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Financial Adviser: 5 Things Every Investor Needs to Know About Monde Nissin's IPO

Know before you invest.
ILLUSTRATOR WARREN ESPEJO
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Branded consumer food manufacturer Monde Nissin Corporation (PSE: MONDE) will be the second company that will go public this year after it recently obtained approvals from regulators to raise up to P55.9 billion in an initial public offering (IPO).

MONDE will be the largest initial public offering in Philippine history, overtaking Converge ICT Solutions (PSE: CNVRG)’s IPO last year at P29 billion.

The other large IPOs in recent years include SM investments (PSE: SM) P28.75 billion; Cemex Holdings’ (PSE: CHP) P21.8 billion in 2016; Robinsons Retail Holdings’ (PSE: RRHI) P26.8 billion in 2013, and Cebu Pacific’s (PSE: CEB) P23.3 billion in 2010.

MONDE will sell up to 4.14 billion shares, composed of 3.6 billion new shares and 540 million secondary shares, to the public at P13.5 per share. The total offering shall be equivalent to 23 percent of the company’s equity after the IPO.

The offering period of MONDE shares will run from May 19 to 25 with a target listing date on June 7, 2021. The expected market capitalization of MONDE at IPO price will be P242 billion.

At this market size, MONDE will easily count among the top 20 largest companies in the Philippine Stock Exchange.

Interestingly, by comparison, MONDE’s market cap will be as large as Globe Telecom’s (PSE: GLO), but will have only about one half of GLO’s revenues and income.

MONDE will be listing at a time when the current PSE Index is on a downtrend due to rising risks of a prolonged economic recession from the ongoing coronavirus pandemic.

Hopefully, by the time MONDE is listed, the overall market sentiment may have already improved with the PSE Index on the way to recovery.

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As in any IPO, it is always wise to spend some time understanding the business of the company and evaluate its growth prospects.

The more you know about the fundamentals of the stock, the better your chances in handling your investment risk and returns.

Here are the top five things every investor needs to know about Monde Nissin’s IPO:

1| Know the background of the company

MONDE is country’s largest noodle and biscuit manufacturer. For over 40 years, the company has built a portfolio of top brands such as Lucky Me!, SkyFlakes, Fita, M.Y. San Grahams, Nissin, Mama Sita’s and Dutch Mill.

In 2020, MONDE’s iconic brand, Lucky Me! dominated the instant noodle market with 68 percent market share, while Dutch Mill brand controlled the yogurt drinks market with 73.2 percent.

MONDE’s other market-leading brands such as SkyFlakes and Fita are number one in the biscuit market with 30.5 percent market share, while Mama Sita’s leads in oyster sauce brands with 56 percent market share.

In 2015, MONDE further strengthened its market position with the acquisition of Marlows Food Limited in UK, one of the largest manufacturers of meat alternative products in the world.

Marlows owns the brand Quorn Foods, which is the market leader in meat alternative market in the UK with 28 percent market share.

For many years, Betty Ang has long been known as the founder of MONDE, being the president of the company, but a look at the list of MONDE’s shareholders reveals that Ang owns only 22.7 percent.

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More than 75 percent of the company is owned by the extended family of Ang’s husband, Hoediono Kweefanus, an Indonesian, who owns 6.6 percent.

Ang’s brother-in-law, Hartono Kweefanus, who sits as the chairman of the board, owns the largest stake in the company with 29.3 percent in the group. Kweefanus is currently the chairman of PT Khong Guan Biscuit, one of the largest biscuit manufacturers in Indonesia.

Another significant shareholder, Henry Soesanto, also Indonesian, who currently serves as chief executive officer of the company, owns 12.63 percent of the company.

Soesanto, who is also Ang’s brother-in-law, will be the selling shareholder of 540 million secondary shares in Monde Nissin’s IPO.

2| Know the growth prospects of the company

MONDE is raising a total amount of P48.6 billion from the sale of its 3.6 billion primary shares to the public.

Out of this total amount, the company intends to spend only 44 percent of the proceeds for capacity expansion, while the balance of 56 percent will be spent on payment of debts.

MONDE plans to use roughly half of the budget for capital expenditure for its branded food and beverage business.

One of the major expenditures will be for the completion of the construction of its manufacturing facility in Malvar, Batangas that will improve its operational efficiency and productivity.

The other half of the capital expenditure budget will be spent in capacity expansion for the meat alternative business, as well as improvement of its product development capabilities.

MONDE has allotted about 27.2 percent of the proceeds to repay its total loan outstanding by roughly 40 percent, while another 28.8 percent of the proceeds will be spent to pay off its convertible notes outstanding.

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MONDE will be paying Arran Investment Pte Ltd from Singapore an estimated amount of P13.4 billion for redemption of the convertible notes worth P9 billion.

