Century Pacific Food, Inc. (CNPF) Prospectus at a Glance

Key points:

  • CNPF’s success relies greatly on its capability to increase profit margins
  • CNPF appears to be an attractive investment to be held for 3 years

The listing vehicle of the Century Group, Century Pacific Food, Inc. (CNPF, the Company) was incorporated only on October 25, 2013. An illustration of Century Group’s restructuring is presented below:

CNPF1

So that CNPF will have the following corporate structure:

CNPF2

Businesses merged to and subsidiaries of CNPF can be grouped under the following business segments:

CNPF3

CNPF enjoys market dominance in all its business segment except for dairy and mixes where the Company is far number 2 from Alaska Milk Corporation which has a market share of 72%.

Brands under CNPF are as follows:

CNPF4

CNPF’s tuna export comprises private label processed tuna as well as branded products. Private label are those manufactured for offer under another company’s brand. The Company’s customers under the private label business are shown above as “major customers”.

Below is the contribution to revenues and earnings of each business segment:

CNPF5

A total of 230 million CNPF shares will be offered on April 23, 2014 to 12 noon of April 29, 2014 at P14.50. The shares are expected to be listed on May 6, 2014.

The company expects to raise P3 billion and will be distributed as follows:

CNPF6

The 33.8% allocation of proceed to working capital and/or potential acquisition is in anticipation of substantial increase in sales due to intensified marketing and sales initiative for the Company’s products. The allocated portion for potential acquisition is for the acquisition of strong but undervalued local brands. The Company claims to have a proven track record of turning under-promoted and neglected brands into market leading brands by applying its strategies, such as proper marketing and extensive national distribution coverage.

As at December 31, 2013 the Company leased 14 distribution depots and warehouses.

CNPF7

Below are the brands that the Company purchased and developed:

CNPF8

The Company allocated 729 million of the proceeds for capital expenditures. The Company intends to construction P457 million worth of tin can manufacturing factory. The factory will have an output capacity of at least two million tin cans a year supplying 25 – 30% of the Company’s tin can requirements. This will enable the Company to improve margins by sourcing tin cans at cost and reducing logistics costs associated with purchasing from third parties.

From the proceeds allocated for capital expenditures, P132 million is allocated for the construction of dairy and mix factory. The new facility is expected to further increase dairy production from 5,500 cases per day to 11,000 cases per day. The Company sees a strong growth opportunity for the dairy market. The Company plans to grow Angel brand through improved formulations, smaller packaging sizes, and achieve market leading position in the two-in-one product platform for canned milk and cream. For the Birch Tree brand, the Company intends to expand into adult and children’s milk segment.

The 32.9 million allocated for IT upgrade is intended for a demand planning software and IT data security. The demand planning software will improve the Company’s demand planning and forecasting and supply replenishment capabilities.

 

Comments:

CNPF’s overall profit margin of 4% (URC has a profit margin of 11% in 2012) is a clear room for growth and the Company is definitely working on it with their plans to construct their own tin can manufacturing factory and review of product offerings to rationalize unprofitable products from its portfolio.

Below is the calculation of CNPF’s PE ratio based on their pro-forma consolidated financial statement:

CNPF9

However, what matters most to investors is the future prospect of a Company. Let’s attempt to forecast CNPF’s earnings based on their strategies and industry statistics and developments.

Industry statistics and developments

Below is the projected growth rate of the industries where CNPF participates:

CNPF10

Philippine tuna exports to the EU are estimated to increase by about 64% by 2014 once it gains duty-free access to the 28-nation trade bloc under the enhanced Generalized Scheme of Preferences (GSP Plus Program).

Below is the tuna export breakdown of the Company:

CNPF11

Assuming that all the strategies mentioned by the Company in its prospectus all went well and they happen to increase profit margin equal to that of URC, we can have the following computations:

CNPF12

Revenues of Canned and processed fish, Canned meat, and Dairy and Mixes are estimated to grow by 7%, 7.30%, and 4.80% respectively from 2014 to 2016.  For e2014 Tuna Export revenues, the calculations are shown below and estimated to grow at the same rate as Canned and processed fish for2015 and 2016.

e2014 Tuna export revenue figures are calculated as follows:

Breakdown per revenue source of export:

CNPF13

For the estimated export revenues in 2014, all else are remained constant while Europe is estimated to grow by 64%.

