CFA Institute Research Challenge hosted by CFA Society of the Philippines Team Triton Investment Research
MARKET SNAPSHOT CNPF: Reeling in Quality Growth Bloomberg CNPF:PM
Shares Outstanding Attractive proxy to Philippine consumption story; initiating with a BUY 3,541.03 (mn) We issue a BUY recommendation on Century Pacific Food, Inc. with a target price (TP) of Php Market Cap (Php mn) 60,551.59 20.91/sh using our Discounted Cash Flow (DCF)-based Sum-of-the-Parts (SOTP) valuation. Our Market Cap (USD mn) 1,142.11 TP represents a 22.3% upside from current levels and implies a 19.8x 2017F P/E for CNPF, at a Daily T/O (Php mn) 23.60 discount to domestic and regional peer averages (24.2x and 24.4x respectively). Our recommendation is grounded on CNPF’s a) dominant market position in fast-growing consumer Daily T/O (USD mn) 0.50 markets; b) brand-building expertise that maximizes strong industry growth potential; and c) Adj. 52 Week Low Php 9.89/sh diversification strategy backed by robust financials. Adj. 52 Week High Php 18.30/sh Dominant market position in fast-growing Philippine consumer markets Closing Price Php 17.10/sh CNPF is the leading producer and distributor of canned food in the Philippines, a fast- CPGI (68.7%) Key Shareholders Arran Investment growing category in the consumer space (5.7% 2015A-2020F CAGR). It has maintained (10.4%) resilient market shares of 84% in canned tuna and 46% in corned beef owing to its a) Free Float 20.9% superior brand equity; b) sustainable retail price leadership driven by cost efficiency and operating leverage; and c) nationwide presence that reaches 60% of all local points of sale. Source: Team Estimates As the market leader, we believe CNPF is in prime position to take advantage of increasing TARGET PRICE BREAKDOWN per capita canned goods consumption driven by favorable consumer trends. VALUE % OF TARGET SEGMENT PER PRICE Brand-building expertise maximizes growth opportunities SHARE Canned and Leveraging on its brand-building capacity and product development expertise, we believe 9.09 43.5% processed fish CNPF can capitalize on uptrade opportunities from rising disposable income (6.2% 2015A- Canned meat 7.75 37.1% 2020F CAGR), driving a 5-year sales CAGR of 11.6% from 2015A to 2020F. As evidence of Dairy and mixes 1.81 8.7% growth maximization opportunities, CNPF has over 38 years of industry experience in transforming agricultural commodities into market-leading brands. Alongside its Tuna OEM 0.35 1.7% commitment to product innovation, the company is well-equipped to take advantage of Coconut OEM 1.91 9.1% higher demand for premium products (e.g. premium meats, milk, and coconut). TARGET PRICE 20.91 100.0% Source: Team Estimates Return-maximizing diversification strategy backed by robust financials We expect CNPF’s strategy of diversifying into new businesses to complement the strong profitability of its core segments, driving an above-industry ROE of 22.4% in 2017F (vs. domestic and regional peer ave. of 20.1% and 16.8% respectively). Alongside its brand- building capabilities, CNPF is focused on conducting value-accretive acquisitions in high growth or complementary categories (e.g. milk, premium meats, coconut) to maximize returns. Given its underleveraged capital structure (7.9% 2016E net D/E vs. 17.7% peer ave.) and strong FCF generation ability (3.2% ave. FCFF 2015A-2020F), CNPF has the flexibility to either maximize its dividend payout or to pursue organic growth and/or M&A opportunities.
Brand equity, cost hedging, healthy balance sheet address key risks We identify greater than expected a) competition, b) execution risk, and c) volatility in input TRAILING RETURN REL. PCOMP INDEX costs as key downside risks to our valuation. We believe that CNPF can mitigate risks from 1 MO 3 MO 1 YR competition, execution, and volatile commodity prices by leveraging on its superior brand equity, marketing expertise, and effective cost mitigation efforts. Despite these investment CNPF 2.4% 17.7% 49.1% risks, we maintain our investment case for CNPF given its capacity to ensure long-term PCOMP -8.4% -8.5% -2.1% market leadership and deliver reliable earnings growth (15.8% 2015A-2020F EPS CAGR), with further upside given its financial flexibility for its growth ventures. Source: Bloomberg 2014 2015 2016E 2017F 2018F 2019F 2020F
P/E REL. PCOMP INDEX Revenue (Php mn) 20,438.6 23,324.5 28,132.3 31,066.2 34,031.9 37.027.3 40,280.6 Net Income (Php mn) 1,735.2 2,078.4 2,722.9 3,051.8 3,375.3 3,794.4 4,261.0 EPS (Php per share) 0.51 0.58 0.77 0.86 0.95 1.07 1.20 EPS Growth (%) 53.6 13.9 33.1 12.1 10.6 12.4 12.3 FCF Yield (%) (0.5) (2.9) 2.0 2.7 3.5 3.3 4.5 ROE (%) 33.8 22.8 23.6 22.4 21.2 20.4 19.8 Net Debt/Equity (%) (19.2) 14.8 8.0 1.4 (5.6) (9.7) (15.5) P/E (x) 21.5 19.0 22.4 19.8 17.9 16.0 14.2 Source: Bloomberg EV/Sales (x) 1.7 1.6 2.2 2.0 1.8 1.7 1.5 Source: Company Information, Bloomberg, Team Estimates
1 C FIGURE 1: HISTORICAL REVENUE BREAKDOWN Business Description
Century Pacific Food, Inc. (CNPF) is the largest producer and distributor of canned goods in the Philippines with more than 38 years of operational excellence. From its initial establishment as a tuna canning facility, CNPF has built a portfolio of household brands in the canned and processed fish, canned meat, and dairy and mixes segments (see Table 1),
recently diversifying its product portfolio with the acquisition of Birch Tree fortified milk and Swift premium meat.
CNPF is also the Philippines’ largest exporter of private label original equipment manufacturer (OEM) tuna products. Recently, the company also acquired Century Pacific Agricultural Ventures, Inc. (CPAVI), an integrated coconut producer catering to domestic and Source: Company Information export markets.
Market leader in core segments CNPF is the market leader in the canned and processed fish and canned meat segments in the Philippines, having maintained resilient market shares of at least 25% and 32% respectively since 2008A. Collectively, these segments have accounted for 67.4% of
CNPF’s topline on average from 2013A to 2016E (see Figure 1). CNPF achieved its dominant market position through well-positioned and homegrown brands including Century Tuna,
555 Sardines, and Argentina Corned Beef. More discussion is found in Appendix B-2.
Long-standing business relationships
CNPF is partnered with 281,000 retail outlets, supporting the company’s expansion strategy in both traditional and modern retail platforms. Globally, CNPF is partnered with renowned
global retailers such as Walmart, Carrefour, and Safeway, allowing its OEM products to be present in 58 countries worldwide. Locally, CNPF reaches 12,000 food service outlets and
capitalizes on increasing out-of-home consumption through partnerships with Starbucks,
Jollibee, Shakey’s, 7-Eleven, and Family Mart (see Appendix B-3).
Ownership structure
CNPF is owned by two major shareholder groups—Century Pacific Group, Inc. (CPGI), the
parent company which has managed the firm’s operations since 1978, and Arran Investment Private Limited, a sovereign wealth fund established by the Government of Singapore. CPGI and Arran Investment own 68.7% and 10.4% of CNPF’s common shares respectively. The
balance of 20.9% corresponds to the public free float level of CNPF.
TABLE 1: CNPF SEGMENTS SNAPSHOT
CURRENT SALES CAGR SALES CAGR SEGMENT COMPANIES BRANDS MARKET (2013A-2016E) (2016E-2020F) SHARE
Century Canning Century, 555, Canned and Corporation, Blue Bay, Processed 54% 13.8% 10.0% Columbus Seafoods Fresca, Lucky Fish Corporation 7
Argentina, Canned Pacific Meat Swift, WOW!, 37% 20.4% 10.2% Meat Company, Inc. Lucky 7, 555 Angel, Dairy and Snow Mountain Birch Tree, 1% 19.8% 13.8% Mixes Dairy Corporation Kaffe De Oro General Tuna Tuna OEM 34% -7.7% 2.4% Corporation
Century Pacific Coconut Agricultural 13.8% OEM Ventures, Inc.
Source: Company Information, Team Estimates
FIGURE 2: GDP EXPENDITURE BREAKDOWN (IN PHP TN) Industry Overview and Competitive Positioning Strong and Sustained Economic Growth Consumption-based economy drives sustainable growth The Philippines is set to deliver strong GDP growth (6.6% 2015A-2020F CAGR) backed by robust and resilient domestic demand for consumer goods (see Figure 2). Irrespective of political cycle, consumption has accounted for 72.2% of national income on average from
1986A to 2015A. Moreover, food and non-alcoholic beverages have accounted for 42.4% of household final consumption on average from 2008A to 2015A. We believe that these
Source: Philippine Statistics Authority, Team favorable macroeconomic tailwinds present a clear opportunity for CNPF given that its Estimates entire product portfolio revolves around food and non-alcoholic beverages.
