99
4.21 4.173.49
2.632.03
1.40
CH IND MY INDO HK SG PH KR TH TW
Source: CEIC Source: CEIC
Most, if not all, wondered where the upside would come from because since 1998, more
than 70% of Philippine’s GDP has been sourced from domestic consumption (Figure 10).
This is the highest in NJA and among the highest globally. Over the past 14 years,
Philippines’ domestic consumption-to-GDP ratio has been 1.4x higher than that of its
regional peers. China, Indonesia, Thailand and even Malaysia garnered more attention
because with domestic consumption contributing only 35-55% of GDP, the potential to
reach developed market levels or even that of the Philippines yielded much higher
expectations of forward growth (Figure 11). More dramatic consumption growth in the
Philippines would only be fuelled by stronger GDP growth, whereas in many other Asian
economies the argument could be made that even with moderating GDP growth domestic
consumption would gain share within the economy.
Consumption resurgence
has just begun and
structural drivers exist to
make it last
Domestic consumption
trends used to be 60% of
elsewhere in the region …
… but volatility was low
Domestic consumption-to-
GDP of 74% is the highest
almost anywhere. Upside
potential seemed weak
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 7
Even compared to the US, which is a consumption-led economy, the Philippines’ domestic
consumption contribution to GDP was nearly 1.4x higher. Therefore, the upside was less
exciting than the rest of the region where the average is 51%, China being the lowest at
only 35%.
Figure 10: PH consumption-to-GDP more than 70% since
1998…
PH domestic consumption-to-GDP, absolute and relative to NJA
Figure 11: …which is the highest in NJA by more than
1.4x
Regional domestic consumption-to-GDP
1.20x
1.22x
1.24x
1.26x
1.28x
1.30x
1.32x
1.34x
1.36x
1.38x
1.40x
1.42x
69%
70%
71%
72%
73%
74%
75%
76%
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
PH Domestic Consumption-to-GDP PH rel. to NJA (rhs)
74%
70%
64%
62%
60%
60%
57%
57%
57%
55%
54%
53%
50%
46%
39%
35%
Source: CEIC Source: CEIC
Against such a backdrop, it was no surprise that before 2011 domestic consumer stocks
traded at a 12mf P/E relative to the overall market of only 0.83x and EPS growth was
forecast to be less than 10% annually.
…that story has been replaced with a new one
The inflection point for domestic consumption came in 2011 following a ten-year high GDP
growth of 7.6% in 2010. In 2011 nominal wage growth was on par with the regional
average, real wage growth not only turned positive after declining for three consecutive
years but exceeded the rest of the region, FDI doubled to US$1.3 bn, CPI fell below that of
the region and unemployment reached an eight-year low of 6.4%. These trends
strengthened further into 2012 (Figure 12).
Domestic consumption-to-
GDP in NJA averages 51%
with China being lowest at
35%
No wonder consumer stocks
traded at 0.83x relative to
the overall market
Things have changed since
2011, and domestic
consumption trends have
gained momentum
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 8
Figure 12: 2011 was the year when nominal and real wage growth surpassed and CPI
moderated to below regional peers
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
2007 2008 2009 2010 2011 2012
PCE Growth rel. NJA
Real Wage Growth rel. NJA
CPI rel. NJA
Domestic consumption inflection point
Source: CEIC
This all led to PCE growth of 6.3% YoY, which was not only the fourth-highest in NJA, but
1.2x the regional average. 2011 and 2012 were the first years since 2007 that PCE growth
in Philippines exceeded that of NJA (Figure 13). The same can nearly be said for PCE
growth relative to ASEAN peers because in 2009 the relative outperformance was
primarily a function of the global financial crisis pressurising consumption in export-
dependent ASEAN economies such as Thailand and Singapore rather than structural
improvement in the Philippines’ growth. We believe 2011 and 2012 highlight the structural
improvements in overall economic and consumption growth on their own merits.
Figure 13: 2011 marked Philippines’ structural growth outperformance relative to peers PCE growth YoY
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2007 2008 2009 2010 2011 2012
Rel. to NJA Rel. to ASEAN
Source: CEIC
The new story has legs
We do not believe the consumption resurgence in the Philippines has run its course. Over
the next two years, we expect PCE growth to be the fourth-highest in NJA and the second-
highest in ASEAN. Essentially, this means that the previously lacklustre consumption,
For two years now private
consumption expenditure
growth has exceeded the
regional average
This is a multiple-year
structural story that has not
run its course
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 9
which grew at only 60-90% that of its peers pre-2011, should grow ~20% and 30% ahead
of NJA and ASEAN peers, respectively (Figure 14 to Figure 17). Given the strong
consumption base and structural improvements, consumption volatility should remain one
of the lowest in the region, thus providing solid earnings visibility for the consumer stocks.
Figure 14: Once a lacklustre consumption story… Average PCE growth 2007 to 2010
Figure 15: …that grew at a fraction of the rate of peers… PH PCE growth relative to NJA average
9.26
7.98
6.57
4.99
4.21 4.173.49
2.632.03
1.40
CH IND MY INDO HK SG PH KR TH TW
0.4x
0.5x
0.6x
0.7x
0.8x
0.9x
1.0x
2007 2008 2009 2010
Source: CEIC Source: CEIC
Figure 16: …evolved into one of the strongest
consumption stories in the region… Average PCE growth 2013-14
Figure 17: …that can sustain growth in excess of peers’ PH PCE growth relative to NJA and ASEAN averages
8.43
6.56
5.475.21
4.40
3.392.85 2.85
2.30
1.49
CH IND MY PH INDO TH KR HK TW SG
Avg. = 4.30
0.55
0.65
0.75
0.85
0.95
1.05
1.15
1.25
1.35
1.45
2010 2011 2012 2013f 2014f
Rel. to NJA Rel. to ASEAN
Source: Credit Suisse estimates Source: CEIC, Credit Suisse estimates
Structural underpinnings
We are confident that the consumption resurgence in the Philippines can be sustained
because of several structural improvements in the economy and with the consumer. As we
mentioned earlier, because of the already high weighting of domestic consumption in
GDP, accelerated growth in consumption will be led and sustained by a stronger overall
economic climate. We do not believe that you can have the former without the latter. Over
the next two years, we expect the ratio of domestic consumption-to-GDP to remain
constant at 74%.
Stronger overall economic
climate is pushing
consumption trends rather
than share gains of GDP
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 10
(1) Consumer confidence and optimism are both near record highs. With rising real
incomes, housing affordability continuing to improve, remittances reaching record
highs of nearly US$2 bn per month and unemployment near lows of 7%, it is no
surprise that consumers are feeling confident and optimistic (Figure 18, Figure 19).
This should lead to stronger growth in both discretionary and staples purchases. Given
the low GDP/capita of the country (US$2,275), we believe staples spending will be the
bigger beneficiary.
Figure 18: Consumer confidence near record highs… Consumer Expectations Diffusion Index
Figure 19: …Filipinos among the most optimistic in Asia Nielsen’s 4Q12 Consumer Confidence Survey
3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12
Rank Country Index
1 India 121
2 Philippines 119
3 Indonesia 117
4 Thailand 115
5 United Arab Emirates 113
6 Saudi Arabia 112
7 Brazil 111
8 China 108
9 Malaysia 103
10 Norway 102
Source: National Statistics Office Source: AC Nielsen
(2) Wealth growth among the highest for 12 years and disproportionately high
relative to incomes. Based on the Credit Suisse Research Institute Global Wealth
Report 2012, net wealth per adult in the Philippines has increased 9.5% annually since
2000, which ranks fifth among all APAC countries (Figure 20). In absolute terms, net
wealth per adult of US$8,152 ranks fourth in ASEAN or third if we exclude Singapore.
Surprisingly, the ratio of wealth per adult-to-income is the second highest behind
China (Figure 21). We believe the wealth story in the Philippines is very positive for
long-term consumption growth because wealth growth should accelerate due to strong
performance of the equity market (financial assets represent 49% of net wealth),
higher property prices and renewed business/infrastructure investment.
Staples/basic needs will be
the biggest beneficiaries of
record-high consumer
confidence
Wealth dynamics in the
Philippines have been
ignored, but provide a
strong foundation for higher
consumption
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 11
Figure 20: Wealth growth has been among the strongest,
and poised to grow even faster going forward 2000-12 net wealth per adult CAGR
Figure 21: Filipinos are disproportionately wealthy
relative to income levels Net wealth per adult / GDP per capita
13.0%
11.3%
11.0%
10.5%
9.5%
9.4%
8.7%
8.6%
8.0%
7.1%
6.4%
6.3%
3.0%
-0.2%
Indonesia
China
Laos
Malaysia
Philippines
Thailand
Vietnam
NJA
Cambondia
Singapore
Korea
India
APAC
HK
3.9
3.6 3.63.3 3.2
3.0 3.0 3.02.7 2.7
2.1
1.3
Source: Credit Suisse Global Wealth Report 2012 Source: Credit Suisse Global Wealth Report 2012
(3) Consumer debt ratios have been declining, allowing for stronger consumption
upon re-leveraging. Over the past 12 years, household debt has grown at half the
rate of net wealth, thus leading to a decline in the debt-to-net wealth rate from 6.7% in
2000 to 2.6% in 2012. While rising consumer leverage stressed many developing
economies up to and during the Global Financial Crisis, Filipinos utilised credit less
due to weaker consumer confidence and prohibitive borrowing rates for both secured
and unsecured credit. High interest rates were largely a function of domestic banks’
unwillingness to lend.
To put this in perspective, Philippines has the second-lowest household debt-to-net
wealth level (Figure 22), but unlike Indonesia, which has the lowest, leverage in the
Philippines has been declining over the past 12- and five-year periods.