 

Conclusion

Assuming all went well for CNPF, we can expect EPS to grow from .33 to 1.11 by 2016. Buying at P14.50 appears to be a good investment for an investor of 3 years.

In addition, CNPF has a dividend policy of declaring 30% of prior year earnings as dividends.

 

 

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

 

Globalport 900 (PORT) – Possible Oil Logistics Play (?)

Globalport 900, Inc. (PORT, the Company) has the following subsidiaries:

PORT1

PORT exhibited growth for 2013 and it is not just full year recognition of earnings. See chart below:

PORT2

*2012 earnings of 252 million is the consolidated earnings assuming full year consolidation in 2012[1]

PORT managed to generate earnings more than 2012 earnings as early as the third quarter of 2013 because of high revenues and improving margins.

However, things may be different for PORT when Manila Mayor Joseph Estrada announced on April 2, 2014 that the three oil firms should relocate from Pandacan. [2]

HCPTI and MNHPI are located in Manila Bay.

PORT3

The Pandacan oil depot relocation debacle stretches way back 2001. [3] On November 30, 2010, Petron Corporation (PCOR) filed a manifestation informing the Supreme Court (SC) that it had decided to cease operation of its petroleum product storage facilities in Pandacan within five (5) years or not later than January 2016. [4] On January 3, 2011, PCOR entered into a share sale and purchase agreement with HCPTI for the purchase of 35% in MNHPI. [5] The reason why PCOR acquired 35% interest of MNHPI is due to the location of MNHPI relative to PCOR’s Limay, Bataan refinery.PORT4

It could be noted that Shell and Chevron are decided not to relocate from Pandacan. [6] The reason is that both companies use pipelines to transport petroleum products from their Batangas facility to Manila. [7] However, with Manila Mayor Joseph Estrada demanding all the three companies to move out of Pandacan, Shell and Chevron may just be forced to relocate to a nearby facility which may be PCOR-PORT’s MNHPI.

MNHPI developments are right on schedule with new North Harbor terminal opening on October 9, 2013. [8] MNHPI has a finger-pier scheme as shown below:

PORT5

MNHPI intends to consolidate the finger-piers into only three terminals: [9]PORT6

In a presentation of MNHPI in January 31, 2013, MNHPI intends to finish terminal 1 as soon as August 2014, [10] which is timely to PCOR’s relocation from Pandacan.

PORT7

There are many unknown factors in forecasting PORT’s earnings assuming that the three oil companies will relocate to MNHPI. Thus, the best strategy is to wait and see should the event happen and forecast earnings from there.

Calculation of estimated 2013 earnings is shown below:

PORT8

With an estimated EPS of 0.18 for 2013, PORT is trading at 45x PE ratio at last traded price of P8.15. At 45x PE and with the Manila day time truck ban [11] to pose a threat on PORT’s growth, PORT appears to be overvalued.

 

Source:

  1. Note 6, SEC 17-A 2012, http://goo.gl/LPokPP
  2. Estrada gives 3 oil firms until January 2016 to relocate depots from Pandacan, http://www.interaksyon.com/article/84024/estrada-gives-3-oil-firms-until-january-2016-to-relocate-depots-from-pandacan
  3. TIMELINE: Pandacan oil depot relocation debacle, http://www.rappler.com/newsbreak/54779-timeline-pandacan-oil-depot-relocation-debacle
  4. PCOR SEC 17-A 2012, Pandacan cases, p. 28, http://goo.gl/6ileJW
  5. PCOR SEC 17-A 2011, note 11, p. 108
  6. Shell says oil depot to stay put in Pandacan, www.interaksyon.com/business/65949/shell-says-oil-depot-to-stay-put-in-pandacan
  7. Industry structure, http://www2.doe.gov.ph/DO/InStruct.htm
  8. New North Harbor terminal opens, http://business.inquirer.net/146719/new-north-harbor-terminal-opens#ixzz2yB7ktb4Z
  9. Port Development Through Public-Private Sector Partnership, slide 42, http://goo.gl/rcvTce
  10. MNHPI Presentation to the 7th Philippine Ports and Shipping 2013 on Modernizing Port Facilities, Equipment & Systems to Service Domestic Shipping, http://goo.gl/xDeqUI
  11. Mixed reaction to a truck ban in Manila, http://www.bworldonline.com/content.php?section=Economy&title=Mixed-reaction-to-a-truck-ban-in-Manila&id=85683