2 FIGURE 3: INFRASTRUCTURE Fiscal reforms to support Philippine consumption story SPENDING AS % OF GDP The new administration plans to institute fiscal reforms promoting inclusive growth, becoming a potential catalyst to further accelerate consumer spending. Reforms include a) lowering personal tax rates (25% from 30%) which will lead to higher disposable income and b) accelerating public infrastructure spending to 5-6% of GDP (from 2.5%) and the rollout of pipelined PPP projects (see Figure 3), which will lead to the creation of high growth regional centers. We believe CNPF can capitalize on higher disposable income and improved
accessibility resulting from these fiscal reforms to accelerate sales growth.
Source: Department of Budget and Management Healthy industry growth backed by macroeconomic tailwinds We expect healthy industry growth for canned goods and milk given favorable consumer FIGURE 4: PER CAPITA CANNED trends and strong growth opportunities from low per capita consumption relative to mature GODDS, MILK CONSUMPTION ASEAN markets such as Singapore (see Figure 4). We expect the two segments to grow at a AND GDP PER CAPITA (IN USD) 1.4x multiple to forecasted per capita food consumption growth in mature ASEAN markets.
Emergence of Favorable Consumer Trends Convenience due to rapid urbanization We expect the trend of rapid urbanization and rising disposable income to lead to greater demand for convenience products (see Figure 5 and Appendix C-4), including canned goods and ready-to-eat products. CNPF’s brand portfolio that consists of ready-to-eat products (e.g. Century Tuna, Argentina Corned Beef, WOW! Ulam) is at the forefront of taking advantage of these trends.
Source: Company Information, Euromonitor, ANZ Premiumization due to rising disposable income, high consumer confidence Higher disposable income and improving consumer outlook are expected to create a FIGURE 5: URBANIZATION LEVEL AND REAL GDP PER CAPITA premiumization effect, translating to a) greater canned goods consumption by lower socio- (IN PHP 000s) economic classes and fast-growing regions outside NCR and b) a shift toward premium products for higher income brackets. Consumer confidence for the low-income segment and in areas outside NCR both improved to their highest levels in 2015A, indicating uptrade and regional expansion opportunities (see Figure 6 and Appendix C-4).
Health and wellness due to higher disposable income We believe that CNPF is well-positioned to capture the health trend in the Philippines given its brand positioning and wide distribution channels. Domestic spending on well-being by Filipino consumers is expected to grow further by 5.2% from 2015A to 2020F (see Table 2 Source: Philippine Statistics Authority and Appendix C-2). This trend is especially beneficial for CNPF’s marine, milk, and coconut FIGURE 6: CONSUMER products whose health benefits have been established in the domestic market. EXPECTATIONS SURVEY RESULTS TABLE 2: SUMMARY OF FAVORABLE INDUSTRY TRENDS CAGR MACROECONOMIC TREND DESCRIPTION (2015A-2020F) Leads to a premiumization effect, benefitting CNPF’s core Household disposable income 6.2% and higher-margin segments Expected convergence to per capita canned goods Per capita canned goods 5.8% (fish) Source: Bangko Sentral ng Pilipinas consumption of mature ASEAN markets driven by rising consumption 5.5% (meat) disposable income and improving consumer optimism Expected convergence to per capita milk consumption of Per capita milk consumption 5.3% mature ASEAN markets driven by rising disposable income and improving consumer optimism Largely driven by higher disposable income, beneficial for Consumer well-being expenditures 5.2% CNPF’s marine, milk, and coconut products Improving modern trade penetration seen as expansion Retail 4.2% opportunity given CNPF’s nationwide distribution network Export recovery presents upside risk for CNPF’s tuna and Exports 8.3% cococnut OEM segments Source: Company Information, Euromonitor, Philippine Statistics Authority, ANZ Bank, Team Estimates
Multi-Format Distribution Channels FIGURE 7: PH EXPORTS (IN PHP TN) Improving modern trade penetration With its 304 SKUs and presence in 652,000 local points of sale, we believe that CNPF can expand its consumer reach due to improving modern trade penetration (28.5% in 2016E to 30.2% in 2019F). This trend will drive a 5-year sales CAGR of 4.2% from 2015A to 2020F for gross domestic retail value (see Appendix C-2).
Favorable prospects for export growth We believe that CNPF can benefit from an expected export recovery both directly and Source: Department of Budget and Management indirectly. Government forecasts exports to grow by a 4-year CAGR of 6.7% 2015A-2019F
(see Appendix C-3) given greater mobility of goods at lower tariffs and freight costs due to EU GSP+, the ASEAN integration, and the Amended Cabotage Law.
3 FIGURE 8: PORTER’S FIVE FORCES Agricultural exports are expected to recover with support from the weakening peso and accelerated ANALYSIS (BRANDED) infrastructure spending. Directly, we expect these tailwinds to benefit CNPF’s OEM businesses. Indirectly, we believe that CNPF’s branded businesses will also grow due to the boost in consumer wealth from export recovery as we estimate exports to account for 52.4% of GDP by 2020F.
Competitive Positioning: Market Leadership Resilient market share and price leadership in high growth segments CNPF has been the market leader (37% market share) in the broad-based canned food category, a fast-growing but highly competitive consumer space (see Figure 8 and Appendix C-1). Within this market leadership includes an 84% market share in canned tuna and 46% share in corned meat. Coupled with cost mitigation efforts (see Appendix B-5), CNPF’s market leadership has allowed the
Source: Team Analysis company to have pricing power in the market, maintaining retail price leadership of at least 14.2% over the closest major competitor (see Table 3 and Appendix C-5) while enjoying better margins (13.4% FIGURE 9: CENTURY TUNA AND 2016E EBIT margin) than those of regional peers (6.7%). ARGENTINA CORNED BEEF MARKET SHARES (2013A-2015A) Nationwide distribution network We believe CNPF can take advantage of higher real GDP per capita growth and improving consumer optimism in regions outside NCR (See Appendix C-4) through its nationwide distribution network that reaches 652,000 local points of sale (60% presence). With over 39 distributors covering the entire archipelago, CNPF is able to reach 281,000 retail outlets, including 3,772 modern retail stores.
Strong export credentials
Source: Company Information We expect CNPF to capitalize on stronger exports growth through its a) market leadership and 38 years of industry experience in the tuna OEM exports industry (34% market share in 2015A), b) TABLE 3: CNPF RETAIL PRICES VS. sustainability and quality control accreditations (see Appendix B-8), and c) expanded sales channels COMPETITORS AS OF NOV. 2016 abroad, including its recent Kamayan and Century China acquisitions (see Appendix B-7). More CANNED TUNA discussion on the competitive dynamics of CNPF’s exports is found in Appendix C-1. Century Tuna Flakes (155 g) Php 27.00 555 Tuna Flakes (155 g) Php 24.50 San Marino Tuna Flakes (155 g) Php 33.95 Corporate Growth Strategy and Key Directions CORNED BEEF Sustaining Market Dominance Argentina Corned Beef (175 g) Php 31.50 Purefoods Sat Corned Beef (175 g) Php 33.50 Aggressive marketing strategy to protect market leadership Highlands Corned Beef (175 g) Php 45.75 As a company focused on building brands, CNPF strives to maintain a top-of-mind awareness and to Purefoods Corned Beef (175 g) Php 56.00 protect the market leadership of its core segments by allocating resources on marketing campaigns Source: Brick-and-Mortar Supermarkets (7.5% of sales on average) such as the Century Tuna 2014 Superbods Contest and Argentina Corned
TABLE 4: CNPF PRODUCT Beef Ganado Ka campaign. INNOVATIONS Optimization to maintain profit margins and price leadership PRODUCT DESCRIPTION INNOVATION CNPF strives to maintain price leadership and favorable margins by engaging in: a) strategic hedging Transparent packaging to Transparent sealed and buying strategies for raw materials, including the utilization its new cold storage facility; b) showcase processed packaging seafood product freshness maintenance of its extensive network of long-standing supply partners, giving the company Angel Full cream milk and bargaining power for raw material costs; and c) achievement of operating leverage through scale. Kremedensada condensed milk in a can Argentina Bacon Instant bacon bits Norte served in a can Diversifying Product Portfolio Packaged milkfish chunks Century Bangus Well-positioned brands to capture broad-based growth marinated with locally- Tocino inspired flavors CNPF aims to capture broad-based growth by maintaining a wide portfolio of brands that cater to Ready-to-eat tuna in the Century Tuna Loaf consumers ranging from mass market to high-end segments (see Appendix B-2). While continuing to form of meat loaf maintain its market share in mass market segments, the company also aims to capitalize on 555 Tuna Rice Packaged tuna and rice Afritada with locally-inspired flavors premiumization trends by launching higher-margin versions of their core products such as 555 Source: Company Information, Euromonitor Spanish Style Sardines, Century Handline Tuna, and Swift Premium Corned Beef.
