A company that’s operating 135 Hypermarkets, 93 Supermarkets, 28 extra 10 S&R warehouse clubs and 16 S&R-QSRs for a total of 282 stores located in different parts of the country with a reported net income of 5 Billion last year is a company I would definitely want to own.

I made a careful study about the company. I summarized some facts about Puregold Price Club.

Facts About Puregold Price Club, Inc.

• Incorporated on September 8, 1998 and opened its first Hypermarket store in Mandaluyong City on December of the same year.
• Lucio Co founded PGOLD and is the current Director and Chairman since 1998.
• Reader’s Digest recognized PGOLD as the most trusted brand in the supermarket category in 2008.
• PGOLD has grown into a retail chain with over 200+ stores nationwide.

Puregold makes its money through;

• Supermarket and Hypermarkets. “Puregold Price Club” is the Hypermarket chain while “Puregold Junior” is the Supermarket chain.
• Discounters. “Puregold Extra“ is the company’s small store format.
• S&R Membership Shopping. Yes that’s right. They own the biggest reseller of imported quality products at very competitive prices.
• Entenso Equities, Inc. PGOLD’s wholly owned subsidy holding 5 retail companies namely;
  • NE Daily Commodities And First Lane
  • PG Lawson, Inc.
  • Ayagold Retailers, Inc.
  • Gold Tempo Company
  • San Roque Supermarkets
• PPCI Subic, Inc. Operates one Puregold branch in Subic Bay, Olongapo City.

They mostly compete with SM Hypermarkets/Supermarkets, Savemore, Shopwise/Rustan’s, Robinsons, Walter-Mart and among others.

The Competitive Edge

The company is continuously growing because of the following:

• PGOLD has successfully positioned itself in the retail market. They have organized stores and built them at strategic locations.
• It has a well-organized brand. The brand “Puregold” has become associated with low & affordable prices and a wide array of goods.
• It has a long list of suppliers and partners which helps maintain their price competitiveness.
• It has a well established relationship with its tenant stores.

The retail industry is a highly competitive business. Yet, I believe that PGOLD will dominate the supermarket segment in the future. PGOLD has a strong business model. This differentiates it from its competitors.

Analyzing The Company’s Competitive Edge

In the chart below, the company has been increasing in Earnings Per Share and Book Value Per Share yearly.

Fig. 1 EPS growth rate at 28.61% compounded annually (from 2010 to 2015).

Fig. 2 BVPS growth rate at 18.99% compounded annually (from 2011 to 2015).

Revenue and Net Income has risen for the past years.

Fig. 3 Revenue – 22.26% CAGR

Fig. 4 Net Income – 46.29% CAGR

Inventory also rose for the past years.

Fig. 5 CAGR – 23.48%

The ratio between them suggests that PGOLD’s supermarket business is facing very tough competition. I would be happier if PGOLD can achieve a 20% ratio it never even reached even 10%.

Fig. 6 A percentage ratio of less than 10% means that a company is in a highly competitive business.

The Gross Profit Margin indicates fierce competition in the supermarket retail business.

Fig. 7 A Gross Profit Margin less than 20% is a sign that a company is in a fierce competition.

Another thing that drives lower Net Income is its very high Selling, General & Administration costs. The ratio between the Gross Profit is very high.

Fig. 8 A good company should strive a lower SG&A to Gross Profit Ratio of 30% or less. PGOLD shows twice as much what we want to expect.

I found out that one of the biggest SG&A expenses of PGOLD is rent. If they will buy out their own land, they could cut down these costs. Last 2015, they paid Php 2.276 Billion pesos for rent alone. The lease periods of these lands range from 10 to 40 years.

Do you see what I mean? I think they would have a big advantage if they will build their stores on lands they own.

There’s a line in the income statement that says Other Operating Income. I looked into it and found out the company’s other sources of income.

PGOLD also makes money through concessionaires, display allowance, rent (through tenants), memberships, promotional activities, listing fees and demo/sampling.

Fig. 9 CAGR – 24.35%

This income is also increasing yearly at an annual compounding return of 24.35%.

In my opinion, if PGOLD will invest in their own parcel of land, they will make more money. PGOLD should build their stores on their own land. This will decrease their leasing costs.

If they do this, they will generate more income.

The ratio between Depreciation and Gross Profit is also good. At an average of 7.81%, this is a very good indicator. PGOLD doesn’t really spend a lot on upgrading and replacing store equipment.

Fig. 10 The lower, the better.