 

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: I own PORT shares

Double Dragon Prospectus at a Glance

Key points:

  •          DD’s current business is not that attractive
  •          DD’s value is largely derived from the anticipated success of CityMall’s strategy to expand in the Visayas and Mindano.
  •          DD could be valued at P2.55 assuming that CityMall is a success for the Company.

This post is a supplemental post to an article found here. The current business of Doubledragon Properties Corp. (DD, the Company) has the following performance:

DD1

Amazing at first glance but when compared with operating cash flows:

DD2

As revenues increase rapidly and cash flows bleeding, the only option that DD could do to fund the growth of its real estate operations is to raise capital or acquire more debt. Negative operating cash flow is not all bad. Rapidly growing companies are expected to have negative operating cash flow to fund growth.  DD generated negative operating cash flows due to the recognition of unrealized gains on investment properties as revenues, recognition of more accounts receivable sales, and build-up of more inventory. The risk that DD is most sensitive to is the lack of demand for the inventory they built.

DD’s most promising business development is its entry in the retail industry through CityMall Commercial Centers Inc. (CityMall) which will provide the company with recurring revenue stream and stable cash flows from rental income. The Company aims to open 100 CityMalls around the country and targets 1 million leasable sq. m. of commercial and office property projects by 2020. CityMall will provide prime spaces for the fast food brands of Jollibee group and will house SM Group brands with the acquisition of SM Investment Corporation of 34% interest in CityMall last February 17, 2014. The supermarket area of CityMall, is non-exclusive and will be open for all the top supermarket chains in the country.

What makes CityMall attractive that even SM group invested for a 34% stake?

CityMall will operate in the retail industry under community shopping centre (community centre) format. Below are key retail formats in the Philippines:DD3

Community centres generally have supermarket or hypermarket as its anchor locator along with various specialty stores. Investment in the community centres is a bet on the strong and rising consumer spending in the Philippines. Community shopping centres thrive despite the presence of large malls as consumers seek convenience in their shopping experience. DD plans to expand CityMall in Visayas and Mindanao and such strategy is well founded:

DD4

Majority of community centres are located in Luzon and Metro Manila while the community centres in Visayas and Mindanao are largely concentrated in Metro Cebu and Davao City. Clearly, there is room for growth in expanding community centre retail formats in Visayas and Mindano.

One of the competitive strengths mentioned in the prospectus is the local knowledge of Mr. Injap Sia of the Visayas and Mindanao markets. With that management experience in mind, DD is in the position to tap the potential markets in Visayas and Mindanao through the expansion of CityMall to these regions.

Valuation

Currently, DD’s revenues are all non-recurring which means application of PE ratio on its current business to value the company will not be valid. Therefore price to book value multiples is the appropriate valuation metric for DD.

Computation of DD adjusted book value are shown below:

DD5

Comparison of DD’s price to book value ratio to other publicly listed companies:

DD6

Based on the table above, DD is valued higher than the established real estate companies that have stable cash flows from rental like RLC and MEG. PGOLD is DD’s most comparable company assuming that CityMall will be DD’s major revenue contributor in the future. That said, DD could be valued at least 3.5x P/BV or a target price of P2.55 (P0.73 x 3.5).

 

 

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: No plans to initiate position in DD

Announcements

1. I graduated in MBA (at last!) which means more time for blogging! :)

2. Joined social media sites:

LinkedIn: http://www.linkedin.com/pub/renzie-doem-agutaya/8b/60b/399

and

Twitter! https://twitter.com/RenzieDoem

I was looking for a platform where investors both sophisticated and newbies can interact and I think twitter is the best platform.