FIGURE 10: PHILIPPINE RETAIL Extensive local knowledge and R&D capability to enhance product portfolio OUTLETS SERVICED BY CNPF CNPF is committed to diversify its product portfolio in line with prevailing consumer preferences,
launching an average of 20 new SKUs (see Table 4) in retail shelves per year and expanding into lucrative segments of the food and beverage industry (e.g. milk, coconut). CNPF achieves this strategy of diversification through its strong local knowledge from 38 years of experience in the industry and
consistent R&D efforts geared toward product development and value-accretive acquisitions.
Expanding Consumer Reach Improving local and export distribution to expand points of sale
CNPF is focused on continuously expanding its sales channels in both domestic and international Source: Company Information markets. CNPF has expanded its local distribution network to 281,000 retail centers and maximized
the strategic location of its six manufacturing facilities, enabling a presence in 60% of local points of
sale. CNPF also aims to expand its international sales reach through key partnerships and acquisitions, recently expanding its sales channels in the USA, Canada, and China (see Appendix B-4).
4
FIGURE 11: CNPF HISTORICAL AND Investment Summary POTENTIAL PRICE CHART We issue a BUY recommendation on CNPF with a target price of Php 20.91/sh using a DCF- based Sum-of-the-Parts valuation. This target price presents an upside of 22.3% based on the closing price of Php 17.10/sh. We estimate CNPF’s EPS to grow at a 5-year CAGR of 15.8% 2015A-2020F, driven by its a) commanding market leadership in high growth consumer segments, b) brand-building ability that maximizes growth potential, and c) expanding product portfolio backed by robust financials.
Commanding market leadership in high growth segments
CNPF has maintained a resilient market share in the canned tuna (84%) and corned meat Source: Bloomberg, Team Estimates (46%) segments, owing to its brand equity, cost efficiency from operational scale, and nationwide distribution network. We expect the company to sustain its market leadership FIGURE 12: CNPF EBITDA LEVEL (IN PHP MN) AND GPM (2013A-2018F) through effective cost hedging, allowing CNPF to maintain price leadership (14.2% cheaper on average) while expanding its EBITDA margin (+224 bps 2015A-2020F). We believe that CNPF is in prime position to capitalize on low per capita canned goods consumption relative
to ASEAN peers given rapid urbanization and improving consumer outlook.
Established ability to build brands in order to maximize growth potential
We believe that CNPF is at the forefront of capturing strong growth potential due to its strategic focus on brand-building, underpinning an 11.6% 5-year sales CAGR from 2015A to
Source: Philippine Stock Exchange, Team Estimates 2020F. Increasing urbanization, rising consumer confidence, and improving health consciousness point toward an uptrade to premium products such as canned tuna, FIGURE 13: CNPF REVENUE (IN PHP powdered milk, and coconut water. Given its proven track record of brand building and MN) AND TOPLINE GROWTH (2013A-2018F) focus on product development, we believe that CNPF is well-positioned to take advantage of these favorable consumer trends.
Financial flexibility to maximize returns via portfolio diversification
CNPF employs a dual strategy of maximizing the profitability of its existing businesses while pursuing value-accretive segments to enhance its product portfolio. Given this diversification strategy, we expect CNPF to generate stable cash flows with an average FCFF yield of 3.2% 2016E-2020F. CNPF also has a strong net debt/equity position (7.9% 2016E), providing flexibility either to internally support growth opportunities through organic expansion and/or Source: Philippine Stock Exchange, Team Estimates M&As or to maximize shareholder returns via dividends (up to 30% of NI). We believe that CNPF’s strategy supports the robust growth of its core businesses, translating to an FIGURE 14: CNPF RETURN ON EQUITY industry-leading ROE of 22.4% in 2017F, against the 19.6% peer average. AND EPS GROWTH (2013A-2018F) FIGURE 15: CNPF SEGMENTS PLOTTED ON BCG MATRIX
Source: Philippine Stock Exchange, Team Estimates
FIGURE 16: CNPF FCFF YIELD AND Source: Company Information, Team Analysis NET DEBT-TO-EQUITY % (2013A-2018F) DCF-based SOTP valuation supports investment case Our valuation confirms that CNPF is currently trading at a discount to domestic and regional peers. We conducted a DCF valuation for CNPF’s branded businesses, against a WACC of
8.81% and a terminal growth rate of 4.0%. Given export cyclicality, we applied a 12.0x and a 16.0x P/E for its tuna OEM and coconut OEM segments respectively based on the
normalized multiples of relevant peers. We note that 89.2% of our fair value for CNPF is
driven by domestic sales, indicating strong exposure to the Philippine consumption story.
Source: Philippine Stock Exchange, Team Estimates Competitive advantages address possible investment risks
Key downside risks to our valuation include greater than expected competition, execution risk, and commodity price volatility. While we applied more conservative estimates to factor
in these risks, we believe CNPF can further mitigate competition and execution risk by leveraging on its market leadership and brand-building expertise. We also expect CNPF to
utilize its cold storage facility and its longstanding relationships with key suppliers to address
volatility in input costs. Amid these risks, we maintain a base case 5-year EPS growth forecast of 15.8% 2015A-2020F CAGR, with further upside potential given its financial flexibility to pursue new ventures.
5 FIGURE 17: CNPF YOY REVENUE GROWTH RATES (2016E-2020F) Valuation
We used an SOTP valuation to arrive at our target price of Php 20.91/sh, presenting a 22.3% upside from CNPF’s closing price of Php 17.10/sh. We conducted a DCF valuation for CNPF’s
branded consumer segments (canned and processed fish, canned meat, dairy and mixes)
while we used a P/E relative valuation for the company’s export segments.
TABLE 5: VALUATION SNAPSHOT IMPLICIT IMPLIED SEGMENT WEIGHT VALUATION METHODOLOGY PRICE 2017F P/E
Canned and Processed Fish 9.09 43.5% 26.9x 10-year DCF against 8.81% Canned Meat 7.75 37.1% 26.4x WACC, 4.0% terminal growth
Dairy and Mixes 1.81 8.7% 29.9x rate Source: Team Estimates Relative Valuation method Tuna OEM 0.35 1.7% 12.0x FIGURE 18: MARINE EXPORTS, using 12.0x P/E multiple for Tuna OEM and 16.0x P/E COCONUT EXPORTS, REAL GDP YoY Coconut OEM 1.91 9.1% 16.0x multiple for Coconut OEM Target Price 20.91 100.0% 19.8x DCF-based Sum-of-the-Parts Source: Team Estimates
We applied a relative valuation for CNPF’s OEM segments given the cyclical nature of the exports industry (see Appendix D-4). We based the 12.0x P/E ratio for CNPF’s tuna OEM segment on the normalized P/E ratios of food manufacturers whose revenues are predominantly tuna exports. A 16.0x P/E multiple for CNPF’s coconut OEM business was taken from the mid-cycle P/E ratio of agricultural producers with export segments.
Marine and coconut exports have fluctuated by 38.9% and 15.9% respectively from 2005A Source: Company Information, Team Estimates to 2015A, versus the minimal variation in real GDP growth (1.4%), hence we valued CNPF’s FIGURE 18: CNPF COCONUT OEM businesses using the mid-cycle P/E ratios of relevant peers. SEGMENT REVENUE BREAKDOWN (2016E) Revenue Growth TABLE 6: REVENUE GROWTH ASSUMPTIONS DAIRY CANNED CANNED AND COMMENTS FISH MEAT MIXES Forecast based on regression estimate Industry Growth 5.8% 5.5% 5.3% (see Appendix D-2) Reflection of brand-building capacity, Market Share Grab 1.0% 2.0% 5.0% especially with Birch Tree milk Driven by the launches of additional Product 1.0% 1.5% 2.5% categories and SKUs, especially Premiumization/Innovation premium versions of core products Source: Company Information, Team Estimates Driven by higher disposable income Uptrade Opportunity 2.2% 1.2% 1.0% and improving consumer optimism FIGURE 19: US COCONUT WATER Growth premium based on exposure to CNPF 5-Year Sales CAGR 10.0% 10.2% 13.8% MARKET SIZE (IN USD MN) fast-growing consumer markets; Source: Team Analysis
Core Branded Businesses: Canned and Processed Fish, Canned Meat and Milk
We forecasted CNPF’s branded sales growth using the expected industry growth rates of each individual category, while applying a company growth premium based on the CNPF’s individual
strategies and competitive advantages. CNPF’s growth premium takes into account a) market share grab from its new growth businesses, b) exposure to faster growing sub-categories (e.g. Source: Company Information, Team Estimates growth of canned tuna expected to outpace canned sardines), c) uptrading to higher value FIGURE 20: SKIPJACK TUNA PRICES premium products, and d) new product launches and innovations. (IN USD/MT) Growth and Expansion Business: Coconut OEM
We projected CNPF’s coconut OEM segment to grow at 5-year sales CAGR of 13.8% 2015A- 2020F based on the weighted average projected growth rates of coconut oil, coconut water, and other coconut by-products (see Figure 18). We see the trend of rising global demand for
coconut to continue in the medium-term and based our estimates on historical demand for the following products—coconut oil (5.4% 2007A-2015A CAGR), coconut water (21.1% 2012A-2015A CAGR), and other coconut by-products (3.7% 2009A-2015A CAGR).