How The Company Handles Debt

Fig. 11 Total Debt

On the Total Debt side, PGOLD has been issuing notes and getting short-term loans since 2012. They used these to fund additional working capital.

I looked at the Current Ratios and Debt to Equity Ratios to see if they can handle the debt. It shows healthy numbers.

Fig. 12 A good company has: (a) Current Ratio > 1.50; (b) Debt/Equity Ratio < 0.50

The Interest Expense to Operating Income ratio also shows a healthy number.

Fig. 13 Less than 15% is best.

These ratios tell me that the company leaders can manage the debt easily.

Return On Equity And Return On Total Capital

What’s even more amazing is the Return on Equity and Return on Total Capital. Both RoE and RoTC shows very consistent high returns.

Fig. 14 12% or greater is the best.

Fig. 15 12% or greater is the best.

High rates of RoE and RoTC suggests that PGOLD has a competitive advantage.

To conclude, I can fairly say that the company is growing at a sustainable rate. Even if the competition is tough, PGOLD is still a good investment I think.

Breaking Down Puregold’s Cash Flow

I’ll now check how the company handles their surplus of cash efficiently.

Here’s the Cash And Short-Term Investments chart.

Fig. 16 Cash & Short-Term Investments

PGOLD places most of their cash in banks and money market funds. In effect, they maximize earnings on the available cash they have. It is also worth noting that the trend line shows an upward trend.

Here’s the Cash Flow Statement Chart.

Fig. 17 Cash Flow

The Net Cash From Operations showed positive values for the last five years.

The Net Cash From Financing Activities is explained at detail for each year below;

• 2011 and 2012 was the time that PGOLD took aggressive actions to raise capital for CAPEX.
• PGOLD paid off 5 Billion pesos of long-term debt but availed 3.448 Billion of debt in 2013. This is good because they have paid more than what they borrowed.
• PGOLD paid off 829 Million worth of dividends in 2014. In addition, PGOLD took out a short-term loan amounting to 480 Million in the same year. This placed the financing activity in a negative figure.
• In 2015, PGOLD took out a short-term loan worth 2.377 Billion. They paid outstanding loans worth 1.097 Billion. And they paid dividends worth 829 Million.

I made a table below to show the difference of the loans they pay and the loans they acquire below.

Fig. 18 Loans availed and paid.

If this trend continues, they will actually reduce the amount of debt they have. This is what I like, companies that grow and reduces debt in the process.

The Net Cash From Investing Activities indicates that the company is investing for growth. Expenses from these activities comes from property additions and depreciation/maintenance CAPEX.

All of these figures about the Cash Flow Statement tells me that PGOLD uses their cash effectively. The Free Cash Flow is now starting to trend upward.

All the company needs to do now is be consistent and surpass earnings expectations in the coming years ahead.

Projected Price After 10 Years

I used Buffett’s Historical Earnings Growth Rate and Sustainable Earnings Growth Rate valuation models below.

Fig. 19 Stock Data

Fig. 20 Historical Earnings Growth Rate Valuation

Fig. 21 Sustainable Growth Rate Valuation

The first model projected a future stock price of Php 153.86 per share. The second model projected a share price of Php 189.29 per share. Remember that these are just estimates.

Buying At The Right Price

Assuming an average 5-year P/E ratio of 24.41, this indicates an estimated return of 4.10%. This is very low. The average 5-year P/BV is 3.14 which indicates a safety net of 31.8%.

I did the math and it turns out that the company is worth 83.2 Billion pesos. Dividing the company’s worth with the weighted average shares of 2,766,513,606, I get Php 30.08. At this price, the P/E becomes 16.62.

This gives me an estimated return of 6.02% (which in my opinion is average).

I used the Graham Formula and I got a buy below price of Php 31.55. I used a 13.29% 5-year EPS CAGR and a 50% margin of safety.

The COL Investment Guide by COL Financial has a buy below price of Php 39.00.

The chart below shows stock volatility in the past years.

Fig. 22 PGOLD Chart

Investors should buy when the price drops or do cost averaging to minimize the risk.

I think these are the best prices at which you can buy PGOLD that makes perfect business sense.

Final Thoughts

I think Puregold is one of the companies that may have a bright future. The way the leaders expand the company says very clear about the future of the company. I have a strong bet that they will dominate the retail supermarket business in the next coming years.

I think it’s time to build up my buying power and wait for a market downturn to buy.

This concludes my Puregold stock review. If you have questions or violent reactions, let me know by writing your thoughts on the comments section.

Happy investing!