San Miguel Corp. (PHS:SMC, Financial) (SMGBY, Financial), the 252.3 billion Philippine peso ($5.1 billion), Mandaluyong-based conglomerate, reported its first-quarter fiscal 2017 results in May. San Miguel delivered 22.6% revenue growth to 195.8 billion pesos and a rather contrasting 16.9% decline in profits to 6.24 billion pesos, resulting in a profit margin of 3.2% compared to 4.7% for the same period last year.
As observed, San Miguel's cost of sales jumped 31.4 billion pesos or 26% year over year, thus resulting in lower profits. In addition, the conglomerate's distribution to non-controlling interest as a share of its profits was 7.6 billion pesos compared to 6 billion pesos in the prior-year period.
Valuations
San Miguel is currently trading below its book value. According to Reuters data, the conglomerate had a trailing price-earnings (P/E) ratio of 30 times compared to the industry figure of 26 times, a price-book (P/B) ratio of 0.8 times versus the industry's 2.4 times and a price-sales (P/S) ratio of 0.35 times versus the industry's 1.3 times.
The company also had a dividend yield of 1.3% with a 40% payout ratio.
Total returns
San Miguel (local shares) has outperformed the broader Philippine index, iShares MSCI Philippines ETF (EPHE, Financial), so far this year with 15.22% total returns compared to the index's 14.22% (Morningstar).
San Miguel Corp.
According to filings, San Miguel was founded in 1890 as a single brewery in the Philippines. Over the course of its 127-year history, San Miguel has transformed itself from a beverage, food and packaging business with a globally recognized beer brand into a diversified conglomerate with market-leading businesses in oil, energy, infrastructure and investment banking.
Together with its subsidiaries, the company is one of the largest and most diversified conglomerates in the Philippines by revenue and total assets, with sales of about 4.7% of the Philippine gross domestic product in 2016.
In addition, San Miguel has strategic partnerships with international companies, including Kirin Holdings Co. (TSE:2503, Financial) for beer, Hormel Foods International (HRL) for processed meats, Nihon Yamamura Glass Co. (TSE:5210) for packaging products and Korea Water Resources Corp. for the Angat Hydroelectric Power Plant.
The company’s reportable segments are beverage, food, packaging, energy, fuel and oil and infrastructure.
Beverage
The beverage segment produces and markets alcoholic and nonalcoholic beverages.
In the first quarter, segment revenue grew 12% year over year to 30.5 billion pesos (15% of total unadjusted sales) as it also delivered a segment margin of 22.9%, which was the same level of profitability in the first quarter of fiscal 2016.
Food
The food segment includes, among others, feeds production, poultry and livestock farming, processing and selling of poultry and meat products, processing and marketing of value-added refrigerated processed meats and canned meat products, manufacturing and marketing of flour, flour mixes and bakery ingredients, butter, margarine, cheese, milk, ice cream, jelly snacks and desserts, specialty oils, salad aids, snacks and condiments, importation and marketing of coffee and coffee-related products and grain terminal handling.
In the recent quarter, revenue in food grew 2.6% to 26.7 billion pesos (13% of total unadjusted sales). The segment also generated a margin of 7.8% compared to 6.8% in the same period last year.
Packaging
The packaging segment is involved in the production and marketing of packaging products, including glass containers, glass molds, polyethylene terephthalate bottles and preforms, PET recycling, plastic closures, corrugated cartons, woven polypropylene, kraft sacks and paperboard, pallets, flexible packaging, plastic crates, plastic floorings, plastic films, plastic trays, plastic pails and tubs, metal closures and two-piece aluminum cans, woven products, industrial laminates and radiant barriers.
Packaging is also involved in crate and plastic pallet leasing, PET bottle filling graphics design, packaging research and testing, packaging development and consultation, contract packaging and trading.
In the recent quarter, segment revenue grew 5.2% to 6.8 billion pesos (3.4% of total unadjusted sales) and delivered a margin of 9.2% (same profitability level in the same quarter of last year).
Energy
The energy segment sells, retails and distributes power through power supply agreements, retail supply agreements, concession agreement and other power-related service agreements, either directly to customers, including Manila Electric Co. (PHS:MER, Financial), electric cooperatives, industrial customers and the Philippine Wholesale Electricity Spot Market.