Export Business: Tuna OEM We forecasted CNPF’s tuna OEM segment’s sales growth at 2.4% 2015A-2020F CAGR. While
we expect a 6.2% 2015A-2020F CAGR for global demand for tuna, we accounted for an Source: Food and Agriculture Organization offsetting -3.8% average decline in prices due to fluctuating skipjack tuna supply.
6 FIGURE 20: SKIPJACK TUNA PRICES Capex (IN USD/MT) We based CNPF’s maintenance capex on its existing and projected production and storage capacity, which utilizes the forecasted sales growth for each segment. We also considered the company’s backward integration and operational efficiency investments in computing for growth capex requirements (see Appendix B-3).
TABLE 7: VALUATION ASSUMPTIONS % OF ASSUMPTION RATE METHODOLOGY WEIGHT Forward yield of 10-year Philippine government yield Risk-free Rate 5.00% adjusted for rate hikes Adjusted raw beta calculation based on covariance of Beta 0.71 CNPF’s returns vs. PCOMP index Source: Food and Agriculture Organization Based on Bloomberg's average country risk premium Market Risk Premium 6.19% (2014A-2016E) FIGURE 22: VALUATION METRICS Cost of Equity 9.39% 90.00% Calculated via CAPM AND TARGET PRICE RANGES Cost of Debt 5.00% Estimated future borrowing rates of CNPF
Effective Tax Rate 30.00% CNPF's effective tax rate for branded businesses
After-Tax Cost of Debt 3.50% 10.00%
WACC 8.81%
Based on forecasted inflation, consumption Terminal Growth Rate 4.00% expenditure growth, and per capita food consumption
growth in mature markets Source: Team Estimates
Source: Team Estimates Weighted Average Cost of Capital As highlighted in Table 7, we arrived at a WACC of 8.81% based on an after-tax cost of debt of 3.50% and a cost of equity of 9.39%. Our risk free rate and cost of debt estimates incorporate upward adjustments for expected rate hikes. Our cost of equity utilizes an adjusted beta in order to better reflect expected future beta, given the company’s short listing period and recent increase in daily turnover.
Terminal Growth We estimated CNPF’s terminal growth rate at 4.0% based on a) the country’s projected inflation rate of 3.8%, b) forecasted long-term consumer expenditure growth rate for the Philippines (4.2%), and c) the expected per capita food sales growth of mature ASEAN markets like Singapore (4.1%).
TABLE 8: RELATIVE VALUATION PEERS TABLE MKT CAP TICKER COMPANY P/E (x) EV/SALES (x) ROE (%) PEG (x) EV/EBITDA (x) (USD mn) 2016E 2017F 2016E 2017F 2016E 2017F 2016E 2017F 2016E 2017F
CNPF:PM Century Pacific Food, Inc. 1,142.11 22.4 19.8 2.2 2.0 23.6 22.4 0.7 1.6 15.3 13.8 JFC:PM Jollibee Foods Corp. 4,206.54 36.6 32.9 1.9 1.7 19.2 20.6 2.5 2.2 19.4 16.7 MAXS:PM Max's Group Inc. 547.85 28.4 24.7 2.6 2.3 14.6 15.0 21.6 18.7
DNL:PM D&L Industries Inc. 1,627.07 30.2 26.4 3.8 3.4 19.6 20.8 1.4 1.2 22.8 19.7 URC:PM Universal Robina Corp. 7,193.62 25.2 24.6 3.3 3.0 20.5 19.9 1.3 1.2 15.8 14.9 Domestic Ave. 26.9 24.2 2.9 2.6 16.3 16.8 1.8 1.6 17.6 15.4
TU:TB Thai Union Group Pcl 2,798.80 17.5x 14.7 1.0 1.0 11.8 13.0 1.3 1.1 13.0 11.1 2282:JP Nh Foods Ltd 5,483.22 22.9 20.6 0.6 0.6 8.3 8.3 9.6 9.0
000895:CH Henan Shuanghui 9,947.20 15.4 14.3 1.3 1.2 26.2 28.1 2.4 2.2 10.7 9.8 603288:CH Foshan Haitian Flavouring 11,452.26 28.5 25.4 6.2 5.5 29.8 29.7 2.5 2.1 21.8 18.9 Regional Ave. 25.2 24.4 2.5 2.2 19.2 20.1 2.1 1.8 15.8 14.0
Overall Ave. 26.0 24.3 2.7 2.4 17.8 18.4 1.9 1.7 16.7 14.7
Market-Cap Weighted Ave. 23.2 25.5 2.3 2.0 18.7 19.3 1.1 1.0 14.2 12.6 Source: Team Estimates Relative Valuation Apart from our SOTP valuation, we also conducted a relative valuation with comparable companies. CNPF’s 2017F P/E ratio of 19.8x shows that it is trading at a discount compared to domestic and regional peers (24.2x and 24.4x respectively) in spite of having an industry- leading ROE. This is supported by a comparable PEG ratio of 1.6x with the domestic and regional peer average of 1.6x and 1.8x respectively.
We also used the regional peer average P/E ratio to arrive at a relative target price. Applying the regional average P/E of 24.4x against our 2017F EPS of Php 0.86/sh, we obtained a target price of Php 21.03/sh with a 23.0% upside—close to our SOTP price objective.
7 Financial Analysis
TABLE 9: KEY FINANCIAL RATIOS 2013P 2014A 2015A 2016E 2017F 2018F 2019F 2020F
Profitability Indicators Gross Profit Margin (%) 17.5 26.3 26.6 29.0 28.5 28.6 28.8 29.0 EBITDA Margin (%) 4.8 11.8 12.7 14.3 14.4 14.5 15.0 15.5 Operating Margin (%) 4.8 11.0 12.1 13.4 13.5 13.5 13.9 14.3 Net Income Margin (%) 3.9 8.5 8.9 9.6 9.8 9.9 10.2 10.6 Return on Assets (%) 7.7 16.5 13.8 15.0 15.5 15.7 16.1 16.1 Return on Equity (%) 22.3 33.8 22.8 23.6 22.4 21.2 20.4 19.8 Leverage Indicators Total Assets/Equity (%) 2.9 2.1 1.7 1.6 1.5 1.4 1.4 1.3 Net Debt/Equity (%) 67.3 -19.2 14.7 8.0 1.4 -5.6 -9.8 -15.5 Liquidity Indicators Current Ratio (x) 1.3 2.1 1.7 2.2 2.6 2.7 3.0 3.3 Quick Ratio (x) 0.6 0.9 0.7 0.9 1.0 1.1 1.3 1.6 Operating Efficiency Indicators Days Receivables 43.69 48.15 48.00 48.00 49.00 51.00 53.00 Days Inventory on Hand 107.93 118.49 114.00 112.00 114.00 116.00 114.00 Days Payable 73.19 81.37 75.00 76.00 75.00 76.00 73.00 Cash Conversion Cycle 78.42 85.27 87.00 84.00 88.00 91.00 94.00 Cash Flow Generation Indicators FCFF Yield (%) 1.1 -0.5 -2.8 2.0 2.7 3.5 3.3 4.5 CFO to Revenue (%) 5.2 1.3 -2.7 8.5 7.9 8.5 7.8 9.4 Shareholder Indicators EPS 0.33 0.51 0.58 0.77 0.86 0.95 1.07 1.20 EPS Growth (%) - 53.6 13.9 33.1 12.1 10.6 12.4 12.3 Source: Company Information, Team Estimates Strong and resilient topline growth FIGURE 23: CNPF CASH CONVERSION CYCLE (2013A-2018F) We estimate CNPF to deliver a strong 5-year sales CAGR of 11.6% 2015A-2020F, driven by the sustained strength of its core brands as well as momentum from its new growth businesses. We expect its canned fish and canned meat segments to grow at 10.0% and 10.2% 2015A- 2020F CAGRs respectively, and its dairy and coconut growth platforms to post a 13.8% sales CAGR over the same period. We believe that CNPF’s resilient topline growth is driven by its strong brand-building and product development efforts, which allow CNPF to take advantage of opportunities in its consumer markets and maintain its momentum in spite of competition.
Quality growth underpinned by stable turnover Source: Company Information, Team Estimates We expect CNPF’s topline growth to be sustained while maintaining a stable cash conversion cycle—an indication of the company’s ability to pursue high quality and sustainable growth. FIGURE 24: CNPF GROSS, EBITDA, Between 2015A and 2020F, we estimate CNPF’s CCC to be stable at an average of 88.21 OPERATING, NET MARGINS days, with minimal variation only caused by the timing of purchases. With longstanding (2013A-2018F) supplier relationships and an increasingly competitive retail industry improving credit terms, we are optimistic that CNPF’s CCC will be stable over the medium-term.
Improving margins and sales mix We expect CNPF’s GPM to expand from 26.6% in 2015A to 29.0% by 2020F driven by the shift to higher margin products including premium meats, dairy, and coconut. Likewise, CNPF’s operating margin is expected to increase by 224 bps from 2015A to 2020F (from 12.1% to Source: Company Information, Team Estimates 14.3%) as a favorable product mix and increased operational leverage offset any increase in IGURE 25: CNPF VS. PEERS NET DEBT- A&P spending, shifts in commodity prices, and additional D&A expenses from new TO-EQUITY RATIO (2016E) investments. Our GPM assumptions already factor in rising coconut and skipjack tuna prices.
