San Miguel Food And Beverage Inc. Analysis Of 1H18 Financials And What I Think About It
Finally! The 1H18 report is already out and I'm excited to share with you my analysis and opinion of FB now that the report contains the consolidated figures from the merging.
This post will analyze the six-month ended June 30 financial figures so that we can come up with an idea of the growth and margins the consolidated company has and what we can expect from it.
I'll also show you the intrinsic value calculations and what I think about the company as a whole.
Let's begin!
Growth Figures For The Six-Month Ended June 30
Income Statement (in Mil) | 1H17 | 1H18 | Growth (%) |
---|---|---|---|
Revenues | 119,130 | 137,441 | 15.37% |
Gross Profit | 38,978 | 44,833 | 15.02% |
Earnings Before Taxes | 18,013 | 21,864 | 21.38% |
Net Income | 12,805 | 15,370 | 20.03% |
Net Income - Parent | 7,929 | 9,260 | 16.79% |
Earnings Per Share | 1H17 | 1H18 | Growth (%) |
---|---|---|---|
Earnings Per Share - 1H18 | 1.27 | 1.50 | 18.11% |
Earnings Per Share | FY17 TTM | FY18 TTM | Growth (%) |
---|---|---|---|
Earnings Per Share - TTM | 2.57 | 3.01 | 17.12% |
Profit Margins For The Six-Month Ended June 30
Margins | 1H17 | 1H18 | Average |
---|---|---|---|
Gross Profit Margin | 32.72% | 32.62% | 32.67% |
EBT Margin | 15.12% | 15.91% | 15.51% |
Net Margin | 10.75% | 11.18% | 10.97% |
Key Performance Indicators
Key Ratios | December 2017 (Unaudited) | June 2018 (Unaudited) |
---|---|---|
Current Ratio | 1.69 | 1.40 |
Debt To Equity Ratio | 0.79 | 0.72 |
Asset To Equity Ratio | 1.79 | 1.72 |
Return On Average Equity - Parent | 28.04% | 26.90% |
Interest Coverage Ratio | 16.00 | 17.64 |
Intrinsic Value Calculation
1) Equity-Bond Valuation
Stock Data | Values |
---|---|
Price (as of Aug. 24, 2018 closing) | ₱96.00 |
Earnings Per Share TTM | 3.01 |
Dividend Per Share TTM | 0.95 |
Book Value Per Share MRQ | 14.14 |
P/E | 31.9 |
P/B | 6.8 |
Earnings Yield | 3.1% |
Dividend Yield | 1.0% |
7-Year Averages | Values |
---|---|
Return On Equity | 9.3% |
Dividend Payout Ratio | 20.8% |
P/E Ratio High | 45.3 |
P/E Ratio Low | 13.9 |
Average P/E Ratio | 29.6 |
Sustainable Growth | 7.4% |
The calculated P/E based on the trailing twelve month EPS is 31.9 which is higher than the 7-year average of 29.6. Earnings yield calculated equates to 3.1% which is lower than the 10-year gov't bond rate of 6.725%.
This suggests that at ₱96.00/share, the stock is already overvalued. FB should trade at ₱44.20/share to match the bond returns. But this doesn't make sense anymore because investors are now willing to pay a high premium on their earnings because of the synergies it created after the merging.
If you're willing to buy it at a premium, the 7-year average P/E is a good yardstick. Based on the average P/E of 29.6, the stock should be priced at ₱89.10. That equates to an earnings yield of 3.4%, a dividend yield of 1.1%, and a P/B ratio of 6.3.
2) Historical Earnings Growth Rate Model
FB's earnings per share have increased at a compounded annual growth rate of 5.8% over the last seven years.
If the earnings per share for the next 10 years increase at this same growth rate, earnings per share in the 10th year will be ₱5.29.
Multiplying this estimated earnings per share by the average P/E ratio of 29.6 gives an estimated price of ₱156.77.
FB is paying dividends regularly so let's add the estimated amount of dividends paid over the 10-year period. Assuming the dividend payout ratio of 20.8% remains constant throughout the period, the sum of the dividends paid over 10 years equates to ₱9.26.
Add that up and you get the total projected gain of ₱166.03. If we compare that to the closing price of ₱96.00, the projected rate of return equates to 5.6% which is low.
If you want to get a return rate of at least 12%, you should buy the stock at ₱53.48.
3) Sustainable Earnings Growth Model
FB's sustainable growth rate is 7.4%. This is calculated by getting the product of ROE and the difference of 1 and the payout ratio.
At this rate, book value per share should grow at to roughly ₱28.89 in 10 years.
If return on equity remains at 9.3% in the 10th year, earnings per share that year would be ₱2.70.
Multiply the estimated earnings per share to the average price-earnings ratio, we get the projected price of ₱79.99.
The sum of dividends paid over 10 years calculated using the payout ratio is ₱4.43. Add them to the projected price and you get a total gain of ₱84.42. Compare this to the closing price and you get a projected return rate of -1.3% which is bad.
If you want to get a return rate of at least 12%, you should buy the stock at ₱27.17.
Final Thoughts
At ₱96/share, it seems that FB is overvalued and doesn't give an attractive return. However, the management thinks otherwise.
A disclosure was released on August 23. In the disclosure, it stated an indicative follow-on offering of ₱140/share. This meant two things; 1) the management thinks that FB's value is ₱140/share, or 2) the management wants to sell at that premium price.
I believe that SMC is selling the shares at a premium so that they can raise as much as USD$3 billion to fund FB's expansion. If that's true, then they should sell at ₱155/share. Otherwise, I think that ₱140/share already makes sense.
Assuming that ₱140/share is the final price, buying at ₱96 offers a 45.8% upside. However, ₱140 is still indicative. It's not yet final so it still goes to the realm of speculation. If you want a 33% margin of safety, price should trade at ₱93.80.
Those who already bought and have a low average might want to know if it's still a good buy. My answer is it depends. If you can maintain your average price equal to the share swap value of ₱79, then I think it's worth it.
I really like this company because of the synergies the consolidation created. It enhanced shareholder value that's why I love to buy more of it.
That's it for FB. If you have any thoughts and reactions in this post, you may leave them in the comments section below.
Happy investing!
Disclosure: I own shares of FB and will continue to buy if an offer that I think makes business sense is presented.
Great article! Thanks IE
Ben Graham said, price should not be more than 1.5 of BV. I personally valuate this to be between 20-30/sh. After the follow-on offering, fair price would be between 40-50/sh. So after the issuance of new shares and with a 50% margin of safety, one should look into buying only if price drop to below 20. I’m not saying price will fall to that level but as a value investor, I would look for other stocks to consider while waiting.