Figure 22: Household balance sheets carry among the
lowest debt in the region
Figure 23: Pent-up savings plus greater accessibility to
credit should drive consumption higher
2.4% 2.6% 3.1%3.8%
14.1% 15.2%17.7%
29.1%
35.6%
-20%
-10%
0%
10%
20%
30%
40%
INDO PH CH IN MY TH SG HK KR
HHOLD Debt-to-Net Wealth
Chg. in HHOLD Debt-to-Net Wealth ('00-'12)
300
350
400
450
500
550
600
650
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12
Total Consumer Credit (Pbn; rhs) Consumer Credit YoY (lhs)
Nominal Consumption YoY (lhs)
Source: CEIC, Credit Suisse Global Wealth Report 2012 Source: CEIC
However, in the past two years, consumer credit growth has accelerated to 16%
annually with auto and mortgage lending growing 17% and 18%, respectively. Credit
card borrowing has been on the rise at ~12% annually during the same period. Banks
Rising consumer credit on
the back of lower rates and
improved confidence to fuel
higher consumption
Household debt ratios
among the lowest in the
region
Consumer credit expected
to grow 20% annually
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 12
are now more committed to growing their consumer loan books with a broader array of
products to sell and more affordable borrowing rates. Consumer credit only represents
18% of bank loan books today, and our Philippine bank analyst, Alvin Tan, expects
consumer loan growth of 20% annually. Filipinos are more confident, and have more
borrowing products to choose from and at lower rates. This will drive higher borrowing
and consumption for a number of years (Figure 23).
It is far too early to sound the alarm bells about consumer credit quality. System-wide
NPLs are down to 2% and it is only ~4% for consumer credit. Household debt
accounts for only 7% of household income and debt servicing costs are less than
1.5% of personal income. In neighbouring ASEAN countries, household debt-to-
personal income exceeds 20%. Savings rates are also relatively high at 15% of
household income. We believe pent-up savings plus re-leveraging of the consumer will
be integral catalysts to stronger consumption for at least the next three years.
(4) Remittances at record highs. Overseas Filipinos’ inward remittances now account
for 8.5% of GDP at ~US$2 bn per month (Figure 24). Over the past five years, the
remittance CAGR has exceeded GDP growth by 550 bp. A healthier global economy
and a modest recovery in developed markets should help sustain the faster growth in
remittances versus domestic GDP.
We believe remittance growth directly fuels consumption growth with a multiplier effect
through the economy. We also anticipate more of the remittance income will flow
through to investment activities (financial and non-financial assets) which provides
sustainability to the wealth and consumption dynamics we discussed above.
Figure 24: Remittance volume is now nearly US$2 bn per month
0
5,000
10,000
15,000
20,000
25,000
0%
2%
4%
6%
8%
10%
12%
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Remittances (USDmn; rhs)
Remittances (% of GDP; lhs)
Source: CEIC
(5) Creation of higher-paying, growing and urbanised jobs. The Philippines has
several structural advantages for a thriving Business Process Outsourcing (BPO)
industry, such as the third-highest annual pool of new graduates (450,000 per year)
and IT technical students in Asia, an English-speaking workforce and costs per full-
time employee for voice BPO on par with those of Delhi, India. Over the past five
years, the BPO industry has grown 28% p.a. to US$11 bn today or 9% of GDP. Over
the next five years, the forecast growth rate is 18% p.a. and that the industry can
reach US$25 bn in size or 10% of GDP (Figure 25).
Naturally, the emergence of an industry in such a short period of time will drive new
job creation—job creation at wages that are often above the minimum wage level that
can accommodate the supply of young graduate Filipinos and that can slow the flow of
No credit quality or systemic
default risk
Inward remittances
continued to grow nearly 2x
the rate of GDP
Inward remittances directly
fuel consumption and food
spending
Third highest annual pool of
graduates in NJA are now
finding higher paying jobs
domestically
BPO jobs expected to nearly
double in the next three
years
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 13
outbound Filipino workers. Young Filipinos now have more options at home to earn
attractive incomes in a growing industry. The BPO industry has created 700,000 direct
jobs in the Philippines, and it is projected this will rise to 1.3 mn by 2016. Interestingly,
2% of the nation’s workforce is contributing 9% of GDP. The emergence of the BPO
industry has been hugely positive for labour productivity in the Philippines.
The indirect jobs created from the BPO industry in retail, food service, transportation
and IT are likely multiple times higher than direct job creation. These jobs do not have
the same impact on total labour productivity, but they are nonetheless important jobs
in the economy that can absorb the young workforce and possibly stem the flow of
outbound Filipino workers.
Figure 25: BPO is a key growth engine for the economy through direct and indirect job
creation
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
0
5
10
15
20
25
2004 2005 2006 2007 2008 2009 2010 2011 2016E
BPO Revenues (US$bn; lhs) BPO Employees (rhs)
Source: BPAP, Credit Suisse estimates
Another interesting aspect of the BPO revolution in the Philippines is that it is driving
urbanisation rates higher and especially in the Tier 2 cities such as Metro Cebu and
Davao. The Philippines has an urbanisation rate of 50%, which is higher than in
Thailand, India, Indonesia, Vietnam, Pakistan and Bangladesh (Figure 26). The Credit
Suisse Research Institute estimates that by 2050, urbanisation will reach 69% and that
51 mn new urban consumers will be created (Figure 27).
Indirect job creation is likely
even higher than that of
BPOs
The BPO industry is driving
urbanisation rates higher
and the emergence of
stronger Tier 2 and 3 cities
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 14
Figure 26: Rising urbanisation driving consumption
trends % of population urbanised
Figure 27: The Philippines is expected to more than
double its urban population Change in urban population 2012 to 2050
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
KR MY PH CH INDO PK TH VN IND BD
2012 2050E
478
343
124
82 7851
3619 15
-1
IND CH PK INDO BD PH VN TH MY KR
Source: CEIC Source: Credit Suisse Research Institute
Doubling of the number of urban consumers will have a profound impact on
consumption trends, discretionary spending and demand for services. Metro Manila
accounts for 23% of the nation’s urban population, but we expect this to decline due to
the emergence of the Tier 2 and 3 cities. Urbanisation in Metro Cebu, Davao, Metro
Clark and Louzon should take place at faster rates. Job creation and spending growth
in these cities should occur at a faster rate, too, as a result. In the BPO industry, costs
in Tier 2 and 3 cities can be as much as 30% cheaper than in Metro Manila. Metro
Manila accounts for 83% of the nation’s BPO workforce—this will likely decline.
(6) Lower food prices. We do not believe there will be a food inflation shock in 2013 or
even 2014 because food producer prices are on a decline, the PHP has been strong
and new supply in food retailing should further bring food prices lower.
Food accounts for 43% of household expenditures in the Philippines and food CPI can
have the largest impact on both basic needs and discretionary consumption patterns.
Over the past 12 months food CPI has moderated from 6%+ to less than 3%. As a net
food importing nation, the 6.3% appreciation in the PHP over the past year can be
seen in lower food PPI. Food PPI actually turned negative in January for the first time
since February 2010.
Widening of the spread between food CPI and food PPI should lead to lower selling
prices for food in wet markets and modern format retail (Figure 28). Food retailers in
the Philippines are competing for traffic as they build new stores/formats, penetrate
and consolidate in rural locations. Therefore, we believe they will pass on higher
margins potentially to the consumers via lower prices. The food retail industry should
remain competitive for quite some time, so we are confident that a sustained decline in
food PPI will lead to lower food CPI.
Urban consumers expected
to increase faster in Metro
Cebu, Davao and Clark
Food PPI prices are on the
decline
Moderating food inflation will
have a large impact on
consumption because it
represents 43% of
household spending
Food retailers will pass
margin savings on to
consumers via lower prices
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 15
Figure 28: Widening of food CPI – food PPI spread will bring down food prices
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Food CPI - Food PPI (YoY %) Food CPI Rolling 6mos (%)
Food PPI Rolling 6mos (%)
Source: CEIC
Soft commodity prices are declining in 2013 and 2014. For 2013, we expect soy and
corn prices to decline 7% and 12%, respectively. We then expect larger declines in
2014 for soy, corn and wheat of 11%, 15% and 12%, respectively. Our long-term price
assumptions for soy, corn and wheat are 24%, 29% and 27% lower than current spot
prices, respectively. This supports our view that for the next several years, the risk of
food inflation shock in the Philippines is low. This is positive for the long-term pick-up
in consumption growth.
Rice represents 9% of the CPI basket in the Philippines, and we forecast flat rice
prices regionally over the next two years in large part to the rice subsidy programme in
Thailand. Therefore, we do not believe rice price shocks are a risk to inflation and/or
consumption acceleration.
Long-term price
assumptions for key soft
commodities are 25-30%
lower than current spot
prices
Rice prices to stay flat – not
push food CPI higher
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 16
URC’s portfolio in the ‘sweet spot’ Consumption resurgence to drive caloric intake
higher
The consumption resurgence in the Philippines should benefit food spending/demand the
most and accelerated rates of growth are likely to be evident across many categories. All
of the consumption drivers we discussed in the previous section should have a direct
impact on food consumption. Volume acceleration in high velocity or basic need foods will
be an important driver of scale and margins.
This is very important for URC because the product categories they operate in are low
ASP, high velocity and spontaneous purchase goods that are widely distributed through
both traditional and non-traditional trade. Its product portfolio has heavy exposure to the
categories and ingredients we believe Filipinos will consume more of on a per capita basis
in the future.