Balanced earnings growth with upside risks Due to CNPF’s strong topline growth, favorable sales mix shift, and improving operational leverage, we estimate CNPF’s EPS to grow at a 5-year 15.8% CAGR 2015A-2020F, outpacing its topline growth. This strong EPS growth will be driven by a balanced growth of both its market leading segments and new growth platforms, which will contribute 11.6 ppts, and 3.7 ppts to overall growth, respectively. Furthermore, CNPF remains in constant pursuit for potential acquisitions that will accelerate growth over the medium-term, a strategy which Source: Bloomberg, Team Estimates represents a significant upside risk to our EPS growth forecasts.
Healthy balance sheet capable of supporting growth and payout
Given CNPF’s strong FCFF generation ability and underleveraged capital structure, we believe that the company is well-positioned to capture organic and M&A growth opportunities. Even when factoring in expansionary capex, we estimate CNPF to post an
average FCFF yield of 3.2% 2015A-2020F, allowing room to pursue new growth opportunities with minimal risk of equity raising. In addition, its low net debt-to-equity ratio of 7.9% 2016E highlights its capacity to gear up the balance sheet if M&A opportunities arise.
8 Superior ROE driven by value-accretive expansion TABLE: GROSS PROFIT MARGIN We believe that CNPF will continue to deliver a strong ROE over the medium-term (21.7% on PER SEGMENT ave. 2015A-2020F), given its dual strategy of maximizing the profitability of its existing AVE. GROSS businesses and constant pursuit of value-accretive M&A opportunities. Organically, we see SEGMENT PROFIT MARGIN (2016E-2020F) CNPF’s NIM expansion to be a key driver for maintaining a healthy ROE. CNPF’s strategy of Canned and Processed Fish 32.4% allocating capital to higher margin branded businesses has shown its mindset of maximizing Canned Meat 34.3% shareholder returns. In addition, CNPF’s fiscal discipline has allowed the company to Milk and Mixes 31.2% maintain a healthy asset turnover ratio (1.49x on ave. 2015A-2020F) by limiting capex spending only to value-accretive opportunities such as CPAVI (+2.9 ppts 2016E ROE). Tuna Export 7.4% Coconut Export 21.4% Source: Company Information, Team Estimates Investment Risks
FIGURE 26: RISK MATRIX FOR CNPF Market Risk | Slowdown in consumption growth (MR1) CNPF faces the risk of slower than expected consumption growth due to uncertainty from OFW remittances and BPO growth. We believe CNPF can mitigate this risk by leveraging on its brand equity and price leadership, maximizing its R&D capability through product
engineering, and capitalizing on medium-term export recovery through its OEM businesses.
Market Risk | Sensitivity to raw material price volatility (MR2)
Despite volatile input prices, we believe CNPF will be able to maintain its profitability given a) its ability to lock in supplier prices, b) its ability to hedge inventory up to six months, and c) its
strategy of adjusting A&P spending in reaction to input price changes. With these measures, we expect the impact of rising commodity prices to be manageable in the medium-term.
Market Risk | Sensitivity to currency volatility (MR3)
Source: Team Analysis CNPF is exposed to higher input costs given that 40.8% of its inputs are USD-denominated. We believe that foreign exchange volatility will have no significant impact in the medium- TABLE 10: SUMMARY OF INVESTMENT term because 26.7% of CNPF’s revenue is also USD-denominated. This leaves a minimal RISKS AND MITIGATING FACTORS 1.9% of sales net exposure for CNPF that it manages by increasing USD-denominated sales RISKS MITIGATING FACTORS and engaging in hedging strategies. MARKET RISKS Strong brand equity, Industry Risk | Increasing heavy local and global competition (IR1) Consumption sustainable price leadership growth R&D efforts and maximizing CNPF’s business segments are threatened by increasing local and global competition, with slowdown medium-term export Thai Union Frozen (TU:TB) considered as its closest peer (see Appendix C-8). We believe recovery Early lock-in of supplier CNPF addresses competition for its branded businesses by leveraging on its scale and Commodity prices market leadership (74% domestic sales), differentiating itself from the export-focused TU price risk Hedging inventory, utilizing (92% export sales). Similarly, CNPF can maintain its market share in its OEM segments by cold storage facility leveraging on its long-standing relationships with foreign retailers and its export credentials. USD-denominated sales Forex volatility Currency hedging Industry Risk | Environmental issues (IR2) INDUSTRY RISKS CNPF’s production may be affected by weather disturbances that could result in production Market leadership and Increasing operational scale loss and inventory shortages, as seen in the slowdown of coconut oil exports (-6.9% 2014A- competition Extensive nationwide 2015A YoY) due to the El Niño phenomenon. We believe CNPF will be able to mitigate this distribution network risk by managing inventory levels to minimize shortage costs and by producing higher-value Optimizing inventory levels Environmental products such as virgin coconut oil, coconut water, and coconut sugar. Production of risk higher-margin products OPERATIONAL RISKS Operational Risk | Corporate governance issues (OR1) Corporate Independent board members As a previously family-owned business by the Po group, CNPF may encounter issues on governance Qualification-based roles establishing their credibility and accountability in terms of how the Board governs the Brand-building expertise M&A execution Management experience company. To address this, CNPF practices good governance policies by having and credentials independent members in the Board and assigning roles based on the qualifications. Source: Team Analysis Operational Risk | Execution risk for potential M&As (OR2) CNPF’s diversification strategy implies an execution risk for the company’s new growth platforms. We believe that CNPF can mitigate this risk through its commitment to its brand heritage and ability to build brands from the ground up, evidenced by its signature Century Tuna. Through highly-qualified managers, translating this proven track record into emerging brands (its dairy and coconut segments) mitigates any concerns on execution risk. TABLE 11: RECOMMENDATION GUIDE RATING TARGET PRICE % UPSIDE Greater than Php BUY >10% Scenario and Sensitivity Analysis
18.81/sh Php 17.10/sh to HOLD 0 to 10% We conducted a sensitivity analysis on our valuation estimates relative to their key inputs. Php 18.81/sh Less than Php We consider a) raw material costs, b) GDP growth, and c) foreign exchange rates to be the SELL <0% 17.10/sh most important variables as 75.1% of CNPF’s 2016E revenues are dependent on these Source: Team Analysis factors. Our base case target price is Php 20.91/sh (22.3% upside; Php 0.86/sh 2017E EPS).
9
TABLE 12: SENSITIVITY ANALYSIS ON KEY INPUTS
Base Case Positive Impact (+) Impact (+) on Negative Impact (-) Impact (-) on Change to Change to Key Inputs Assumption Sensitivity on TP 2017E EPS Sensitivity on TP 2017E EPS HOLD SELL Change in Tuna Prices +4.0% (2.0%) 22.94 0.89 +2.0% 18.90 0.83 +2.9% +4.2% Change in Canned Meat Prices 0.0% (2.0%) 23.52 0.88 +2.0% 19.61 0.84 +1.6% +2.9% Change in Milk Prices 0.0% (2.0%) 21.37 0.87 +2.0% 20.45 0.85 +4.5% +8.2% Change in Coconut Prices +2.0% (2.0%) 21.27 0.87 +2.0% 20.56 0.85 +5.9% +10.8% Real GDP Growth Rate 6.6% +2.3% 22.30 0.89 (2.3%) 18.87 0.83 (2.4%) (3.6%) USD/PHP Exchange Rate Php 51.32 (10.8%) 21.71 0.89 +9.7% 20.11 0.85 +24.9% +44.1% Source: Team Estimates : m We note that raw material costs are the most sensitive variable to our valuation. An increase in tuna and meat prices by 200 basis points beyond FAO estimates will reduce CNPF’s
intrinsic value to Php 16.41/sh or Php 18.30/sh respectively. Unfavorable shifts in the PHP- USD exchange rate and GDP growth may also have an impact toward our valuation. Despite these risks, we believe CNPF will remain consistent in its execution, relying on its established market leadership, brand-building expertise, and financial flexibility to mitigate any unfavorable movements in key inputs.
We further assess our key growth drivers and valuation inputs (WACC and growth rates) versus certain thresholds that would change our recommendation to a HOLD or a SELL. FIGURE 27: REAL GDP GROWTH BASE, BULL, AND BEAR FORECASTS Although unlikely, we outline our results in the Table 12 and Table 13.