By the way, Arran Investments Pte Ltd, which stands to make over P4 billion from the IPO, was the same company that acquired 17.5 percent of AC Energy (PSE: ACEN) through a private placement at P2.97 per share.

3| Know the earnings prospects of the company

About 80 percent of MONDE’s annual net sales comes from its branded food and beverage business. Its noodle business contributes about 50 percent of the total net sales, while its biscuit business about 30 percent.

The balance of 20 percent comes from MONDE’s meat alternative business from overseas.

Last year, MONDE’s total net sales grew by 3.8 percent to P67.9 billion from P65.5 billion in 2019. This resulted to an increase of eight percent in operating profits to P13.1 billion from P12.1 billion in 2019 due to higher gross profits and lower operating expenses.

Lower interest expenses and higher foreign exchange gain last year enabled MONDE to increase its net income by 21 percent to P8.07 billion from P6.6 billion in 2019.

This year, assuming the repayment of loans will cut interest expenses by 60 percent given same sales growth of 3.8 percent, MONDE’s net income should increase by 19.4 percent to P9.6 billion.

But this growth in earnings will come as a result of financial deleveraging rather than organic growth. Earnings growth after 2021 will more or less mirror the company’s average sales growth of less than five percent.

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Over the long-term, MONDE’s earnings growth will depend on the success of its meat alternative business, which has been losing in the past two years.

Total sales of MONDE’s meat alternative business, Quorn Foods, has been declining since 2018 from P15.4 billion to P15 billion last year. This has resulted to a significant decline in profitability from a net income of P321 million in 2018 to a net loss of P859 million in 2020.

Hopefully, with the improvement in research and development, the recovery in MONDE’s meat alternative business should help support its total earnings to grow at higher level.

4| Know the price valuation multiples

It is interesting to note that MONDE’s current pricing share almost similar multiples with its closest competitor, Universal Robina Corporation (PSE: URC).

This lack of compelling discount may limit MONDE’s upside potential as all the growth opportunities of the stock are already priced in the share price.

For example, if we assume MONDE will earn P9.6 billion in net income this year as explained above, its prospective pricing multiple at market cap of P242 billion will be 25 times Price-to-Earnings (PE) ratio.

This multiple will put MONDE’s PE ratio at just slightly higher than URC’s prospective PE ratio of 24 times, assuming URC net income will grow the same rate from 2020 this year.

Now, the use PE ratio may have some drawbacks as accounting earnings may be manipulated. So, the other way to price a stock is the use of Enterprise Value (EV)-to-EBITDA ratio.

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The use of EV/EBITDA ratio provides a clearer picture of a company’s financial performance because it removes taxes, non-operating expenses and income and financial charges.

If we apply this to MONDE, using 2020 financials, we will derive an EV/EBITDA of 14.74 times, which is 10 percent more expensive than URC’s 13.35 times.

Without historical price reference for MONDE, it is difficult to assume at this point if the market will price MONDE the same way it priced URC in the past.

The premium that the market will give to MONDE may differ with URC given the differences in operating risks.

5| Know the intrinsic value of the stock

It has been said that a company creates value for its shareholders when it generates a return on invested capital (ROIC) that is higher than its weighted average cost of capital (WACC).

The higher the residual spread between a company’s ROIC over its WACC, the higher the share price of the stock should be as reflected in its high Enterprise Value (EV) to Invested Capital (IC) ratio.

In theory, the ratio of ROIC-to-WACC should be equal to EV-to-IC ratio so that when a stock’s ROIC-to-WACC is higher than its EV-to-IC ratio, it means that the stock is undervalued, and vice versa.

If we apply this theoretical valuation to MONDE, we will find that the stock has ROIC of 23.8 percent against its WACC of only 7.8 percent, which is very good.

An ROIC higher than the cost of capital means the company is healthy and growing, while an ROIC lower than the cost of capital suggests the company is unsustainable and destroying value.

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If we take the ratio of MONDE’s ROIC-to-WACC, we will derive a multiple of 3.1 times.

At Monde Nissin’s IPO price offer of P13.50 per share, MONDE’s projected Enterprise Value is estimated at P226 billion. If we compare this against the company’s invested capital, we derive an EV-to-IC ratio of 4.0 times.

While MONDE’s ROIC-to-WACC at 3.1 times is remarkable, its pricing at EV-to-IC ratio of 4.0 times showed that the stock’s perceived value has gone way ahead of its fundamentals.

Compared this to URC, the stock’s current ROIC-to-WACC ratio is 2.87 times, which is similar to MONDE, but its EV-to-IC ratio is substantially low at 1.07, making the stock grossly undervalued.

If we equate MONDE’s EV-to-IC ratio to its ROIC-to-WACC ratio at 3.1 times, we should theoretically derive a fair value price for the stock at P10.51 per share.

Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice [email protected] or follow him on Twitter @henryong888 

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