San Miguel Pure Foods Up By 30% But Still Undervalued | The Investing Engineer PH

Special Report: Analysis of San Miguel Corp. (SMC)’s share swap deal with Pure Foods and GSMI

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San Miguel Pure Foods Up By 30% But Still Undervalued

san miguel pure foods stock review

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.


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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.

Final Thoughts

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.

Happy investing!

Disclosure: I hold shares of FB and I plan to add to my positions if I see an opportunity I can't pass.

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  • Heston says:

    Great Article!
    I got Purefoods due to your reco. Thank you for that. My PF (or FB) is now up 12.75%. Will add more in the coming months. Cheers!

  • Jed says:

    Hi Mark!

    Thanks for sharing this very valuable information. You’ve mentioned the word, “split-adjusted” and it seems to be in a multiple of 10. Has the company executed a stock split before? Or this is based on the change in par value? 🙂

  • Pepe says:

    Hi Mark,

    I am a passive investor and have added FB to my port. I am curious if you have a buy below and target price for this? And can you share your pivot points so I could know when to add more?

    Thank you

    • June 2018 Pivot Points: PP 67.17, S1 64.43, S2 61.87, S3 59.13, R1 69.73, R2 72.47, R3 75.03.
      My soft target: 79.20
      My June strategy (caveat): Accumulate below PP preferably below S1 and keep an average price below 59.90.

      If you don’t have a base, then buying at the current price will give you limited upside and put you on a higher risk.

      • Pepe says:

        Hello, FB is at the 79 range. What do you suggest? Sell or wait?

        • I’m still waiting for the follow-on-offer. That will give more upside. The rally has something to do with its 1H18 report.

          FB: Booked 1H18 net income of P15.24 Bn, grew by 20% driven by strong demand for its product. Consolidated revenues increase by P15.4% to P137.4 Bn, while operating income surged 20% to P22.9 Bn.

  • Eduardo says:

    Hello Sir!

    Maraming salamat sa article na ito. I’m up 30% po.

    More power!

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