TABLE 13: SENSITIVITY ANALYSIS ON DCF VALUATION ASSUMPTIONS WACC (%)
7.81% 8.31% 8.81% 9.31% 9.81%
4.50% 25.00 23.15 21.73 20.61 19.70 4.00% 23.55 22.07 20.91 19.97 19.19 3.50% 22.43 21.22 20.25 19.44 18.76 3.00% 21.55 20.53 19.69 18.99 18.39 Source: Department of Budget and Management, 2.50% 20.83 19.96 19.23 18.61 18.08 Note: BUY and HOLD cases are highlighted in white and grey respectively; Source: Team Estimates Bloomberg, Team Estimates
FIGURE 28: CORPORATE GOVERNANCE Corporate Governance SNAPSHOT TERMINAL Corporate governance and social responsibility GROWTH RATE (%) CNPF ensures compliance with principles of good corporate governance and provides support for social causes (see Figure 27). Leading the company toward sustained growth, CNPF’s executive officers consist of experts with over 25 years of experience in the industry (see Appendix E-1 and E-2). Moreover, by a) adhering to policies and initiatives set by
international organizations, b) participating in animal conservation initiatives, and c) ensuring their raw materials are obtained through honorable practices, CNPF aims to embody a good
reputation in the industry and promote environmental conservation to secure long-term sustainability (see Appendix E-3). A more detailed evaluation of CNPF’s corporate
Source: Team Analysis governance policies are outlined in Appendix E-4.
Independence in the board By appointing two independent members in the board of directors, CNPF follows the stipulations in Rule 38 of the Amended IRR of the SRC. The independent directors, Johnip Cua and Fernan Lukban, along with the reputable Board Advisor, Enrique A. Gomez Jr., commit to following an unbiased approach in making decisions that will benefit the company. The Board of Directors ensure that these independent views and perspectives are taken into account in its decision-making process.
Diffusion of responsibilities based on expertise The members of the Board are assigned to responsibilities that best suit their expertise (see Appendix E-1 and E-2). This is seen in the composition of the Board, most notably in the previous work experience of CEO Christopher Po and COO Teodoro Po, who serve as the company’s chief strategist and operations specialist respectively.
Maintaining transactions on an arm’s length basis Although CNPF is engaged in related party transactions, the company maintains transactions on an arm’s length basis by hiring third-party consultants and auditors to value their transactions. This was seen when the company finalized its IPO and acquired CPAVI, which was priced at 20-25% discount to ensure value to the company’s shareholders. Company transactions are done in accordance to the best interest of CNPF’s shareholders., as seen in several key acquisitions (more discussion in Appendix B-7).
10 Table of Contents
LIST OF ABBREVIATIONS USED………………………………………………………………………………………………………………………………… 12
APPENDIX A: FINANCIALS………………………………………………………………………………………………………………………………………..... 12 Appendix A-1: Consolidated Balance Sheet.…………………………………………………………………………………...... 13 Appendix A-2: Consolidated Income Statement.…………………………………………………………………...... 13 Appendix A-3: Consolidated Statement of Cash Flows..…………………………………………………….....…...... 14 Appendix A-4: Financials Summary per Segment…………………………………………………………………………………...... 14 Appendix A-5: Key Financial Ratios of Peers……………………………………………………………...... 14
APPENDIX B: COMPANY OVERVIEW………………………………………………………………………..………………………...... 15 Appendix B-1: CPGI Subsidiaries……………………………………………………………...... 15 Appendix B-2: Brand Positioning……………………………………………………………...... 15 Appendix B-3: Capacity Utilization……………………………………………………………...... 15 Appendix B-4: Sales Channels……………………………………………………………...... 16 Appendix B-5: Supply Chain……………………………………………………………...... 16 Appendix B-6: Key Acquisitions……………………………………………………………...... 16 Appendix B-7: Accreditations and Awards……………………………………………...... 17
APPENDIX C: INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING…………………………….………...... 17 Appendix C-1: Porter’s Five Forces Analysis..…………………………………...... ……………………………………...... 17 Appendix C-2: SWOT Analysis..…………………………………...... ……………………………………...... ……………...... 19 Appendix C-3: Key Economic Figures…………………………………...... ……………………………………...... …………...... 20 Appendix C-4: Convenience Product Demand and Premiumization Effect……..…………………………...... …………...... 20 Appendix C-5: CNPF Market Shares in Branded and Export Segments…………………………...... …...……………….…...... …...……………….…...... …...…….. 21 Appendix C-7: CNPF Brands Perceptual Map...……….………………………………………………………………………………..…….…...... …...……………….…...... …...……… 21 Appendix C-8: CNPF:PM and TU:TB Comparison…………………………………………………………………………………..…….…...... …...……………….…...... …...……….. 22 Appendix C-9: Brick-and-Mortar Retail Prices Comparison………………………………………………………………………..…….…...... …...……………….…...... …...…… 22
APPENDIX D: VALUATION ………………………………………………………………………………………………………………………………………… 23 Appendix D-1: Branded Segments DCF Valuation……………………………………………………………………………………………………………………………………………………… 23 Appendix D-2: Branded Segments Regression Analysis for Revenue Growth Forecasts ………………………………...…………………………………………………… 24 Appendix D-3: Tuna OEM and Coconut OEM Segments P/E Multiple Valuation ……………………………………………...……………………………………………………. 25 Appendix D-4: Raw Material Prices and COGS Breakdown …………………………………………………………………………………………………………….……………………….. 25 Appendix D-5: Sensitivity to Valuation Assumptions…………..…………………………………………………………………………………………………………….……………………….. 27
APPENDIX E: CORPORATE GOVERNANCE ……………………………………………………………………………………………………………... 27 Appendix E-1: CNPF Board of Directors………………………………………………………………………..………………………….………………………….………………………….…………… 27 Appendix E-2: CNPF Senior Management………………………………………………………………………………………………..………………………….………………………….………….. 28 Appendix E-3: Corporate Social Responsibility and Sustainability Practices ………………………………………………….………………….………………………….………… 29 Appendix E-4: Evaluation oF CNPF’s Quality of Corporate Governance ……………………………………………………….……………….……………….………………………. 30
11 List of Abbreviations Abbreviation Full Term CNPF Century Pacific Food, Inc. CCC Century Canning Corporation CSC Columbus Seafoods Corporation PMCI Pacific Meat Company, Inc. SMDC Snow Mountain Dairy Corporation CPAVI Century Pacific Agricultural Ventures, Inc. CPGI Century Pacific Group, Inc. DCF Discounted Cash Flow SOTP Sum-of-the-Parts CAGR Compounded Annual Growth Rate OEM Original Export Manufacturer SKU Stock-Keeping Unit CEO Chief Executive Officer COO Chief Operating Officer IPO Initial Public Offering TP Target Price DCF Discounted Cash Flow SOTP Sum-of-the-Parts P/E Price-to-Earnings Ratio ROE Return on Equity D/E Debt-to-Equity Ratio FCFF Free Cash Flow to Firm CCC Cash Conversion Cycle EPS Earnings per Share EBIT Earnings Before Interest and Taxes NIM Net Income Margin WACC Weighted Average Cost of Capital CAPM Capital Asset Pricing Method Capex Capital Expenditures M&A Mergers and Acquisitions R&D Research and Development A&P Advertising and Promotions Expense GDP Gross Domestic Product PPP Public-Private Partnerships ASEAN Association of Southeast Asian Nations NCR National Capital Region EU GSP+ European Union Generalized System of Preferences Plus New administration Current government of President Rodrigo Duterte
Appendix A: Financials