From our APAC: Consumption S Curve report in August 2012, we found that basic food
products start to see saturation and declining per capita rates of consumption growth at
GDP/capital levels of US$4,000 to US$5,000. With a GDP/capital level of US$2,275 and
unlikely to exceed US$4,000 for another ten years, we believe consumption growth rates
for food and beverages can be 5-15% p.a. depending on the category.
The caloric intake in the Philippines resides below the curve relative to the rest of the
world. Therefore, as incomes grow at a faster rate and underlying consumption trends are
stronger, caloric intake growth will exceed income growth because of the ‘catch-up’ effect.
Lower food inflation should also help this trend. From Figure 29, we can see that the
Philippines is right at the start of the sweet spot of the curve for caloric intake.
Figure 29: Caloric intake will catch up quickly with renewed consumer confidence and
propensity to consume
China
IndiaIndonesia
Korea
Malaysia
PhilippinesThailand
Brazil
Czech RepublicMexicoPolandRussia
South Africa
Turkey Hungary
Egypt
ArgentinaJapan
AustraliaUnited Kingdom
United States
Germany
FranceItaly Canada
R² = 0.5362
2,000
2,200
2,400
2,600
2,800
3,000
3,200
3,400
3,600
3,800
4,000
0 10,000 20,000 30,000 40,000 50,000 60,000
Cal
orie
s (K
cal/C
apita
/day
)
GDP per capita Source: FAOSTAT, IMF, World Bank, Credit Suisse estimates
Filipinos consume a disproportionately high amount of calories through animal proteins
(primarily pork meat) relative to other Asian and emerging market peers. Therefore, we
believe non-meat categories will grow at a faster rate. These include vegetable oils,
wheat-based carbohydrates, milk, eggs, alcoholic beverages (beer, wine and spirits),
stimulants (coffee and tea) and poultry.
Low ASP, high velocity food
items should benefit first
and most from the
consumption resurgence
These are the categories
where URC is most
dominant
Consumption for
staples/basic needs for the
Philippines is at the steepest
point in the curve
Food and beverage
categories can sustain
5-15% annual growth rates
Non-meat categories will
grow faster than animal
proteins
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 17
Accelerated top-line growth at home
We believe URC’s product portfolio is well positioned to capitalise on the accelerated
consumption and caloric intake story. Higher rates of growth should be evident in their
domestic operations for the next three years at least.
As we mentioned above, URC’s product portfolio is exposed to low-ASP, high velocity
items that are distributed through both traditional and non-traditional trade. The broad
appeal and accessibility of their products put them in a ‘sweet spot’ within the consumption
resurgence picture in the Philippines (Figure 30 and Figure 31).
Figure 30: Domestic branded goods now represent 50% of
sales…
Figure 31: …and well represented by several categories
that will see higher rates of growth
BCFG PH
50%BCFG Intl
29%
Agro-
Industrial
Group
10%
Commodity
Foods
Group 11%
FY13E Revenue: PHP 84 bn
Snacks 27%
Biscuits 9%
Confect.
13%RTD Tea
12%
Coffee 21%
Grocery
14%
Packaging 5%
BCFG PH FY13E Revenue: PHP 42.2bn
or 50% of total sales
Source: Credit Suisse estimates **BCFG=Branded Consumer Food
Group
Source: Credit Suisse estimates **BCFG=Branded Consumer Food
Group
88% of URC’s domestic branded foods portfolio is exposed to categories where we
believe growth rates will accelerate over the coming four years (Figure 32 and Figure 33).
The main exception is RTD Tea, but a forward growth rate of 12% is the highest of any
product category and only indicates moderation from an unsustainably high growth rate of
15% previously. 12% category growth for RTD Tea is quite impressive in its own right.
In aggregate, underlying consumption growth of URC’s key categories is expected to
accelerate from 5% p.a. historically to 8% p.a. going forward.
50% of revenues come from
domestic branded foods
Growth rates for URC’s key
product categories are
accelerating
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 18
Figure 32: Category size for URC’s key products P bn
Figure 33: Portfolio product category growth rates
accelerating going forward
24.637.7
54.024.3
30.4
37.5
15.9
24.7
34.0
14.8
21.7
29.2
5.0
11.4
18.0
16.4
10.9
14.0
0.1
0.1
0.1
2006 2012 2016E
Canned
Instant Coffee
RTD Tea
Instant Noodles
Biscuits & Cookies
Confectionary
Snacks
Total = 101
Total = 137
Total = 187
7%
4%
8%7%
15%
-7%
5% 5%
9%
5%
8% 8%
12%
7%6%
8%
2006-2012 CAGR
2012-2016E CAGR
Source: Euromonitor, Credit Suisse estimates Source: Euromonitor, Credit Suisse estimates
As a result of accelerated growth in URC’s key product categories, we expect top-line
growth in the domestic branded food group to accelerate from 11% p.a. over the past five
years to 16% p.a. over the next four years. In 2012 it became evident that the top-line
growth story of URC was shifting back to the Philippines where 71% of revenue is derived
and now with a positive delta in growth rates. The new domestic appeal for the story has
positive implications on how the company is valued and execution risk. The company’s
dominant market position in the Philippines is an excellent way to capitalise on the
accelerated growth rates going forward.
Market share gains on top of stronger category
growth
We expect URC to further increase market share in its key categories to further compound
the accelerated growth in underlying demand (Figure 34). Not only categories where URC
does not have leadership share, but even dominant positions in snacks, confectionary,
cookies and RTD tea are expected to experience share gains over the next three years.
The latter is interesting because URC already has a 75% share in RTD tea, which as seen
above, is a category expected to grow 12% p.a., but share gains continue at the expense
of MNCs such as Nestle. Nestle has seen its market share decrease to essentially zero.
URC’s strong pricing proposition and flavour innovation deserve most of the credit.
With 40% excess capacity utilisation in domestic operations, volume growth can be
accommodated for the next two years. We expect the company to start investing more in
the domestic manufacturing network starting 2H13 because with the renewed growth in
the Philippines, it will want to stay ahead of the capacity curve. This is the right decision;
therefore, we should not have to worry about capacity bottlenecks like it experienced in
Thailand and Vietnam over the past three years.
With market share rising and brand values expanding, the rise in intrinsic value of the URC
franchise in the Philippines can drive materially higher shareholder value. As we
mentioned earlier, with growth catalysts returning home to the Philippines, URC is best
positioned to compete and gain share due to its 60 years of operating experience, broad
distribution, strong brand equity and scale advantages.
Aggregate market share to
increase by 14 p.p. over the
next four years
Declining risks of capacity
bottlenecks
Intrinsic value will be
enhanced by rising brand
values
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 19
Figure 34: URC’s market share is on the rise led by beverages, snacks and confectionary
0%
10%
20%
30%
40%
50%
60%
FY12A FY13E FY14E FY15E FY16E
Coffee '16E share 54% (+34p.p.)
Aggregate '16E share 57% (+14p.p. vs '12)
Snacks '16E share 43% (+1p.p.)
Grocery '16E share 28.8% (+0.2p.p.)
RTD Tea '16E share 81% (+6p.p.)
Confectionary '16E share 36% (+2p.p.)
Biscuits '16E share 16.2% (+0.2p.p.)
Source: Company data, Euromonitor, Credit Suisse estimates
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 20
Strengthened business model URC is a branded consumer goods company on the verge of accelerating top-line growth
and moderating input costs, which combined should lead to three years of strong earnings
growth, unseen in the past decade. The long-term shareholder value will be driven by
brand value growth, and with the consumption resurgence in the Philippines, the
company’s strong domestic brand is the primary driver. Earnings visibility and volatility are
enhanced not only because of the stronger underlying consumption and rising margins,
but also because the company divested 97% of its investment portfolio in January 2013.
On a recurring basis (excluding investment gains/losses) forward EPS growth of 24% p.a.
should be dramatically outpaced by free cash flow growth of 53% p.a. We conservatively
expect cash returned to shareholders to grow moderately faster at 28% p.a., but with net
cash on the balance sheet equal to 3% of market cap at the end of FY13, there is plenty of
room for higher cash distribution or even a special dividend.
Operationally and financially, URC’s business model should be more appealing going
forward than it was in the past.
Diversified portfolio poised for margin expansion
URC operates in three business segments—branded consumer food, agro-industrial (farm
and feed production), and commodity foods (sugar and flour milling). The company’s
diversified business model allows it to reap the benefits of a steady revenue stream (from
its packaged food business) with opportunities for growth and margin expansion from
market share gains, positive mix and favourable commodity prices.
We forecast FY13 revenue will grow 18% due to accelerating momentum in Branded
Consumer Food Group (BCFG) Philippines, continued strong performance from BCFG
International, and a significant rebound in sugar volumes and selling prices. We expect
BCFG to be the key revenue and earnings driver, contributing 79% of sales and 60% of
EBIT in 2013.
In terms of geographical segments, we forecast URC will derive 71% of sales and 78% of
EBIT domestically in 2013, and international revenues will be driven by its two largest
foreign markets, Vietnam and Thailand.
