San Miguel Pure Foods Up By 30% But Still Undervalued
I started buying San Miguel Food And Beverage Inc. 'FB' (formerly San Miguel PureFoods Inc. 'PF') last November 2017 after I saw their disclosure about the share swap deal with SMC and GSMI.
After careful analysis of the deal, I immediately knew that this may turn out into something big.
This post will discuss the investment idea behind it and why I think that this is a good bet.
Simplifying The Details Of The Share Swap Deal
When the disclosure was released last November 6, it was mentioned there that FB will acquire 7,859,319,270 shares of San Miguel Brewery Inc. (SMC) and 216,972,000 shares of Ginebra San Miguel Inc. (GSMI) with a value of ₱336,349,294,992.60 by issuing 4,242,549,130 shares.
To do this, FB changed its par value from ₱10.00 to ₱1.00 thus increasing its authorized capital stock so that it can issue the 4,242,549,130 shares.
This transaction is worth ₱79.29 per share split-adjusted, or ₱792.80 per share.
From this simple analysis, we can tell that FB is acquiring a profitable beer business worth ₱792.80/share. Based on this, I bought shares between ₱530 to ₱560 per share.
Profitability And Liquidity Ratio Analysis
Before the share swap deal, FB is fairly valued based on my calculations. My 3Q17 intrinsic value estimate equates to ₱312.92 with a soft target of ₱425.30. Last October 2017, FB is trading between ₱306 and ₱311.
I like FB because it increased its profit margins. Gross profit margin increased from 18.62% in 2012 to 22.97% in 2016. Net margin increased from 4.36% in 2012 to 5.09% in 2016.
The average 3-year return on assets and return on equity equates to 7.23% and 11.83% respectively.
Liquidity is also good. FB maintains a current ratio between 1.4 and 1.9. Debt to equity is maintained below 0.8.
FB's Stock Performance And What I Expect To Happen This Year
FB is already up by 30.81% YTD and I believe that the uptrend momentum is only just the beginning.
The reason has something to do with Pure Foods plans on doing a follow-on offering to maintain the required minimum public float. According to the article, the offering could raise around $1.5 billion.
Ramon Ang, San Miguel's President, mentioned that Pure Foods will be worth an estimated $9 billion to $10 billion following that transaction.
An interesting analysis by Mark Yu of Perrenial Investing puts the company's valuation at ₱1,607 per share based on Ramon Ang's estimates. Split adjusted, that would be ₱160.70 per share. On a YTD performance, that's a possible 203.78% return.
I believe that this is logical and that's why I'm waiting for the follow-on-offer. When the stock split took effect, price rose by 9%. I believe that the increase is due to the market trying to price FB to what it's really worth. I also believe that the follow-on-offer will also have a positive effect on the prices. There's a possibility that it will increase around the share swap deal value.
As of this writing, my position size in FB is 83% and I'm currently up by 17.89%. My overall portfolio is up by 11.85% versus PSEI's YTD performance of -7.16%.
With the analysis I presented above, I believe that it's possible for me to net a huge gain on this value play.
I bought this stock when it was trading in the ₱530 to ₱560 per share which is based on a return rate approximately equal to a 10-year gov't bond at 5.95%. I bought more shares as the price went up while keeping an eye on my average price. I believe that I got a very good deal on this.
If the price drops below ₱58 per share split adjusted, I would buy more.
Also, consider this analysis by RCBC securities regarding Pure Foods' share swap deal to get a better perspective on the subject matter.
Got any thoughts on this? Feel free to post them on the comments section below.
Disclosure: I hold shares of FB and I plan to add to my positions if I see an opportunity I can't pass.