Financial Adviser: 5 Reasons Why Ramon Ang's San Miguel Food and Beverage, Inc Is the Cheapest Food Stock Today and How to Profit from It
The Philippine Statistics Authority (PSA) reported last week that inflation in October has accelerated to 7.7 percent, the highest in 14 years, from 6.9 percent in September.
With global inflation on the rise as supply chain issues caused by the ongoing war in Ukraine remained unresolved, it is likely that headline inflation will continue to go up, possibly to double-digit levels in the coming months.
Amid the rise in prices, food stocks—particularly the big brands—are generally considered to be inflation hedges because they are able to pass on the additional costs to consumers through higher prices.
But higher interest rates as a result of the rise in inflation also raises risks of food stocks. Higher input costs tend to lower margins and income of food companies in the short-term. Because of this, share prices of food stocks have been falling this year. The food sector is down by an average of 17 percent this year, higher than the 13 percent loss of the Philippine Stock Exchange (PSE) index.
Among the biggest losers in the sector is San Miguel Food and Beverage, Inc (PSE: FB), which has a year-to-date loss of -51.05 percent.
The other heavyweight losers in the sector that have at least P100 billion market cap are Monde Nissin (PSE: MONDE) with year-to-date loss of -29.01 percent; Emperador (PSE: EMI) with -5.2 percent, and Universal Robina (PSE: URC) with -1.1 percent.
FB is currently trading at its five-year low. The last time that the share price of FB traded at P30 peso range was in 2017 when the stock was still known as San Miguel Purefoods.
It was in 2018 when FB became San Miguel Food and Beverage Inc. as a result of a three-way consolidation between San Miguel Brewery, Ginebra San Miguel, and San Miguel Pure Foods.
With the share price of FB now down to pre-consolidation era, the stock makes a good candidate for value investing.
As a value investor, no matter how low the stock has fallen, it is always wise to get to know the company and its fundamentals. When you understand the business of the company, you will have more confidence in investing in the stock.
Here are the five things every investor needs to know about San Miguel Food and Beverage, Inc and how we can profit from it:
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1| Earnings rising to record high
San Miguel Food and Beverage, Inc (PSE: FB) is the leading food and beverage company in the Philippines. About 87 percent of its revenues comes from categories where it has dominant market positions.
FB’s market leading brands include San Miguel Pale Pilsen, San Mig Light, and Red Horse for beer; Ginebra San Miguel for gin; Magnolia for chicken and ice cream; Monterey for fresh and marinated meats; Purefoods for processed meats; and B-Meg for animal feeds.
FB’s revenues come primarily from three business segments: the food segment contributes about 47 percent. This is followed by the beer and non-alcoholic beer segments, which contribute about 44.5 percent; while the spirits hard liquor segment contributes about eight percent.
Total revenues of FB have been increasing by a compounded growth rate of 30.6 percent per year since 2015, from P106.8 billion to P310.8 billion in 2019.
This steady growth in revenues has translated to 42 percent growth in FB’s net income from P4.5 billion in 2015 to P18 billion in 2019.
During the 2020 pandemic, FB suffered a 31.7 percent decline in net income to P12.5 billion as total revenues fell by 10 percent to P279 billion. But last year, FB’s total revenues recovered almost to its pre-pandemic level at P309 billion, while total net income after minority interests improved to a record high at P19.8 billion.
This year, with the reopening of the economy, FB’s total revenues continued to get stronger.
For the first six months of the year, FB’s total revenues increased by 17.8 percent to P172 billion from P146 billion in the same period last year. This increased FB’s net income by 5.8 percent to P12.5 billion from P11.8 billion in 2021.
If we annualize FB’s earnings this year based on the results of its first half performance, we can project that it may likely achieve a net income of P26 billion by the end of the year on total record revenues of P364 billion.
2| High earnings quality driving expectations of future positive cash flows
Earnings are an important driver of share prices. Investors use earnings updates as basis to project how stocks are likely to be valued in the coming months.
The problem is that not all earnings share the same quality.
If you have two stocks that have similar businesses and earnings growth outlook, you should always choose the one with higher cash flows because the risk is lower.
The cash flows of a company can be broken down into three components: operating, investing, and financing activities.
Among the three, the operating cash flow is considered the most important because it indicates the capacity of a company to generate cash from the business. If a company cannot produce adequate cash flows from operations, it will not be able to finance its expansion activities unless it secures funding from outside either by borrowing or capital raising.
The operating cash flow is seen as a safer alternative to net income because there is less room for management to manipulate the figures.
