Based on a recent company news release, RFM Corp. delivered a good 8% (508 million Philippine pesos) organic profit growth for the first half of fiscal year 2016. Further, the company grew its total sales by 5% (5.8 billion Philippine pesos). As a result, the company was able to take home roughly 9 cents per one Philippine peso of sales.
According to Bloomberg data, RFM Corp. (PHS:RFM, Financial) has a trailing 12-month price-earnings ratio of 16 and price-sales ratio of 1.23. The company also has a current dividend yield of 3.61%.
(PhP: Philippine Peso. As of 7/21/2016, $1 is to 47.07 PhP)
RFM Corp. was able to consistently deliver growth in both top- and bottom-line figures. The company has a five-year average growth of 5.7% and 7.7% growth in sales and profits, respectively. Mr. Southeast Asian market, in return, had rewarded RFM’s shares. Accordingly, RFM shares returned 413% since data was available (Sept. 20, 2007) and the Philippine Composition Index returned 138%. On the other hand, the S&P 500 index returned 43%. (All percent return figures exclude dividends.)
Business overview
According to its 2015 annual filing, RFM was incorporated on Aug. 16, 1957, as Republic Flour Mills Inc. to manufacture flour in the Philippines, a country that does not grow wheat. Instead, the company imports it from the U.S. and Australia.
RFM considers itself a major player in the food and beverage industry in the Philippines. The company’s business is oriented the following: processing and manufacture of flour, bread, flour-based products like pasta and cake mixes, sauces, milk and juice drinks, and ice cream.
RFM has two major business segments: institutional and consumer segments. Institutional segment primarily manufactures and sells flour, pasta, bakery and other bakery products to institutional customers, while consumer segment manufactures and sells ice cream, meat, milk and juices, pasta products, and flour and rice based mixes.
RFM also operates non-food businesses, which include barging services (Rizal Lighterage Corp.) and leasing of commercial/office spaces (Invest Asia Corp.) that serves the internal requirement of the various operating divisions.
The consumer business segment delivered 63.1% to RFM’s total sales in 2015, while the institutional segment contributed 36.5%. In total, these two segments represent 99.6% of RFM’s business. Accordingly, the former had a total of almost 40 brand products, compared to the latter’s seven.
(RFM’s widely known brands, company website)
The Philippines is known for its tropical weather and average temperature in the high 70s Fahrenheit to low 80s year round. Filipinos tend to enjoy buying ice cream products and sodas to cool down.
In 2015 RFM claimed that it had a 76% market share in the ice cream category with its widely known Selecta brand.
Interestingly, RFM does not own its ice cream business outright. RFM has a 50-50 joint partnership with Unilever Philippines, forming an entity called Unilever-RFM Ice Cream Inc. (URIC). In 2015, the entity grew its sales by 13% year over year and had total sales of 3.7 billion Philippine pesos.
RFM is also a market leader in the pasta business segment, saying it has a 35% market share in the business by sales. The company, on the other hand, ranked third in the spaghetti sauce category at 13% market share. Further, RFM’s flour business has about 9% market share in its institutional business segment.
Sales and profits
In 2015 RFM earned most of its sales (98%) domestically. The company had an operating profit of 1.19 billion Philippine pesos from its 11.98 billion Philippine pesos in sales. Despite the ongoing sales growth, the company’s foreign sales had observably declined.
The foreign business segment delivered a three-year decline average of 11%, while the domestic (Philippine) sales delivered 3% growth. Interestingly, RFM derives better margin from its foreign sales than domestic. RFM had a three-year operating margin average of 19.6% for foreign sales and 9% for domestic sales.
Accordingly, the company delivered 906 billion Philippine pesos in profits with 8% year-on-year growth.
Dividends
RFM has been paying and growing its dividends since 2008. The company has three-year average dividend growth of 30%. In 2015 it paid 26% of its profits to its shareholders as dividends.
Cash, debt and book value
In January 2014, the group acquired the Royal pasta trademark from the Unilever Group (UN, Financial) for 2.08 billion Philippine pesos ($46.0 million U.S. dollars). This acquisition of the Royal trademark gave a minimal to moderate boost to the already leading market share of RFM.
In 2013 RFM had a leading market share in the pasta business with 29% of the market with its own Fiesta brand. The company’s market share spiked to 36% after its Royal trademark acquisition in 2014, and in 2015 had dropped to 35% market share.
According to Financial Times data, the company had 1.56 billion Philippine pesos in cash as of June 2016. RFM also had a total debt of 150 million Philippine pesos, resulting into a debt-to-equity ratio of 0.02. As of mid-2016, the company had a book value of 9.76 billion Philippine pesos.
Cash flow
In fiscal year 2015, RFM had total cash flow of 2.84 billion Philippine pesos, an 850% jump from previous year. This was made possible by RFM’s increased receivables and increased payables. As a result, the company improved its free cash flow to 2.38 billion Philippine pesos.
(Consolidated RFM cash flow statement, p. 101 in recent annual filing)
Conclusion
RFM company has been around for almost 60 years. Over that time, the company has been able to adapt to growing diversity in taste of its consumers. The company strategically formed alliances to gain more scale in selling some of its well-known products, such as the Selecta brand name. Interestingly, the company decided to spend 2 billion Philippine pesos, or 17.6% of its 2015 sales, to improve its already market-leading status in the pasta business by some hundreds of basis points as discussed above.
Compared to the valuations of some of its domestic peers, such as the 9 times P/E ratio of San Miguel Purefoods and 31 times P/E ratio of Universal Robina Corporation, RFM sits somewhere in the middle.
In summary, investors should still look forward for the company’s plans in expanding its sales abroad, and perform possible alliances overseas to further improve its sales over time. Meanwhile, there could still be other viable investment options out there to consider before RFM shares at the moment.
Disclosure: I have no RFM shares, nor plan to initiate a long/short position this week or the next. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Gurufocus). I have no business relationship with any company whose stock is mentioned in this article.
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