3. There is a new site where I am planning to participate actively: http://www.stockquotient.com/
I receive no financial benefits from the site but I like their concept of following the structure of seekingalpha.com. I believe that someday filipinos will help each other in the journey of continuing education in stock investing and stockqoutient is that platform for those investors who are willing to help and willing to learn more.

 

More posts coming your way! :)

Aboitiz Power Case Analysis

How many people have you heard that said: “I wish I could have bought AP way back 2007 at P6”?

AP1

Instead of wishing something that will never happen (i.e. turning back time), let’s examine why AP increase from P6 to P35 and moved sideways from thereon so that through this analysis we will learn something that we can apply for future stock purchases.

The breakdown of our problem is:

  1. Why AP increased from P6 to P35 in 2007 to 2010?
  2. Why AP price moved sideways from thereon?

Why AP Increased From P6 to P35 in 2007 to 2010 and Traded Sideways Thereon?

In order to answer the problems, much insight can be derived from the following relationships:

AP2 AP3 AP4

Based on the charts presented above, the following can be observed:

  1. Capacity of AP’s power generation increased before price jumped from below P10 to P30’s level.
  2. The substantial increase in generation capacity was only reflected in the revenues of AP in 2010 thus the spike in the price in 2010.
  3. AP’s stock price is driven by the increase in revenues and EPS.
  4. The stock price moved sideways as generation capacity growth slowed down.

Power capacity drives the revenues of AP. Revenue growth in effect drives the EPS of AP. The increase of EPS places AP at an attractive valuation.

AP5

Therefore, power capacity is the foundation of AP’s value (and to other power generation companies).

Warren Buffett loves a company with good economic moat and a good management. Economic moat is the barrier for entry of competitors. The power generation industry has a natural barrier for entry of being capital intensive and the 3-year lead time before the completion of a power plant construction. The power shortage in the Philippines assured AP that the electricity capacity that it produces have ready buyers. Combined that with a management that can deliver what it promised, AP delivered a lot of shareholder value to its investors.

 

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: No position

Forecasting ACR’s 2013 and 2014 Earnings

Alsons Consolidated Resources, Inc. (PSE: ACR, the “Company”) is different from stocks which I consider cheap, at P1.40 ACR is trading at 17.5x PE ratio using 2012 earnings. A purchase of stock with high PE ratio is justified if there is substantial growth in expected future earnings. For example, stock A trades at P40 with earnings per share (EPS) of P1 or a PE ratio of 40x (P40 / P1). Assuming that by next year stock A’s EPS will jump to P30, then stock A is a bargain even at P40 because by next year stock A will be trading at 1.33x PE ratio (purchase price of P40 / EPS next year of P30).

ACR’s attraction is its move to concentrate its earnings source to power generation in Mindanao. ACR currently have 100 MW and 55 MW capacities through Western Mindanao Power Corporation (WMPC) and Southern Philippines Power Corporation (SPPC). ACR announced in a press release on March 22, 2013 the takeover of 98 MW Illigan Diesel Power Plant. [1] On July 9, 2013, ACR announced the buyout of the remainder 40% interest in Conal[2] hiking its effective interest in WMPC and SPPC to 55% from 37.40%. ACR expects phase one (105 MW) of its 75%-owned coal-fired power plant in Maasim, Sarangani, Sarangani Energy Corporation (SEC) to operate commercially in September 2015 and phase two (105 MW) to operate in 2016. [3] Other than SEC, ACR is in the advance stages of development for the 105 MW San Ramon Power, Inc. (SRPI) in Zamboanga. The completion of the construction is expected to be delayed for 6 to 12 months or a push back of the completion from 2016 to 2017-2018. [4] All in all, ACR expects a surge of its power capacity from 155 MW to 463 MW by 2016-2018 which is 25% of Mindanao’s projected peak demand of 1,829 in 2016. [5]

However, what matters most to investors are: how much will it contribute to ACR’s earnings and what should be the valuation?