Figure 35: URC's FY13E revenue by segment % of total revenue
Figure 36: URC’s FY13 revenue by region % of total revenue
BCFG PH
50%BCFG Intl
29%
Agro-
Industrial
Group
10%
Commodity
Foods
Group 11%
FY13E Revenue: PHP 84 bn
Philippines
71%
Vietnam
13%
Thailand
10%
Other 6%
FY13E Revenue: PHP 84 bn
Source: Credit Suisse estimates **BCFG=Branded Consumer Food
Group
Source: Credit Suisse estimates **BCFG=Branded Consumer Food
Group
Domestic brand value
growth is the key driver of
long-term shareholder
returns
Cash flow growth, 2x higher
than earnings growth, could
lead to positive cash
distribution surprises
Branded food business
complemented by modest
upstream operations
Revenue growth expected
to accelerate to 18% YoY in
F13 from 6% in F12
Domestic margins are
superior to international
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 21
Figure 37: FY13E EBIT by segment % of total EBIT
Figure 38: FY13E EBIT by region % of total EBIT
BCFG PH
38%
BCFG Intl
22%Agro-
Industrial
Group 5%
Commodity
Foods
Group 35%
FY13E EBIT: PHP 9.3 bn
Philippines
78%
Vietnam
11%
Thailand
10%
Other 1%
FY13E EBIT: PHP 9.3 bn
Source: Credit Suisse estimates **BCFG=Branded Consumer Food
Group
Source: Credit Suisse estimates **BCFG=Branded Consumer Food
Group
Strong momentum in BCFG to drive top-line growth
Over the next four years, we expect the revenue CAGR to be 14% versus 11% historically.
The most dramatic acceleration in top-line growth should come from the domestic branded
foods business (Figure 39). These rates are primarily driven by accelerated growth in
URC’s domestic and international branded consumer foods group (BCFG) as the firm
continues to gain market share in key segments.
Figure 39: Accelerated revenue growth in branded foods operations Revenue growth by segment YoY
FY13E FY14E FY15E FY16E 4Y CAGR
BCFG PH 16.9% 13.6% 13.7% 16.4% 15.1%
BCFG VN 23.5% 20.5% 20.6% 20.6% 21.3%
BCFG TH 25.7% 11.5% 12.5% 12.4% 15.4%
BCFG Other 13.1% 27.2% 12.2% 11.5% 15.8%
BCFG 18.7% 15.5% 14.6% 16.2% 16.2%
Farm 26.1% 12.2% 0.8% 0.8% 9.5%
Agro-Industrial Group 8.8% 2.5% 0.4% 5.8% 4.3%
Flour -4.8% -0.5% 1.0% 0.0% -1.6%
Sugar 49.8% 6.0% -6.0% 6.0% 15.6%
Commodity Foods Group 19.9% 3.2% 3.1% 3.6% 7.2%
Total revenue growth 17.8% 12.9% 12.2% 14.3% 14.3%
Source: Credit Suisse estimates
URC’s domestic BCFG business consists of three segments—snackfoods (51% of FY13E
sales), beverages (34%) and grocery products (15%). The Philippines’ snackfoods market
size is estimated to be P75 bn in 2013 and three-year forward CAGR of 9%. We expect
URC to hold its dominant position in the category by maintaining its aggregate snackfoods
market share of 31-32% in the next three years.
As URC’s products are usually priced at a 20-30% discount to its competitors, we do not
see much room for increased pricing power and forecast ASPs to grow in line or slightly
above input cost inflation (2-4% p.a.). Therefore, the key driver of domestic snackfoods
growth for the company should be above-industry volume growth of 5% p.a. in the next
three years. We believe this is realistic as URC’s new snackfood products continue to
perform well in the Philippines.
Stronger underlying demand
and continued share gains
are driving higher domestic
branded foods revenue
growth
Snacks category to grow at
9% p.a.
Volume growth potential is
greater than ASP
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 22
URC’s strong domestic beverage business is a key reason for accelerated sales growth in
the BCFG segment. While the company already has a dominant 75% share in the
domestic RTD Tea market (valued at P7.5 bn in 2013), it is quickly catching up in the
much bigger instant coffee category (P34.7 bn in 2013). FY12 sales growth for beverages
was 56% YoY, largely due to better-than-expected coffee sales.
The Philippines instant coffee industry is still on a structural uptrend, projected to see a
three-year forward CAGR of 9.5%, but recent sales performance and management
optimism lead us to believe that URC can outperform the segment and grow its market
share from 20% in 2012 to 44% in 2015 through volume growth of 30% p.a.Figure 40 and
Figure 41 show that our forecasts for total beverage sales growth of 40% in 2013 and 28%
in 2014 are critical to strong domestic BCFG momentum.
Figure 40: Above-category growth most pronounced in
the domestic beverage segment 3Y fwd. sales CAGR, URC vs overall domestic industry
Figure 41: Accelerated beverage growth key driver of
16.4% domestic BCFG revenue growth in FY13 % of domestic BCFG revenue (values in P bn)
7.1%9.3%
7.6%7.4%
26.0%
8.4%
Snackfoods Beverage Grocery
Industry URC
51% 47% 44%
35%39%
43%14%
13%
13%
FY13E FY14E FY15E
Snackfoods Beverage Grocery
40.2 bn
45.7 bn
52 bn
Source: Credit Suisse estimates Source: Credit Suisse estimates
URC’s international BCFG business is another key revenue driver. With 80% of
international sales from Vietnam and Thailand, we believe the company is well positioned
to gain from the structural consumption growth stories in both the countries (Figure 42).
URC has the second-highest market share in the large RTD Tea market in Vietnam
(valued at P52 bn in 2013), where the industry will likely see 14% growth p.a. for the next
three years. We forecast volume growth in Vietnam will be in line with the industry, and
ASPs will rise at 8% p.a. due to high inflation in Vietnam, leading to top-line growth of 21%
p.a. from FY13-16.
With regards to Thailand, URC has the leading biscuits and wafers market share (23%
and 24%, respectively), and we expect room for further market share gains as a result of
steady ASP increases and above-industry volume growth rates as the company launches
new products and expands capacity by 20% in the near term. Thailand YoY growth should
accelerate in the next three quarters due to lower base comparisons last year.
Figure 42: URC to see continued market share gains in Vietnam and Thailand % market share (FY12A is reported)
FY12A FY13E FY14E FY15E FY16E
VN beverage market share (value) 36.0% 37.6% 39.3% 41.8% 44.9%
VN beverage market share
(volume) 38.0% 38.0% 37.3% 37.3% 37.3%
TH biscuits market share (value) 23.0% 25.9% 26.0% 26.6% 27.7%
TH biscuits market share (volume) 25.0% 28.6% 30.0% 31.4% 32.9%
Source: Company data, Credit Suisse estimates
Domestic coffee growth
could continue to surprise to
the upside
Coffee consumption in the
Philippines presents some
strong growth
characteristics
Well positioned to capitalise
on the strong domestic
consumption story in
Vietnam
Thailand revenue growth to
accelerate through the
balance of FY13
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 23
URC’s agro-industrial group (AIG) represents 9% of FY13E revenues, and is largely a
factor of live hog, live poultry and feed (we estimate 50% corn and 50% soy) selling prices
that are regulated by the government. We forecast volume growth will be limited to 5-10%
p.a. as both the farm and feed markets are highly fragmented and competitive, with URC
holding roughly a 2% aggregate market share.
The deterioration of corn and soy prices from FY13-15 (-10% p.a. on average) should
drive lower feed revenues, but we expect the rebound in farm revenues (26% YoY in
FY13) due to rising meat prices to offset the feed decline and lead to overall AIG revenue
growth of around 3% p.a. in the next three years. Lower feed prices will drive margins
higher in the farming operations.
Similarly, we expect the company’s commodity foods business to grow at 3.4% p.a. from
FY13-16 as improved sugar selling prices offset declining flour prices. As with AIG, volume
growth in the flour and sugar segments should be limited as the government imposes
allocation constraints on flour millers. With the exception of FY13 (40% sugar volume
growth due to acquired sugar mill and recovery from last year), we forecast flat volume
growth for both businesses, leading to single digit top-line growth in the segment.
Margins to expand amid a better raw material price
environment We forecast URC’s EBIT will grow 20% in FY13 and at a four-year forward CAGR of
22.6% as a more favourable raw material price environment sets in for the next two years
(Figure 43).
Figure 43: EBIT growth higher than that of sales … EBIT growth by segment YoY
FY13E FY14E FY15E FY16E 4Y CAGR
BCFG PH 19.5% 40.6% 20.4% 36.8% 29.0%
BCFG VN 42.5% 70.8% 40.4% 35.1% 46.6%
BCFG TH 24.1% 13.5% 12.8% 10.9% 15.2%
BCFG Other 0.6% 77.6% 29.1% 20.6% 29.2%
BCFG 23.9% 42.9% 24.4% 33.2% 30.9%
Farm 171.1% 51.1% 18.6% -10.2% 44.5%
Agro-Industrial Group 13.6% -16.1% 49.4% 21.4% 14.7%
Flour -26.9% 23.1% 8.8% 17.0% -1.0%
Sugar 50.1% -6.4% -4.0% 4.2% 11.1%
Commodity Foods Group 15.3% 2.1% -0.4% 8.2% 6.1%
Total EBIT growth 20.2% 25.7% 18.1% 26.7% 22.6%
Source: Credit Suisse estimates
This, in addition to increased efficiencies, should drive overall EBIT margin expansion of
350 bp from FY12 to FY16 (Figure 44).