If operating cash flow is greater than the reported earnings, it means the company has a high earnings quality that may merit a long-term premium on valuation. The higher the ratio of operating cash flow to net income, the higher the earnings quality of the company, hence the greater the earnings predictability.
FB’s operating cash flow has been growing by an average of 23 percent per annum, from P11.9 billion in 2015 to P40.7 billion last year.
FB’s operating cash flows are consistently higher than its reported net income since 2015, indicating high quality of earnings.
Its operating cash flows to net income ratio before the pandemic has averaged about 1.33 times before it increased to 1.90 times in 2020. Last year, FB’s operating cash flow to net income ratio normalized at its historical average of 1.30 times.
This year, FB’s operating cash flow to net income for the first six months has increased to 1.63 times.
By following market behavior, stocks with high operating cash flow to net income ratio, particularly those with 1.5 times and above, have better chance of generating positive returns in the next 12 months.
3| Growing return on equity arising from solid financial position
FB’s strong balance sheet allows it to support its business goals and maximize its financial performance.
FB’s current ratio, which measures its ability to pay its short-term payables, is 1.72 times as June 2022, higher than the 1.49 times it reported in the same period last year.
A company with a current ratio of less than 1.00 does not have the capital on hand to meet its short-term obligations if they were all to become due at once, but a current ratio that is greater than 1.00 means that the company has the financial resources to remain solvent in the short term.
FB has debt-to-equity ratio of 48.7 percent of its total equity. If the cash reserve of FB at P50.8 billion is included in the computation for net debt, its net debt-to-equity ratio will be reduced to only 16 percent.
FB also has been improving its return on equity. In 2019, FB’s return on equity was 20.01 percent. This fell to 14 percent in 2020 pandemic but recovered strongly to 22.5 percent last year.
This year, FB’s return on equity for the first six months was already 12.2 percent. If we annualize this, we can expect return on equity to reach at 24 percent.
FB’s high return on equity justifies its growing dividend payments. In 2020, FB paid a total cash dividend of P1.60 per share. This increased by 6.25 percent in 2021 to P1.71 per share.
This year, FB has already paid P1.46 per share as of August. It is expected to pay another dividend this November.
If FB pays another P0.40 per share, this will make its total cash dividend this year at P1.86 per share, 8.8 percent higher than last year.
At P1.46 cash dividend that has been paid so far, FB is already trading at 4.58 percent dividend yield. If we project the additional P0.40 per share this November, this will increase FB’s dividend yield to an attractive 5.4 percent.
4| Trading below historical pricing multiples
If we divide FB’s current market capitalization of P206 billion by its 12-month trailing income of P20.5 billion, we can derive FB’s Price-to-Earnings (PE) ratio of 10.08 times.
This is relatively very low compared to its average PE in 2021 at 21.3 times. Prior to last year, FB’s average PE from 2018 to 2020 was 29.65 times.
If we price FB at its PE multiple from last year, we should target the stock to double over time to P72.3 per share.
At 21.3 times, FB’s conservative pricing will still be lower than its historical compounded earnings growth rate of 28 percent.
FB is also trading at only two times its book value per share, which is again historically low compared to its average of 5 times Price-to-Book Value ratio.
FB’s improving return on equity at 22 percent warrants a higher Price-to-Book Value ratio in the long-term.
If we price FB at its historical Price-to-Book Value of 5.0 times, the stock should be priced at P85.6 per share.
5| Trading at large discount to intrinsic value
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 valuation to FB, we will find that the stock has an impressive ROIC of 20 percent against its WACC of only 9.1 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.
If we take the ratio of FB’s ROIC-to-WACC, we will derive a multiple of 2.2 times.
At the current share price of FB, its projected Enterprise Value is estimated at P231.9 billion. If we compare this against the company’s invested capital of P236.6, we will derive an EV-to-IC ratio of only 0.98 times.
While FB’s ROIC-to-WACC at 2.2 times is remarkable, its pricing at EV-to-IC ratio of 0.98 times showed that the stock’s perceived value has fallen to low beyond its fundamentals, making the stock grossly undervalued.
Ideally, we need to equate FB’s EV-to-IC ratio to its ROIC-to-WACC ratio to reflect its true valuation. If FB’s EV-to-IC ratio is equal to ROIC-to-WACC ratio at 2.2 times, we should theoretically derive a fair value price for FB at P83.97 per share.
At this target price, the current price of FB offers 59 percent discount. Further breakdown of the stock towards P30 support should give an excellent opportunity for it to accumulate.
Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888