APPENDIX A-1: CONSOLIDATED BALANCE SHEET BALANCE SHEET (in PhP mn) 2013P 2014A 2015A 2016E 2017F 2018F 2019F 2020F ASSETS Current Assets Cash and cash equivalents 804.39 1,264.21 722.16 1,033.15 797.34 1,640.28 2,288.72 3,579.78 Trade and other receivables - net 2,330.89 2,561.73 3,592.69 3,806.49 4,364.35 4,772.99 5,574.35 6,123.56 Inventories - net 3,714.23 5,194.21 5,925.98 6,554.74 7,086.21 8,081.88 8,673.02 9,202.73 Due from related parties 212.66 41.37 108.56 119.89 131.33 142.89 155.45 Held-to-maturity investments - current 152.44 14.69 14.69 14.69 14.69 14.69 14.69 Biological assets 37.48 31.43 50.09 55.31 60.59 65.92 71.71 Prepayments and other current assets - net 176.75 118.61 218.68 621.30 686.09 751.59 817.74 889.59 Total Current Assets 7,026.26 9,541.33 10,547.00 12,189.01 13,123.88 15,453.34 17,577.34 20,037.51 Non-current Assets
Property, plant, and equipment - net 1,046.78 1,421.37 3,133.94 4,089.38 4,621.77 5,055.15 5,563.93 6,128.32 Trademarks 40.00 40.00 2,955.33 2,955.33 2,955.33 2,955.33 2,955.33 2,955.33
12 Retirement benefit asset ------Held-to-matrurity investments - non-current 28.23 13.11 13.11 13.11 13.11 13.11 13.11 Deferred tax assets 21.75 56.68 81.73 81.73 81.73 81.73 81.73 81.73 Other non-current assets 23.86 101.11 50.84 100.25 110.70 121.27 131.95 143.54 Total Non-current Assets 1,132.38 1,647.40 6,234.94 7,239.79 7,782.63 8,226.58 8,746.04 9,322.02 Total Assets 8,158.64 11,188.73 16,781.95 19,428.80 20,906.51 23,679.92 26,323.38 29,359.53
LIABILITIES AND EQUITY Current Liabilities Notes payable 2,717.30 - 2,250.00 694.00 - - - - Trade and other payables 2,535.49 4,099.49 3,863.97 4,605.43 4,872.26 5,515.93 5,707.60 5,951.03 Income tax payable 51.84 128.49 146.53 146.53 146.53 146.53 146.53 146.53 Due to related parties - 286.07 13.98 13.98 13.98 13.98 13.98 13.98 Total Current Liabilities 5,304.63 4,514.06 6,274.48 5,459.94 5,032.77 5,676.44 5,868.11 6,111.55 Non Current Liabilities Long Term Loan - - - 1,320.00 990.00 660.00 330.00 - Retirement benefit obligation 13.95 93.87 157.04 157.04 157.04 157.04 157.04 157.04 Deferred tax liability 1.42 0.46 3.59 3.59 3.59 3.59 3.59 3.59 Total Non-current Liabilities 15.37 94.33 160.63 1,480.63 1,150.63 820.63 490.63 160.63 Total Liabilities 5,319.99 4,608.39 6,435.12 6,940.57 6,183.41 6,497.07 6,358.75 6,272.18 Equity Share capital 1,500.00 2,231.02 2,360.69 3,541.03 3,541.03 3,541.03 3,541.03 3,541.03 Share premuim - 2,769.34 4,911.99 4,911.99 4,911.99 4,911.99 4,911.99 4,911.99 Share-based compensation reserve - 3.38 5.26 5.26 5.26 5.26 5.26 5.26 Other reserves - 30.63 30.63 30.63 30.63 30.63 30.63 30.63 Currency translation adjustment 19.35 19.48 48.51 48.51 48.51 48.51 48.51 48.51 Retained earnings 1,319.30 1,526.49 2,989.76 3,950.81 6,185.69 8,645.43 11,427.22 14,549.93 Total Equity 2,838.65 6,580.34 10,346.83 12,488.23 14,723.10 17,182.85 19,964.63 23,087.35 Total Liabilities and Equity 8,158.64 11,188.73 16,781.95 19,428.80 20,906.51 23,679.92 26,323.38 29,359.53 Source: Company Information, Bloomberg, Team Estimates
APPENDIX A-2: CONSOLIDATED INCOME STATEMENT INCOME STATEMENT (in PhP mn) 2013P 2014A 2015A 2016E 2017F 2018F 2019F 2020F Net Revenues 19,023.05 20,438.56 23,324.53 28,132.30 31,066.21 34,031.93 37,027.25 40,280.56 Cost of Goods Sold 15,696.78 15,063.99 17,128.16 19,980.10 22,227.45 24,282.25 26,360.09 28,616.88 Gross Profit 3,326.28 5,374.56 6,196.37 8,152.20 8,838.77 9,749.67 10,667.16 11,663.68 Interest Income 10.23 9.17 7.63 7.35 10.52 8.12 16.70 23.30 Other Income 165.58 181.69 92.52 - - - - - 3,491.86 5,556.25 6,288.89 8,159.55 8,849.28 9,757.79 10,683.86 11,686.98 Operating Expenses 2,415.24 3,119.55 3,376.65 4,136.31 4,367.20 4,811.26 5,117.08 5,432.44 Depreciation - 152.75 152.38 232.88 287.02 329.63 393.29 460.31 Finance Costs 112.45 15.29 1.16 81.72 45.01 33.76 22.51 11.25 Other Expenses 14.05 39.58 35.94 - - - - - 2,541.74 3,174.42 3,413.75 4,450.90 4,699.23 5,174.65 5,532.88 5,904.00 Profit (Loss) Before Tax 950.12 2,381.83 2,875.14 3,708.64 4,150.05 4,583.14 5,150.98 5,782.97 Income Tax Benefit (Expense) 216.43 646.66 796.71 985.70 1,098.29 1,207.87 1,356.61 1,521.95 Profit (Loss) for the Period 733.68 1,735.17 2,078.43 2,722.95 3,051.76 3,375.27 3,794.36 4,261.03 Core Net Income 743.92 1,532.40 1,938.50 2,722.95 3,051.76 3,375.27 3,794.36 4,261.03 Source: Company Information, Bloomberg, Team Estimates
APPENDIX A-3: CONSOLIDATED CASH FLOW STATEMENT CASH FLOW STATEMENT (in PhP mn) 2013A 2014A 2015A 2016E 2017F 2018F 2019F 2020F Cash Flows from Operating Activities Profit (Loss) before tax 960.35 2,238.25 2,730.39 3,708.64 4,150.05 4,583.14 5,150.98 5,782.97 Adjustments for: ------Depreciation 193.39 152.75 152.38 232.88 287.02 329.63 393.29 460.31 Retirement benefit expense 9.31 18.08 57.82 - - - - - Loss on inventory obsolescence - 71.19 17.91 - - - - - Loss on impairment of input VAT - - 13.02 - - - - - Unrealized foreign exchange loss (gain) - (0.45) 11.11 - - - - - Doubtful accounts expense (2.57) 30.31 5.59 - - - - - Provisions - - 7.85 - - - - - Loss on decline in value of inventories (5.89) - 3.72 - - - - - Loss (gain) on disposal of property, plant, and 3.10 (0.31) 3.55 - - - - - equipment Share based compensation expense - 3.38 1.89 - - - - - Financial costs 112.45 15.29 1.16 81.72 45.01 33.76 22.51 11.25 Loss on transfer of retirement benefit obligation - 16.00 ------Interest income (10.23) (9.17) (7.63) (7.35) (10.52) (8.12) (16.70) (23.30) Operating cash flows from working capital changes 1,259.90 2,535.31 2,998.76 4,015.89 4,471.57 4,938.41 5,550.08 6,231.24 Decrease (Increase) in: ------Trade and other receivables (1,057.49) (1,560.16) (754.69) (213.80) (557.86) (408.63) (801.37) (549.21) Due from related parties - (903.51) 171.29 (67.20) (11.32) (11.44) (11.56) (12.55) Inventories 2,056.57 (3,663.38) (536.72) (628.76) (531.47) (995.67) (591.14) (529.70) Biological assets - (37.48) 6.05 (18.66) (5.22) (5.28) (5.33) (5.79) Prepayment and other current assets -net 144.22 24.57 1.08 (402.61) (64.80) (65.50) (66.15) (71.85) Other non-current assets 5.18 (78.78) 98.54 (49.41) (10.45) (10.57) (10.67) (11.59) Incrase (Decrease) in: ------Trade and other payables (1,135.88) 4,008.74 (404.64) 741.46 266.84 643.66 191.68 243.43
13 Due to related parties - 500.52 (1,378.30) - - - - - Other non-current liabilities (64.94) ------Exchange differences on translating operating 7.02 1.55 (32.75) - - - - - assets and liabiltiies
Cash generated from operations 1,214.58 827.38 168.62 3,376.91 3,557.27 4,255.53 5,293.98 4,084.98 Contribution to the retirement fund (8.43) (30.55) (30.62) - - - - - Income tax paid (221.08) (534.70) (783.03) (985.70) (1,098.29) (1,207.87) (1,356.61) (1,521.95) Interest received - - 6.06 - - - - - Net cash from (used in) operating activities 985.08 262.12 (638.98) 2,391.21 2,458.98 2,877.11 2,898.91 3,772.03 Cash Flows from Investing Activities Acquisitionss of subsidiaries (net of cash acquired) - - (3,396.81) - - - - - Acquisitions of property, plant, and equipment (341.81) (539.74) (1,101.07) (1,188.31) (819.41) (763.00) (902.08) (1,024.70) Proceeds from sale of property, plan, and equipment 79.70 4.89 364.48 - - - - - Maturities (Acquisition) of HTM investments - (182.83) 151.41 - - - - - Interest income received 10.23 11.33 2.83 7.35 10.52 8.12 16.70 23.30 Net cash used in investing activities (251.87) (706.35) (3,979.17) (1,180.96) (808.89) (754.89) (885.38) (1,001.41) Cash Flows from Financing Activities Proceeds from issuance of share capital - 3,500.36 2,272.31 - - - - - Proceeds from notes payable - - 2,250.00 694.00 - - - - Proceeds from long term debt - - - 1,650.00 - - - - Dividends paid - - (446.20) (581.55) (816.88) (915.53) (1,012.58) (1,138.31) Net receipts from related parties ------Net repayments of loans (555.85) (2,214.60) - (2,580.00) (1,024.00) (330.00) (330.00) (330.00) Finance costs paid (112.45) (15.29) - (81.72) (45.01) (33.76) (22.51) (11.25) (1,365.09 Net cash from financing activities (668.30) 1,270.47 4,076.11 (899.27) (1,885.90) (1,279.29) (1,479.56) ) Net Increase (Decrease) in Cash and Cash 64.91 826.24 (542.05) 310.98 (235.81) 842.94 648.44 1,291.06 Equivalents Cash and Cash Equivalents, Beginning 739.49 437.96 1,264.21 722.16 1,033.15 797.34 1,640.28 2,288.72 Cash and Cash Equivalents, Ending 804.39 1,264.21 722.16 1,033.15 797.34 1,640.28 2,288.72 3,579.78 Source: Company Information, Bloomberg, Team Estimates