Figure 44: … leading to expanding EBIT margins EBIT margins (%) by segment
FY12A FY13E FY14E FY15E FY16E
BCFG PH 8.3% 8.5% 10.5% 11.1% 13.0%
BCFG VN 8.9% 10.2% 14.5% 16.9% 18.9%
BCFG TH 10.1% 9.9% 10.1% 10.1% 10.0%
BCFG Other 1.7% 1.5% 2.1% 2.4% 2.6%
BCFG 8.1% 8.4% 10.4% 11.3% 13.0%
Farm 2.1% 4.6% 6.2% 7.3% 6.5%
Feed 9.0% 7.4% 1.9% 6.4% 10.6%
Agro-Industrial Group 5.5% 5.7% 4.7% 7.0% 8.0%
Flour 31.1% 23.9% 29.5% 27.2% 31.8%
Sugar 45.6% 45.7% 40.4% 39.6% 38.9%
Commodity Foods Group 37.7% 36.2% 35.8% 34.6% 36.2%
Overall EBIT margin 11.0% 11.2% 12.4% 13.1% 14.5%
Source: Company data, Credit Suisse estimates **EBIT margins include corporate allocations
9% of revenue exposed to
farming operations
Moderating input costs for
feed can drive higher farm
margins
Modest growth for sugar
and flour operations
Improved scenario of EBIT
growing ahead of sales
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 24
In the BCFG International segment, we expect Vietnam and Thailand 2013 EBIT growth to
be higher than that in the Philippines due to higher pricing power abroad, leading to
segment 3Y forward EBIT CAGR of 33% p.a. Recently, URC saw strong growth
momentum from Indonesia (37% sales YoY in 1Q FY13), and we project the country to
break even on an EBIT basis in FY14 and then US$2 mn positive contribution in FY15.
Our COGS in the BCFG segment are driven by 60% raw material costs, 20% overhead (in
line with country CPI inflation), 10% labour (in line with country nominal wage growth), and
10% transportation costs. While CPI and labour inflation should be in the mid-to-high
single-digit range in the next three years, key input prices (corn, flour, cooking oil, potato)
are all projected to decrease from FY13 to FY15 (Figure 45). We project cost of goods
sold for BCFG will increase only 16% and 12%, respectively (vs. 19% and 15% revenue
growth). On the other hand, we forecast an increase in advertising and promotion
expenses for the BCFG business from 7% of sales in 2012 to 8% as the company focuses
on new product launches, but increased efficiencies should be enough to offset any
potential decrease in operating margins.
Figure 45: Historical and forecast commodity selling prices % YoY
FY 11A FY12A FY13E FY14E FY15E FY16E
Hog -1.5% -2.9% 5.0% 2.0% -4.0% -4.0%
Broiler -4.5% -1.0% 5.0% 2.0% -4.0% -4.0%
Corn 8.4% 5.3% -4.0% -23.0% -6.0% 10.0%
Soy (F/X adjusted) 30.8% 0.6% -5.8% -14.6% -5.9% 2.9%
Flour n.a. n.a. -4.8% -0.5% -1.0% 0.0%
Sugar 10.2% -18.6% 7.0% 6.0% 6.0% 6.0%
Source: CEIC, Credit Suisse estimates
Margins in URC’s agro-industrial and commodity food groups are largely a factor of input
price fluctuations, and we believe favourable prices can lead to EBIT margin expansion of
2.5 p.p. from FY12 to FY16. In the farm business, we believe margins can expand around
2 p.p. p.a. in the short term due to an increasingly favourable meat price environment and
declining animal feed prices until 2015, when meat prices start to moderately decline.
URC’s commodity foods group has the highest profitability among the three business
segments—while the segment contributes only 11% of FY13 revenues. CFG EBIT will be
35% of total FY13 EBIT, implying FY13 EBIT margins of 36.2%. Sugar EBIT margins
should remain resilient at 39-40% after FY13E as we forecast selling prices will remain
steady, while falling wheat prices and an appreciating PHP (as URC generally purchases
wheat from abroad) will defend flour margins even as flour selling prices are projected to
decline marginally during FY13-16. We also add an extra 100 bp a year to margins due to
increased scale.
FY13-16E earnings CAGR of 22%
Our revenue and margin forecasts lead to reported EPS growth of 7%, 23%, 17% and
27% from FY13 to FY16, respectively.
However, excluding the impact on earnings from fluctuations in the investment portfolio,
forecast EPS growth is 27% YoY in both FY13 and FY16. Earnings should be much less
volatile going forward than they were in the past because the company sold off 97% of its
investment portfolio in January 2013 with proceeds mainly to pay off debt. With ~US$50
mn of cash remaining to pay off most of debt, earnings growth should be more stable.
Key assumptions
We lay out key assumptions in our model in the following table.
Expect Indonesia to be EBIT
profitable in FY15
Declining soft commodity
prices set the stage for more
visible margin expansion in
coming years
Recurring EPS growth of
27% YoY in both FY13 and
FY14
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 25
Figure 46: Key model assumptions for FY13-16E
FY13E FY14E FY15E FY16E
Market share
PH Snackfoods 31.3% 31.0% 30.9% 31.6%
PH Beverage 38.2% 44.6% 50.5% 58.5%
VN Beverage 37.6% 39.3% 41.8% 44.9%
TH Biscuits 25.9% 26.0% 26.6% 27.7%
ASP growth PH packaged foods (excl. coffee) 0.6% -1.2% 1.3% 3.8%
PH Coffee 0.6% -1.2% 1.3% 3.8%
Vietnam packaged foods 5.0% 7.0% 8.0% 10.0%
Thailand packaged foods 3.8% 0.4% 2.0% 3.7%
Hog/Poultry 5.0% 2.0% -4.0% -4.0%
Feed -4.6% -15.8% -5.2% 4.7%
Flour -4.8% -0.5% -1.0% 0.0%
Sugar 7.0% 6.0% 6.0% 6.0%
Volume growth PH packaged foods (excl. coffee) 5.5% 5.9% 6.4% 6.3%
PH Coffee 63.8% 39.9% 28.4% 26.8%
Vietnam packaged foods 17.6% 12.6% 11.7% 9.7%
Thailand packaged foods 19.1% 9.1% 9.2% 9.3%
Hog/Poultry 20.0% 10.0% 5.0% 5.0%
Feed -5.0% 5.0% 5.0% 10.0%
Flour 0.0% 0.0% 0.0% 0.0%
Sugar 40.0% 0.0% 0.0% 0.0%
Source: Credit Suisse estimates
Cash stockpile – look for more returns to
shareholders
The cash flow profile of URC has improved dramatically, and with the investment portfolio
being sold down and cash flowing to the balance sheet, the financial risk is the lowest in
10 years.
Excluding fluctuations in the investment portfolio, gross free cash flow historically
averaged 27% of EBITDA. Going forward, we expect this to average 47% (Figure 47). Our
free cash flow forecasts include incremental capex over the next three years for new
projects outside of the core business that includes investment in Myanmar, sugar ethanol
capacity and the biomass project. The surge of cash generation can be used for
acquisitions and/or increased distributions to shareholders. We believe the latter is one of
the key points of appeal of the URC story going forward.
Cash generation to rise to
47% of EBITDA
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 26
Figure 47: URC free cash flow generation reaching new heights – can lead to positive
surprises of cash returned to shareholders P mn
-35%
-15%
5%
25%
45%
65%
85%
-2,500
-500
1,500
3,500
5,500
7,500
9,500
11,500
13,500
FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E FY16E
Gross FCF (lhs) Gross FCF to EBITDA (rhs)
Hist. avg: 26.6%
Source: Company data, Credit Suisse estimates
URC is trading at FY13E FCF yield of 2.4% which is in line with its regional peers, but FCF
growth going forward at URC is higher than that of the peer group.
In terms of FY13E net cash-to-market capitalisation for regional branded food & beverage
companies, URC ranks #9 at 3.5% and is one of the only two ASEAN companies in the
Top 10 (Figure 48). We are confident in the company’s capital allocation decisions, and
given the 60% ownership by JG Summit Group, dividend to shareholders is always
something management will consider. Dividend income in the Philippines for corporates is
not taxed.
Figure 48: URC’s net cash balance to market cap ranks among the highest among NJA
branded consumer staples
Company Symbol CS
Rating
Market Cap.
(USD mn)
2013E
Net Cash/Mkt. Cap.
Wuliangye 000858.SZ O 14,825 39.8%
Nongshim 004370.KS U 1,594 31.3%
Luzhou Laojiao 000568.SZ O 6,930 16.5%
China Mengniu 2319.HK O 5,017 15.8%
Moutai 600519.SS N 30,436 13.4%
Indofood CBP ICBP.JK O 5,385 12.3%
Shanxi Xinghuacun Fen Wine 600809.SS O 5,614 5.8%
Universal Robina URC.PS O 4,925 3.5%
Tenfu 6868.HK N 693 2.7%
NJA Average -11.7%
Source: Company data, Credit Suisse estimates
FCF yield comparable to
peers, but FCF growth is far
superior
URC is one of only two
branded ASEAN food
companies in the Top 10
with a 3.5% of market cap
as net cash
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 27
Staples in the Philippines are cheap The relative 12-month forward P/E premium of 17% for consumer staples in the
Philippines versus the overall market is lower than Asian peers, global emerging markets,
developed markets and all countries combined. With renewed consumption growth,
improved earnings visibility, upward earnings revisions, declining costs of capital and
rising ROEs, inexpensive consumer staples stocks in the Philippines are unlikely to last, in
our view. We expect a continued re-rating of Philippine consumer staples stocks relative to
the overall market.
We do not believe URC is expensive because one thing we have seen in recent years
across ASEAN in particular is that consumer staple stocks within a resurging domestic
consumption market accompanied with positive earnings surprises and revisions can
sustain large (50-100%) premium multiples relative to the overall market. We believe URC
offers the best opportunity for investors to capitalise on a re-rating in the Philippines and
trades at a mere 24% premium to the overall market which is the lowest of ten similarly
sized branded food companies across the region.
The global debate—inexpensive or expensive?
The debate carries on whether consumer staple stocks are inexpensive or expensive in
both emerging and developed markets. What is the right price to pay for stable staples that
should yield over time superior earnings visibility, rising ROEs and ROICs, free cash flows
and higher payout ratios to shareholders? Over the past 12 years, empirical data show
that investors believe consumer staple stocks are worth a premium to the overall market.