For 2013, we should consider the following events:

  1. Increase of ACR’s interest in Conal to 100% from 60%.
  2. Takeover of 98 MW Illigan Diesel Power Plant.

Illigan Diesel Power Plant is 100% owned by ACR through Mapalad Power Corporation (MPC) while WMPC and SPPC initially contributes 37.40% earnings and was later increased to 55% with the 100% control of Conal in July. For conservatism, let’s assume that the increase of interest in Conal will have no effect in ACR’s earnings. In order to calculate for the estimated earnings contribution of MPC, 1) revenue contribution must be calculated and 2) applied with applicable profit margin.

Below is the calculation of MPC’s actual and estimated revenue contribution:

ACR1

Note that MPC rehabilitated the 98 MW diesel power plant in Illigan. The power plant started operating at 10M-26MW for March to June which explains the small revenues it generated in the second quarter. It gradually increased capacity and was finally fully rehabilitated at 98MW capacity in September 2013. Thus, it is very conservative to assume that MPC will generate only P591 million revenues in the fourth quarter given that MPC will operate at 98MW capacity in the last three months of 2013.

In determining the applicable profit margin, looking at historical profit margin will be helpful in in order to determine the appropriate figure:

ACR2 ACR3

The sudden dip of ACR’s profit margin in the 3rd quarter of 2013 is alarming. It may mean inefficiency in operating the Illigan power plant which is likely because the power plant is already old. However, according to the management, the surge in cost of goods and services was caused by the increase in fuel usage of MPC but was pass-on to its customers. [6] However, should the fuel costs be “pass-on” ACR’s profit margin should have not declined from 40% in the 2nd quarter to only 16% in the 3rd quarter. Therefore, we can say that costs incurred in rehabilitating MPC’s Illigan power plant were also included in the cost of goods and services. For conservatism, let’s assume a profit margin of 20% for Illigan power plant.

Below is the calculation of estimated earnings of ACR’s in 2013:

ACR4

Based on our calculation above, we can expect ACR to report earnings attributable to parent of P582 million which is a little higher than P508 million reported in 2012.

How about for 2014? For 2014, let’s consider the increase in ownership in Conal.

 ACR5

For 2014, we can expect earnings attributable to parent of P930 million or an EPS of .148. With an estimated EPS of .148 for 2014, ACR is trading at 9.45x PE ratio.

One more thing to consider

ACR’s sale of 60% interest in Lima Land, Inc. for 1.36 billion [7] appears to be at a huge gain. Below is my calculation based on the figures provided in the 3rd quarter of 2013:

ACR6

Considering one-time gain, we can expect ACR to report earnings in 2013 attributable to parents of P1,081 million. (Warning: Make sure not to use PE multiple valuation on earnings that includes one-time gains.)

Using conservative assumptions in estimating forecasted earnings, in my opinion, ACR is an attractive investment for those willing to hold for 2-5 years.

Sources:

  1. Press Release: “Alsons Consolidated 2012 Profit up 12%, as it takes over Iligan Diesel Power Plant”; Board approval of cash dividend declaration, Annual Stockholders’ Meeting on May 24, 2013 with record date of April 15, 2013, http://goo.gl/r2vhM0
  2. Press Statement: “Alsons Consolidated Resources, Inc. Acquires EGCO stake in Conal Holdings Corporation”, http://goo.gl/4bk66r
  3. Press Release: “Alsons Power’s 13 Billion Peso Sarangani Energy Plant to Operate First 105 Mega Watt Phase by 2015″, http://goo.gl/lnwKYT
  4. Clarification of news article: “Alson’s Zamboanga City power plant faces delay”, http://goo.gl/piKaDV
  5. Press Statement: “Alsons Power current capacity to more than double in 3 years – will supply over 1/4 of Projected Mindanao Peak Demand by 2016″,http://goo.gl/7Y4bHK
  6. SEC 17-Q September 2013, Management’s Discussion and Analysis of Results of Operations and Financial Condition, p.29
  7. Signing of Share Purchase Agreement by Aboitiz Land, Inc. with Alsons Land Corporation re: acquisition of 60% interest in Lima Land Inc.,http://goo.gl/t9Syy3

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: I own ACR shares