Revenue in the energy segment for the recent quarter fell 2.9% year over year to 19.4 billion pesos (9.6% of total unadjusted sales) and reported a margin of 31.2% compared to 36.7% in the same period last year.
Fuel and oil
The fuel and oil segment is engaged in refining and marketing of petroleum products.
Revenue in the segment grew impressively by 38.5% to 106.4 billion pesos (52.9% of total unadjusted sales; largest revenue generator for San Miguel). The segment also delivered a segment margin of 8.5% compared to 6.4% in the same quarter last year.
As observed, the business has experienced an average revenue decline of 15% in the last couple of years.
In review, San Miguel operates its fuel and oil business through Petron (PHS:PCOR, Financial), which is involved in refining crude oil and marketing and distribution of refined petroleum products in the Philippines and Malaysia (1).
In addition, Petron is the number one integrated oil refining and marketing company in the Philippines.
Infrastructure
The infrastructure segment is engaged in the business of construction and development of various projects such as airports, roads, highways, toll roads, freeways, skyways, flyovers, viaducts and interchanges.
Revenue for the infrastructure segment grew 13.5% to 5.3 billion pesos (2.6% of total unadjusted sales) and delivered a margin of 48% (most profitable of all segments) compared to 51.8% in the same period last year.
Sales and profits
In the past three years, San Miguel’s revenue declined an average of 2.9%, profits also declined by an average of 8.4% and had an average profit margin of 1.8% (Morningstar).
Cash, debt and book value
As of March, San Miguel had 200.8 billion pesos in cash and cash equivalents and 484 billion pesos in debt with debt-equity ratio of 1.7 times compared to 1.79 times in the same period last year. As observed, the conglomerate reduced its overall debt by 7 billion pesos while shareholder equity increased by 9.9 billion pesos, therefore leading to a somewhat less leveraged balance sheet.
Of its 1.3 trillion pesos in assets, 13.9% were identified as goodwill and intangible assets. The company also grew its book value by 4.9% to 443.8 billion pesos.
Cash flow
In the recent quarter, San Miguel’s cash flow from operations declined 15% to 21.6 billion pesos. As observed, the large conglomerate had cash outflows amounting to 7.96 billion pesos in the recent quarter in relation to its noncash current assets and certain liabilities, among others.
Capital expenditures, including allocation to noncurrent assets, were 10.95 billion pesos, leaving the company with 10.62 billion pesos in free cash flow compared to 13.9 billion pesos in the same period last year. San Miguel allocated 63% of its free cash flow for the period to dividends for shareholders and noncontrolling interests.
In review, the company delivered unstable positive free cash flow in recent years despite steady dividend payouts. San Miguel also issued 41 billion peos worth of common and preferred shares in the past three fiscal years, net any preferred share repayments, therefore diluting previous shareholders.
In the recent quarter, San Miguel also allocated 5.9 billion pesos to debt repayments, net any borrowings.
Conclusion
San Miguel showed strong revenue growth in the recent quarter due to its largest segment, fuel and oil (52.9% of unadjusted revenue total), and more specifically its subsidiary’s (Petron) operations. The steep climb in revenue was secondary to higher oil prices.
As observed, San Miguel is responsible for spreading its shareholders' earnings to other noncontrolling interests and, therefore, could lead to overall profits. Nonetheless, the company claimed it would have 62% higher combined profits, excluding the effect of foreign exchange losses, in comparison to the same period last year.
San Miguel did look cash rich despite having a leveraged balance sheet. In addition, the conglomerate does dilute its existing shareholders occasionally by issuing billions of new shares.
An analyst that covers San Miguel had a price target of 112 pesos a share—4.7% higher than today’s share price of 107 pesos. Meanwhile, asking a 40% margin from its book value would indicate a value of 266.3 billion pesos or 112 pesos per share.
In summary, San Miguel is a hold.
Notes
Me: Petron is a publicly listed company in both the local Philippine market and internationally through its ADRs. Nonetheless, Petron seems to be wholly-owned by San Miguel according to this screen capture from a recent annual filing (Note 2):
Disclosure: I have shares in Manila Electric Co.