Therefore, the question has become more about how much premium?
MSCI Developed Market and MSCI All Country consumer staples are trading at 22% and
30% 12-month forward P/E premiums (Figure 49), respectively, to the overall market.
Emerging market consumer staples are trading at larger premiums due to higher top-line
and earnings growth rates. GEM, NJA and ASEAN (ex. Singapore) consumer staple
stocks are trading at 35%, 66% and 37% 12-month forward premiums (Figure 50),
respectively, to the overall market. We exclude Singapore from the ASEAN average
because of its heavy weighting of commodity companies rather than branded goods
companies. Including Singapore, the ASEAN average would still be a healthy premium of
26% to the overall market, which is higher than in the Philippines.
Consumer staple stocks in
the Philippines relative to
the market are the cheapest
against Asian peers, GEM
and developed markets
Consumption resurgence,
positive earnings revisions
and lower costs of capital
will fuel a further re-rating
We add Philippines to the
global debate of whether
consumer staple stocks are
cheap or expensive. We
think the answer is – cheap
NJA and ASEAN consumer
staples trade at 66% and
37% premiums to market
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 28
Figure 49: Relative valuations of staples have widened to
reflect lower costs of capital and improved earnings
visibility Consumer staples 12mf P/E relative to overall market
Figure 50: Emerging market consumer staples trade at
wider premium valuations Consumer staples 12mf P/E relative to overall market
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
Dec-
01
Jun-0
2D
ec-
02
Jun-0
3D
ec-
03
Jun-0
4D
ec-
04
Jun-0
5D
ec-
05
Jun-0
6D
ec-
06
Jun-0
7D
ec-
07
Jun-0
8D
ec-
08
Jun-0
9D
ec-
09
Jun-1
0D
ec-
10
Jun-1
1D
ec-
11
Jun-1
2D
ec-
12
MSCI Developed Markets
MSCI All Country
22%
30%
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Dec-
01
Jun-0
2D
ec-
02
Jun-0
3D
ec-
03
Jun-0
4D
ec-
04
Jun-0
5D
ec-
05
Jun-0
6D
ec-
06
Jun-0
7D
ec-
07
Jun-0
8D
ec-
08
Jun-0
9D
ec-
09
Jun-1
0D
ec-
10
Jun-1
1D
ec-
11
Jun-1
2D
ec-
12
MSCI GEM MSCI NJA
ASEAN ex. SG
37%
66%
35%
Source: Factset Source: Factset
Across the globe, consumer staple stocks relative to the overall market are trading at
higher multiples today than historical averages (Figure 51). Rising equity risk premiums
coupled with lower risk-free rates in developed markets coupled with low Beta consumer
staple stocks has led to re-ratings, and in emerging markets, the inverse is true. Consumer
staple stocks in emerging markets have higher betas, often above 1; therefore, declining
equity risk premiums coupled with lower risk free rates have led to even more dramatic
multiple expansion in absolute and relative terms.
Figure 51: Premium for consumer staples globally has widened in the past decade Consumer staples 12mf P/E relative valuation to overall market
Current 12mf
P/E
Current rel.
to market
10Y historical
average
Relative to 10Y
average
12M
change
24M
change
MSCI China 21.6x 2.28 1.39 65% 12% 74%
MSCI Korea 13.8x 1.60 1.41 13% 11% 23%
MSCI Taiwan 20.3x 1.41 1.35 4% 11% -6%
MSCI Indonesia 19.0x 1.31 1.31 1% -1% 9%
MSCI India 27.5x 2.03 1.49 37% 22% 32%
MSCI Malaysia 16.9x 1.22 1.10 11% 8% 12%
MSCI Singapore 11.6x 0.83 1.10 -24% -18% -25%
MSCI Thailand 22.2x 1.79 1.25 43% 13% 39%
MSCI Philippines 23.0x 1.17 1.08 8% 41% 24%
MSCI All Country 12.9x 1.30 1.19 10% 3% 12%
MSCI Developed Markets 13.1x 1.22 1.16 5% 0% 9%
MSCI GEM 10.6x 1.35 1.39 -3% -24% -10%
MSCI NJA 18.8x 1.66 1.27 30% 13% 32%
MSCI ASEAN 18.5x 1.26 1.17 8% 7% 12%
ASEAN ex. Singapore 20.3x 1.37 1.18 16% 13% 21%
Source: Factset
Among the Asian countries (except for Singapore, which is heavily weighted with
commodity-based consumer staple stocks) and relative to all major regions, the
Philippines consumer staples sector trades at the lowest premium relative to the overall
market (Figure 52). The rerating in the Philippines has been the highest over the past 12
months, but this is not the case over the past 24 months. In the past two years, China,
India and Thailand consumer stocks have re-rated more versus the overall market.
Stable staples have re-rated
due to lower costs of equity
in emerging markets and
better earnings in developed
markets
Premium for staples in the
Philippines is the lowest at
only 17%
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 29
Thailand’s re-rating is reasonable, given the resurgence in domestic consumption;
however, China and India are more a function of limited options of structural stories in
consumer discretionary. ROE expansion can justify the re-ratings in India, Thailand and
the Philippines, but not so much in China.
Figure 52: PH consumer staple stocks have the lowest relative multiple 12mf P/E relative valuation to overall market
0.83x
1.17x 1.22x 1.22x 1.26x 1.30x 1.31x 1.35x 1.37x 1.41x
1.60x 1.66x1.79x
2.03x
2.28x
Source: Company data, Credit Suisse estimates
Philippine consumer staples will continue to re-rate
The relative valuation discount for Philippine consumer staple stocks is unlikely to last for
three key reasons:
(7) Consumption resurgence. As we discussed in the first section, what was once a
lacklustre domestic consumption story where PCE growth lagged regional peers’ has
transitioned into one of the more exciting consumption stories where forward growth
will exceed regional peers’. Consumer staple stocks, such as URC, do not need to
migrate out of the Philippines in pursuit of higher growth; they can now find it at home.
Thailand is a fantastic recent example of this. Up until mid-2010, Thai consumers had
a low propensity to spend. This was primarily due to the domestic instability since the
coup in late 2006. Once domestic stability surfaced and was seen to be sustainable
(with the dominant election victory of the Pheu Thai Party in mid-2011), the propensity
to spend has increased. In conjunction, consumer companies have decided to
capitalise on the domestic consumption story by broadening their business models, re-
leveraging the balance sheet to build national, and even regional, business models.
Rising consumer confidence and stronger earnings growth drove the rerating in 12-
month forward P/E multiple from 1.3x in May 2010 to 1.79x today. The multiple re-
rating even persevered through the floods of 2011.
The parallels between the Philippines and Thailand are striking, in our view. Relative
valuations for consumer staples broke away from the consumer confidence trend in
mid-2011 (Figure 53:) in Thailand. However, in the Philippines this has yet to happen
(Figure 54), and we believe it is on the horizon as earnings revisions continue to be
positive and underlying consumer demand strengthens.
Stronger underlying demand
support further re-rating
Thailand’s re-rating has
been more profound than
the Philippines
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 30
Figure 53: Relative valuations in Thailand moved ahead of
consumer sentiment 1Y into the resurgence…
Figure 54: …while this inflection is still on the horizon for
the Philippines
0.90
1.00
1.10
1.20
1.30
1.40
1.50
May-
10
Jul-1
0
Sep-1
0
Nov-
10
Jan-1
1
Mar-
11
May-
11
Jul-1
1
Sep-1
1
Nov-
11
Jan-1
2
Mar-
12
May-
12
Jul-1
2
Sep-1
2
Nov-
12
Jan-1
3
Consumer Confidence Index
Consumer Staples Relative PE
Thai Floods
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
Mar-
11
May-
11
Jul-1
1
Sep-1
1
Nov-
11
Jan-1
2
Mar-
12
May-
12
Jul-1
2
Sep-1
2
Nov-
12
Consumer Confidence Index
Consumer Staples Relative PE
Source: CEIC, Factset Source: CEIC, Factset
(8) Better quality earnings and improved visibility. With stronger underlying demand
comes superior earnings quality and visibility. 80% of URC’s business is branded, and
as we mentioned earlier, the underlying demand growth for its key product categories
is expected to accelerate over the next four years. This should fuel upward earnings
revisions for the domestic business (71% of total 2013E revenue or 47% for domestic
branded foods alone).
Positive earnings revisions for consumer staple stocks in the Philippines over the past
six months have well outpaced those of NJA and ASEAN (Figure 55). Earnings
momentum in the Philippines clearly stands out from the rest because this is the only
market where earnings revisions over the past six months for both 2013 and 2014
have been positive. Even Thailand has seen negative earnings revisions.
Figure 55: PH consumer staples have by far a superior earnings revision momentum Change in consensus estimates over the past six months
11%
-6%
-10%
-6%
23%
-3%-5%
-4%
Philippines NJA ASEAN Thailand
2013E 2014E
Source: I/B/E/S, Credit Suisse estimates
Accelerated earnings growth
supports further re-rating
Philippines is the only
market in NJA where there
have been positive earnings
revisions over the past six
months
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 31
Positive earnings surprises and earnings revisions should put further upward pressure
on the consumer staples relative valuation in the Philippines and the gap relative to
other markets should narrow.
(9) Declining costs of capital. Costs of capital for Philippine consumer staple stocks are
declining and this is pushing both absolute and relative valuations higher. The re-
rating thus far is partially due to this, and we believe there is further room for
valuations to expand on the back of this phenomenon.
