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.

 

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22 thoughts on “Century Pacific Food, Inc. (CNPF) Prospectus at a Glance

  1. Renzie, it doesn’t make sense that you assume CNPF can get its margins to the same level as URC. They are in different businesses. The margins on packaged meats are very different from that of salty snacks and confectionery.

    Reply
    • Can you suggest of a comparable company for CNPF?

      My logic was that, assuming CNPF also targets a profit margin similar to that of URC.

      The change in profit margin from 2014 – 2016 is purely guesstimates. There are many ways for them to achieve that as you may have read in their prospectus (tapered integration, probable introduction of products with higher margins, increase of revenue contribution of higher margin products, cease of production of unprofitable products) but I am not sure if they would eventually reach 10% profit margin.

      Wonderful comment. thanks. 🙂

      Reply
  2. Hi, Renzie. I am having a hard time educating myself in fundamental analysis, particularly business valuation. By any chance your new job is managing private funds so I can just join? If not, would you consider conducting weekend seminars/workshops/tutorials on business valuation for dummies? 🙂 Thanks

    Reply
    • hello ryan,

      I am working in an accounting firm, KPMG.

      Yup. I would love to conduct seminars even just for free.:)

      What in business valuation did you find hard?

      Regards,

      Renzie

      Reply
  3. Thanks for the prompt reply.

    I find it difficult to determine the proper valuation method for different types of companies. I tried DCF on Splash Corp. (using an excel I found at Safal Niveshak blogsite) but since the FCF is very inconsistent, I don’t know whether I should put FCF growth rate and have no idea how to determine what rate to consider. I’m not even sure how to arrive at a reasonable discount rate. I am also clueless as to whether retirement benefits liabilities should be considered in computing the net debt level.

    I really hope you were not kidding about the seminar and that you have time for it because I’m really gonna take you up on it. I’ll just ask some of my friends if they are also interested so more would benefit and organize first the concepts/issues that I need clarification the most. I’ll just email you privately in the next few days to ask for your most convenient date, time, and place.

    Thanks so much and really looking forward to learning from you. Mabuhay ka, kapatid.

    Ryan

    Reply
    • Apply only DCF on companies whose FCF you can reasonably estimate (thus you can rarely use this on growing companies). with regards to discount rate, you can use risk free rates (government bonds) + your desired rate of return considering the risks you take.

      A good explanation of DCF is here: http://www.oldschoolvalue.com/blog/valuation-methods/how-value-stocks-dcf/

      Although found on books and widely used, I don’t use DCF.
      For the following reasons:
      1. Estimating proper discount rate
      2. estimating cash flows and
      3. assumption that the company will operate in perpetuity

      joel greenblatt does not use DCF either.

      “Question 11. What type of things would you look for in an annual report that your typical investor might not pick up on? Do you feel there is a need to do a DCF analysis of a company? (cyrano)

      JG: I look for obvious things when looking for bargains, not something terribly obscure. So, if a company has two divisions, one that earns money and one that loses, I might speculate on what the company might be worth without the money losing division, but that wouldn’t involve higher mathematics or special sleuthing talents. A DCF analysis is potentially a useful reality check to see what kind of growth rate, earnings and discount rate would justify the current price. However, I usually just look at a simple multiple to normalized earnings. If I can buy something at a very low multiple and I have confidence in the earnings stream, I don’t have to calculate a DCF to know whether I want to buy it.”
      http://www.gurufocus.com/news/59450/answers-from-joel-greenblatt-are-here

      I usually use simple multiples in valuation, PE and P/BV.

      With regards to the seminar, I am serious about it and that I want to give it for free.:)

      who would be the willing participants? people not yet investing in the stock market? I’m just here in makati.

      Reply
  4. Thanks again, Renzie. I found P/E unappealing because my first observation was that all the stocks I was interested in have high P/Es in relation to the prescriptions of the american value investors I admire. Maybe I just have to investigate deeper and more regularly to spot the rare but fast moving elephants. Unfortunately, we only have a handful of listed companies and perhaps all pro analysts/firms are capable of covering all of them so prolonged mispricing may not be as common here as in other jurisdictions. But then again, you were able to spot opportunities like PAX and there are enough crazy people as shown by the recent massive fluctuations of PCKH so I guess one just needs to acquire the needed skill to profit from market inefficiencies.

    Re: participants – people who have started investing modestly in mutual funds and UITFs and now want to level up and invest directly in the stock market but are clueless on how to find bargains. I just want to steer them away from the noise and temptations of speculative stockpicking. I’ll email you next week. Happy weekend.

    Reply
    • No problem. Let me know ryan.

      I’ll prepare case studies and presentations on basic valuations and how to spot those opportunities. The presentation will not be more than an hour and more on Q&A. 🙂

      Reply

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