Both interest rates and costs of equity are at 15-year lows (Figure 56). Low rates will
persist as the government attempts to moderate an appreciating PHP that threatens
the BPO industry and devalues remittances. Low risk of an inflation shock, as we
discussed earlier, allows the BSP (central bank) to remain dovish in its interest rate
policies.
Figure 56: Debt costs and the risk-free rate are at all-time lows
-
5
10
15
20
25
30
35
40
91 Day T-Bills 10yr Gov't Bonds
Source: Bloomberg, Datastream
Globally, cost of equity for consumer staples companies has fallen to ten-year lows
and this is a key reason why relative 12-month forward P/E valuations are now 30%
higher at 1.3x versus the overall market (Figure 57).
Lower costs of debt and
equity capital support further
re-rating
Declining costs of equity for
staples is a global
phenomenon
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 32
Figure 57: US consumer staples’ cost of equity
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg, Datastream
For Philippines consumer staples, cost of equity is now down to ~6.5%, which is the
lowest since 1998 and ~200 bp below the five-year average (Figure 58).
Figure 58: Cost of equity for consumer staples at record
lows CAPM = Rf + Beta (Equity Risk Premium)
Figure 59: Relative multiples have been pushed higher by
declining costs of equity
2%
4%
6%
8%
10%
12%
14%
Jul-08 Jul-09 Jul-10 Jul-11 Jul-12
Average = 8.5%
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.34%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
Jul-08 Jul-09 Jul-10 Jul-11 Jul-12
Consumer Staples Cost of Equity(inverse; lhs)
Consumer Staples rel PE to Market(rhs)
Source: Bloomberg Source: Bloomberg, Datastream
URC to further re-rate to a 40% premium to market
URC’s shares have re-rated relative to the market by 27% over the past 12 months to
1.24x, which is moderately above the 17% premium the consumer staples sector trades
at. The relative multiple is 2 standard deviations above the five-year average (Figure 60),
but more relevant is the average since the beginning of 2011 when the domestic
consumption resurgence began (Figure 61). In this case, the relative valuation is only 1.5
standard deviations above the historical average.
URC’s share price has re-
rated but not overly so
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 33
Figure 60: URC re-rating over the past five years… 12mf PE relative to overall market
Figure 61: …but the more relevant period is since the
beginning of January and re-rating has been less 12mf PE relative to overall market
0.20
0.40
0.60
0.80
1.00
1.20
1.40
2-Jan-08 2-Jan-09 2-Jan-10 2-Jan-11 2-Jan-12 2-Jan-13
Avg.
+2 STDEV
+1 STDEV
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
3-Jan-11 3-May-11 3-Sep-11 3-Jan-12 3-May-12 3-Sep-12 3-Jan-13
Avg.
+2 STDEV
+1 STDEV
Source: Datastream Source: Datastream
We believe URC deserves to trade at a 40% premium to the overall market which is in line
with ASEAN and GEM peers but below the NJA average. This implies a 27x P/E multiple.
URC presents the best consumer staples opportunity to leverage further re-rating in the
sector, in our view, because consensus earnings estimates remain too low as the market
is not fully factoring in the strength of the domestic demand story, market share gains,
moderating raw material costs, high growth in Indonesia and strong 2H13 recovery in
Thailand.
Our EPS estimates are 4%, 12% and 21% ahead of consensus in FY13, FY14 and FY15,
respectively (Figure 62). Our FY14 margins could prove conservative if higher ASPs from
new products and mix benefits are actually positive. The market is factoring in only 15%
annual EPS growth over the next three years, whereas we expect 22%.
Positive earnings revisions have not begun in earnest yet for URC like they have in the
rest of the sector.
Figure 62: Above consensus estimates due to stronger market share and margin performance March YE; P bn
2013E 2014E 2015E
CS I/B/E/S CS vs
I/B/E/S
CS I/B/E/S CS vs
I/B/E/S
CS I/B/E/S CS vs
I/B/E/S
Revenue 83,877 80,106 5% 94,712 89,746 6% 106,289 94,324 13%
EBITDA 13,199 12,718 4% 16,063 14,500 11% 18,710 14,920 25%
EBIT 9,377 9,030 4% 11,785 10,507 12% 13,920 10,700 30%
Pre-tax income 9,551 9,541 0% 12,037 10,866 11% 14,071 11,507 22%
Net income 8,314 8,516 -2% 10,210 9,483 8% 11,935 10,226 17%
EPS 3.97 3.83 4% 4.87 4.34 12% 5.69 4.69 21%
EBITDA margin 15.7% 15.9% -14bps 17.0% 16.2% 80bps 17.6% 15.8% 179bps
EBIT margin 11.2% 11.3% -09bps 12.4% 11.7% 74bps 13.1% 11.3% 175bps
ROE 16.6% 17.0% -37bps 19.0% 17.9% 111bps 20.8% 18.0% 279bps
DPS 2.33 1.88 24% 3.10 2.12 46% 3.93 2.58 52%
Pay-out Ratio 59% 49% 979bps 64% 49% 1,481bps 69% 55% 1,395bps
Source: I/B/E/S, Credit Suisse estimates
URC presents the best
opportunity to capitalise on
further re-rating of consumer
staples
Expect consensus EPS
estimates to move higher
through 2013
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 34
Compared to direct peers – a 40% premium is justified
Relative to a group of ten similarly sized Asian branded food companies, URC trades at
the smallest 12-month forward P/E premium to the market despite having higher forward
earnings growth, higher ROE expansion over the next three years and positive earnings
revisions (Figure 63). The peer group average premium valuation to the market is 105%,
so a 40% premium could even be deemed conservative, in our view.
We acknowledge that if URC produces positive earnings surprises through the rest of
FY13 that the relative valuation could swing much more dramatically to premiums in
excess of 40%. We have seen this with many of the regional branded food companies.
Figure 63: URC compares favourably to branded food companies in the region–supporting our rerating thesis
Company Universal
Robina
Uni-
Pres. Orion ICBP
China
Mengniu
United
Spirits
Lotte
Conf.
Hite
Jinro
Super
Group Nongshim
Peer
Group
Avg
URC vs
Peer
Group
Symbol URC.PS 1216 001800 ICBP 2319 UNSP 004990 000080 SPGP 004370
CS rating O N NR O O O NR U NR U
Current price (LCY) 97.50 58.90 1,092k 8,950 21.85 1,961 1,796k 34,850 3.85 291,500
Target price (LCY) 130.00 50.80 na 8,100 22.08 2,400 na 25,000 na 210,000
Upside (%) 33% -14% na -9% 1% 22% na -28% na -28%
Market cap (US$ mn) 4,952 9,662 5,951 5,383 5,017 4,738 2,331 2,211 1,723 1,619
Abs. Performance: YTD 16% 11% -1% 15% -1% 0% 10% 15% 19% 7%
Abs. Performance: 12m 70% 47% 51% 66% 1% 291% 6% 44% 119% 21%
Rel. Performance: YTD 0% 7% 0% 2% 1% 1% 10% 15% 15% 8%
Rel. Performance: 12m 33% 47% 51% 43% -3% 277% 6% 44% 108% 21%
Relative 12mf P/E 1.24 1.45 3.37 1.33 1.47 2.91 2.18 2.04 1.61 2.00 2.04 -38.8%
P/E
12mf 22.3x 21.1x 29.1x 20.0x 14.2x 39.9x 18.8x 17.5x 22.9x 17.2x 22.3x 0.5%
CFY 21.9x 20.9x 28.5x 19.8x 13.9x 38.6x 18.5x 17.4x 22.6x 17.1x 21.9x 0.4%
CNFY 21.6x 20.8x 28.0x 19.6x 13.7x 37.6x 18.3x 17.3x 22.4x 16.9x 21.6x 0.2%
EPS growth
CFY 7% 8% 26% 17% 46% 77% 8% 23% 15% -7% 24% 3%
NFY 23% 7% 25% 12% 19% 85% 16% 9% 13% 11% 22% 1%
3yr Fwd 16% 7% 20% 14% 27% 63% 16% 22% 17% 5% 21% 3%
ROE
CFY 16.6% 15.3% 18.0% 19.8% 15.3% 6.7% 5.0% 8.9% 21.5% 6.2% 13.0% 366bps
NFY 19.0% 15.2% 19.0% 19.8% 16.7% 8.2% 5.7% 9.5% 22.0% 6.5% 13.6% 540bps
3yr Fwd Change (bps) 418 -4 357 8 65 60 187 539 282 -1 166 256bps
6M EPS revisions
2013E 1.2% 2.5% 0.3% -0.1% -15.6% -13.0% -16.5% -11.4% 21.5% -6.6% -4% 6%
2014E 0.7% 5.9% 2.2% 4.5% -12.5% 29.0% -24.7% 0.4% 21.6% -3.6% 3% -2%
Source: Company data, Credit Suisse estimates, I/B/E/S estimates for Not Rated stocks
Initiating coverage with a P130 12-month target price
URC’s shares are trading at 24.7x 2013E EPS and 16x 2013E EBITDA, which are 9% and
22% discounts, respectively, to what we consider the regional peer group of branded food
companies. Excluding cash on the balance sheet, URC is trading at 24x 2013E EPS.
As we mentioned earlier, we believe a relative premium to the overall market of 40% is
justified due to the superior earnings story, earnings visibility, less volatility after selling
down the investment portfolio and high probability of more profound positive earnings
revisions. Therefore, with an overall market target multiple of 19x, this implies a target
multiple of 27x for URC. This implies less than 10% multiple expansion over the next 12
months.
Compared to similar-sized
branded food companies in
the region support further
re-rating for URC
URC multiples are at a
discount to regional peers
Target price is based on 27x
P/E or a 40% premium to
the market
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 35
If earnings performance surprises to the upside, the relative P/E multiple versus the overall
market could potentially get closer to the NJA average of 1.7x or even 1.8x such as in
Thailand. A key point to consider and based on recent regional market precedents, a
resurgence in the domestic consumption story can fuel sustained re-ratings in both
earnings expectations and multiples because stable staples are not a common commodity
for investors across NJA.
At 27x our 2014E EPS estimate of P4.87, the fair value of URC is P130/share 12 months
out.
Our 12-month target price is well supported by our DCF value of P138.10/share (Figure
64). Our discounted cash flow (DCF) is based on a WACC of 8.6%, long-term free cash
flow growth of 6.6% annually and a terminal EV/EBITDA multiple of 12.2x.
Positive earnings revisions
could push the relative
valuation to the market even
further
DCF value suggests a 49%
12mf P/E premium to the
market, which is not
unimaginable
14 M
arc
h 2
01
3
Un
ivers
al R
ob
ina C
orp
.
(UR
C.P
S / U
RC
PM
) 3
6
Figure 64: URC – DCF model
(mn Ps) Steady State . . . CAGR
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2032 2033
Revenue 83,877 94,712 106,289 121,465 128,752 136,478 144,666 149,006 153,476 158,081 162,823 212,447 218,821
EBITDA 13,199 16,063 18,710 23,008 24,463 25,931 27,487 26,821 27,626 28,455 29,308 38,241 39,388 3.7%
EBITDA Margin 15.7% 17.0% 17.6% 18.9% 19.0% 19.0% 19.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0%
EBIT 9,377 11,785 13,920 17,641 19,568 21,021 22,565 22,168 23,204 24,232 25,257 34,970 36,155
EBIT Margin 11.2% 12.4% 13.1% 14.5% 15.2% 15.4% 15.6% 14.9% 15.1% 15.3% 15.5% 16.5% 16.5%
Less: Adjusted Taxes (938) (1,178) (1,392) (1,764) (2,348) (2,523) (2,708) (2,660) (2,785) (2,908) (3,031) (4,196) (4,339)
NOPLAT 8,440 10,606 12,528 15,877 17,220 18,499 19,857 19,508 20,420 21,324 22,226 . . . 30,774 31,816 4.5%
Working Capital (1,378) (801) (761) (1,382) (500) (500) (500) 0 0 0 0 0 0
Depreciation 3,822 4,278 4,791 5,367 4,895 4,909 4,922 4,653 4,422 4,223 4,051 3,271 3,233
Capex (6,150) (6,150) (7,000) (6,000) (5,000) (5,000) (5,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000)
FCF 4,733 7,933 9,558 13,862 16,615 17,908 19,279 21,161 21,841 22,547 23,277 . . . 31,044 32,049 6.6%
Revenue Growth 6.0% Revenue Growth 3.0%
EBITDA Margin 19.0% EBITDA Margin 18.0% PV of Cash Flows 187,017
Depreciation Rate 14.0% Depreciation Rate 14.0% PV of Terminal Value 95,564
Capex (5,000) Capex (3,000) Net Cash/(Net Debt) 6,947
Working Capital (500) Working Capital 0
Tax Rate 12.0% Tax Rate 12.0% Equity Value 289,529
Shares O/S 2,097
Cost of Equity Growth 2.0%
LT Equity Weight 80% WACC-g 6.6% Equity Value per Share 138.10
Risk Free Rate 4.5% Terminal Value 491,728
Equity Risk Premium 5.0% Implied EBITDA Multiple 12.2x
Beta 1.02
Cost of Equity 9.6%
Cost of Debt
LT Debt Weight 20.0%
Cost of Debt 5.5%
Tax Rate 12.0%
After-tax Cost of Debt 4.8%
Weighted Average Cost of Capital (WACC) 8.6%
Weighted Average Cost of Capital Terminal Value
1 Year Forward DCF
Forecast Stage 1
Stage 1 Steady State
Source: Company data, Credit Suisse estimates
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 37
Investment risks The company’s business involves a number of risks, some of which are listed below:
Macroeconomic risks
As 78% of URC’s revenues come from Philippines, its business is significantly influenced
by the economic, political and social environment in the country. Our model assumes that
domestic private consumption in the Philippines will grow at 9% p.a. for the next two years,
while CPI inflation will increase at 3-4% per year. Any adverse change in Philippines’
economic condition would affect consumer sentiment, purchasing power and spending
patterns and have a negative impact on consumer demand for URC’s products and lead to
downside risks in our revenue and earnings estimates.
Commodity price risks
URC’s production operations depend upon obtaining adequate supplies of raw materials
on a timely basis. Moreover, its profitability depends on the prices of raw materials as they
affect both input costs and selling prices. Its Branded Consumer Food business depends
on raw materials such as corn, flour, sugar, cocoa, coffee, potatoes and PET resin.
Earnings in the Agro-Industrial Group are driven by hog, broiler, corn and soy prices.
Lastly, earnings in the Commodity Foods Group are driven heavily by flour and sugar
prices. Any significant fluctuation of such materials may result in a corresponding
fluctuation in our earnings estimates, leading to both upside and downside risks.
Foreign currency exchange risks
The Company has significant foreign currency exchange risks as 22% of its revenues are
from abroad (primarily Vietnam and Thailand) and major raw materials such as soy,
wheat, tapioca and breeding stocks are imported from countries and regions such as
China, North America and Europe. As URC’s reporting currency is the Philippines Peso,
any significant change in the USD, EUR, RMB, VND or THB is likely to change the
company’s cost and revenue structures, leading to both upside and downside risks to our
earnings estimates.
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 38
Companies Mentioned (Price as of 13-Mar-2013)
Charoen Pokphand Foods Public (CPF.BK, Bt34.25) China Mengniu Dairy (2319.HK, HK$21.45) Dabur India (DABU.BO, Rs134.05) Emami Ltd (EMAM.BO, Rs596.35) Godrej Consumer Products Ltd (GOCP.BO, Rs769.2) Hite Jinro (000080.KS, W34,000) Indofood CBP (ICBP.JK, Rp8,950) Jollibee (JFC.PS, P124.0) LOTTE CONFEC (004990.KS, W1,796,000) Luzhou Laojiao (000568.SZ, Rmb30.74) Marico Ltd (MRCO.BO, Rs216.7) Moutai (600519.SS, Rmb183.83) Nippon Indosari (ROTI.JK, Rp6,800) Nongshim (004370.KS, W287,500) Orion KR (001800.KS, W1,090,000) Puregold Price Club, Inc (PGOLD.PS, P39.5) Shanxi Xinghuacun Fen Wine (600809.SS, Rmb41.33) Super Group Sg (SPGP.SI, S$3.8) Tenfu (6868.HK, HK$4.38) Thai Union Frozen Products PCL (TUF.BK, Bt64.75) Tingyi (0322.HK, HK$21.05) Uni-President Enterprises (1216.TW, NT$59.6) United Spirits Ltd. (UNSP.BO, Rs1958.8) Universal Robina Corp. (URC.PS, P97.5, OUTPERFORM, TP P130.0) Want Want China Holdings Ltd. (0151.HK, HK$11.48) Wuliangye (000858.SZ, Rmb24.34)
Disclosure Appendix
Important Global Disclosures
I, Karim P. Salamatian, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as E uropean ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respect ively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 39
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 43% (54% banking clients)
Neutral/Hold* 38% (47% banking clients)
Underperform/Sell* 16% (40% banking clients)
Restricted 3%
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Price Target: (12 months) for Universal Robina Corp. (URC.PS)
Method: Our target price of P130 for Universal Robina Corp. (URC) is derived by applying a 27x multiple to our FY14 EPS (earnings per share) forecast of P4.87.
Risk: Risks that may impede our P130 target price for Universal Robina Corp. include: fluctuations in commodity prices which drive both selling prices and input prices, and domestic and international revenue growth surprising on the downside; macroeconomic risks, as 78% or its revenues come from the Philippines; and foreign currency exchange risks, as major raw materials are imported.
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See the Companies Mentioned section for full company names
The subject company (URC.PS, 0322.HK, 1216.TW, 000080.KS, TUF.BK, ICBP.JK, UNSP.BO, DABU.BO, EMAM.BO, 000568.SZ, 6868.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (URC.PS, 1216.TW, ICBP.JK, 000568.SZ, 6868.HK) within the past 12 months.
Credit Suisse has managed or co-managed a public offering of securities for the subject company (URC.PS, 1216.TW) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (URC.PS, 1216.TW, ICBP.JK, 000568.SZ, 6868.HK) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (URC.PS, 0151.HK, 0322.HK, 1216.TW, 000080.KS, 004370.KS, TUF.BK, ICBP.JK, UNSP.BO, DABU.BO, EMAM.BO, 000568.SZ, 2319.HK, 6868.HK) within the next 3 months.
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (UNSP.BO).
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The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (URC.PS, 0151.HK, 0322.HK, 1216.TW, 000080.KS, 004370.KS, CPF.BK, TUF.BK, ICBP.JK, GOCP.BO, UNSP.BO, DABU.BO, MRCO.BO, EMAM.BO, PGOLD.PS, 000858.SZ, 000568.SZ, 2319.HK, 600519.SS, 600809.SS) within the past 12 months
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14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 40
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For Thai listed companies mentioned in this report, the independent 2012 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Charoen Pokphand Foods Public (Very Good) , Thai Union Frozen Products PCL (Very Good)
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Credit Suisse (Hong Kong) Limited ...................................................................................................... Karim P. Salamatian, CFA ; Rebecca Kwee
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14 March 2013
Universal Robina Corp.
(URC.PS / URC PM) 41
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