APPENDIX A-4: FINANCIAL SUMMARY PER SEGMENT Canned and Processed Fish 2016E 2017F 2018F 2019F 2020F Net Revenues 10,356.09 11,495.26 12,644.79 13,782.82 15,023.27 Gross Margin 34.02% 32.02% 32.02% 32.02% 32.02% Operating Margin 15.11% 15.02% 14.97% 15.39% 15.82% Net Income Margin 10.38% 10.40% 10.38% 10.70% 11.02% EPS 0.30 0.34 0.37 0.42 0.47 Canned Meat 2016E 2017F 2018F 2019F 2020F Net Revenues 8,098.28 8,989.09 9,888.00 10,777.91 11,747.93 Gross Margin 34.34% 34.34% 34.34% 34.34% 34.34% Operating Margin 16.79% 16.70% 16.65% 17.07% 17.50% Net Income Margin 11.55% 11.57% 11.56% 11.88% 12.19% EPS 0.26 0.29 0.32 0.36 0.40 Milk and Mixes 2016E 2017F 2018F 2019F 2020F Net Revenues 2,682.32 3,084.67 3,516.52 3,973.67 4,450.51 Gross Margin 31.22% 31.22% 31.22% 31.22% 31.22% Operating Margin 10.20% 10.08% 10.08% 10.49% 10.91% Net Income Margin 6.94% 6.94% 6.97% 7.27% 7.58% EPS 0.05 0.06 0.07 0.08 0.10 Tuna Export 2016E 2017F 2018F 2019F 2020F Net Revenues 4,564.61 4,701.55 4,795.58 4,891.49 4,989.32 Gross Margin 9.00% 7.00% 7.00% 7.00% 7.00% Operating Margin 3.54% 3.44% 3.39% 3.32% 3.25% Net Income Margin 2.27% 2.30% 2.28% 2.25% 2.22% EPS 0.03 0.03 0.03 0.03 0.03 Coconut Export 2016E 2017F 2018F 2019F 2020F Net Revenues 2,431.00 2,795.65 3,187.04 3,601.36 4,069.53 Gross Margin 23.00% 21.00% 21.00% 21.00% 21.00% Operating Margin 17.69% 17.59% 17.54% 17.47% 17.40% Net Income Margin 17.40% 17.43% 17.41% 17.36% 17.32% EPS 0.12 0.14 0.16 0.18 0.20 Source: Company Information, Bloomberg, Team Estimates
APPENDIX A-5: KEY FINANCIAL RATIOS OF PEERS Mkt Cap EBITDA Margin Ast TO Ticker Name Country FCFF Yld (%) Net D/E (%) (USD mn) (%) %) CNPF:PM Century Pacific Food, Inc. PH 1,142.11 2.71% 14.28% 7.85% 1.55% TU:TB Thai Union Group Pcl TH 2,798.80 1.22% 8.03% 92.02% 1.15% 2282:JP NH Foods Ltd JN 5,483.22 7.01% 5.59% 16.64% 1.74% 000895:CH Henan Shuanghui Investment - A CH 9,947.20 7.01% - -5.55% 2.30% 600597:CH Bright Dairy & Food Co Ltd - A CH 2,345.96 -7.10% - -20.76% 0.67% VNM:VN Vietnam Dairy Products Jsc VN 8,063.49 4.14% 25.62% -38.68% 1.72% 603288:CH Foshan Haitian Flavouring - A CH 11,452.26 3.09% 0.00% -33.28% 1.15% KFB:MK Kawan Food Bhd. MA 228.41 -3.07% 26.84% -23.85% 0.62% 2587:JP Suntory Beverage & Food Ltd. JN 12,780.67 0.00% 13.00% 45.31% 0.98% NEST:IN Nestle India Ltd. IN 8,457.29 1.73% 20.80% 0.00% 1.37%
14 Regional Mean 1.76% 16.65% 3.98% 1.30%
Regional Median 2.41% 16.90% -13.15% 1.15%
CNPF:PM Century Pacific Food Inc. PH 1,142.11 2.71% 14.28% 7.85% 1.55% JFC:PM Jollibee Foods Corp. PH 4,206.54 2.97% 9.15% -12.43% 1.77% MAXS:PM Max's Group Inc PH 547.85 -0.67% - 73.63% 1.03% DNL:PM D&L Industries Inc. PH 1,627.07 1.88% 17.39% 18.46% 1.12% URC:PM Universal Robina Corp. PH 7,193.62 3.35% 20.36% 18.11% 1.04% PGOLD:PM Puregold Price Club Inc. PH 2,174.09 -0.10% 8.58% 11.86% 1.94% RRHI:PM Robinsons Retail Holdings Inc. PH 2,074.41 2.70% 7.04% -3.13% 1.57% Philippine Mean 1.69% 12.50% 17.75% 1.41%
Philippine Median 2.70% 13.27% 11.86% 1.55%
Overall Average 1.72% 14.58% 10.86% 1.36%
Market Cap Weighted Average 2.80% 10.76% 3.69% 1.43% Source: Company Information, Bloomberg, Team Estimates
Appendix B: Company Overview
APPENDIX B-1: CPGI SUBSIDIARIES
Source: Company Information
APPENDIX B-2: CNPF BRAND POSITIONING In line with its mission to “nourish everyone, everyday, everywhere,” CNPF ensures that it caters to the whole socio-economic spectrum of Filipino consumers. Its brand catalog shows that it positions itself from mass markets to affluent segments of the consumer market in order to capture broad- based growth.
Source: Company Information
APPENDIX B-3: CNPF CAPACITY UTILIZATION The following table shows CNPF's capacity for each product category considering projected revenue growth from 2016E to 2020F.
2014A 2015A 2016E 2017F 2018F 2019F 2020F
Tuna 77% 88% 98% 80% 90% 98% 90% Sardines 45% 51% 57% 63% 69% 76% 82% Meat 82% 70% 78% 87% 96% 90% 98% Milk and Mixes 29% 33% 38% 44% 50% 56% 63% Tuna OEM 79% 86% 88% 91% 93% 95% 96% Coconut 70% 81% 92% 90% 90%
Source: Company Information, Team Estimates
15
APPENDIX B-4: CNPF’S SALES CHANNELS
Source: Company Information
On top of its local and global distribution networks, CNPF also has additional sales channels through food service outlets. Consumer food service outlets are also steadily increasing in number (6.3% CAGR 2011A- 2015A), providing CNPF another lever to grow. We expect CNPF to benefit from the increase in out-of- home food consumption. CNPF supplies to over 3,500 leading institutional accounts such as Starbucks, Jollibee, Shakey’s, 7-Eleven, and Family Mart, who have more than 12,000 food service outlets. While the segment only accounts for 3.0% of revenues, the opportunity for growth remains favorable as food service outlets continue to expand their geographic reach and share in consumer expenditures.
APPENDIX B-5: CNPF’S SUPPLY CHAIN CNPF company engages in forward contracts for raw materials, conducts bulk purchasing strategies, and attempts to extract operational synergies while maintaining long-standing partnerships with key suppliers and regional distributors. It maximizes its production facilities, which are located near input sources.
Source: Company Information
APPENDIX B-6: CNPF’S KEY ACQUISITIONS ACQUISITION YEAR SEGMENT DESCRIPTION Canned and Blue Bay is a middle market canned tuna brand that helps enable CNPF’s multi-brand, multi- Blue Bay 2001 processed fish product portfolio in the canned fish market. Birch Tree, known as everybody’s milk in the ‘80s, was relaunched and is now a trusted Birch Tree 2003 Dairy and mixes household milk brand, nourishing children with high levels of calcium and zinc through its full cream or fortified variants. Kaffe de Oro is an up-and-coming coffee brand that conveniently comes in sleek and handy three- Kaffe de Oro 2008 Dairy and mixes in-one packs – even sugar-free versions are available for the health-conscious. Home Pride is CNPF’s mixes brand that produces tasty and easy-to-prepare mixes for everyday Home Pride 2008 Dairy and mixes soups or dishes that are constantly consumed locally. Canned and Swift is a well-trusted brand known for its high quality and delicious canned meat products that Swift 2012 processed meat allows CNPF to further expand and support its local and international canned meat operations. Vita Coco - Exclusive Vita Coco is the best-selling coconut water brand in the US and EU, with CNPF becoming the 2014 Coconut OEM Distributor Rights Philippines’ exclusive distributor. Century Pacific CPAVI creates quality coconut products (such as virgin coconut oil, coco flour, and coco water) for Agricultural Ventures 2016 Coconut OEM both export and domestic markets, establishing CNPF’s long-term presence in the high growth Inc. (CPAVI) health wellness based market. Kamayan, North USA & Canada Kamayan is the leading shrimp paste brand in North America that will help support the export 2016 America distribution presence and growth of CNPF’s international branded businesses. Century China Group CNPF acquires full control of distributing Century Tuna in while creating an opportunity for future 2016 China distribution of Companies growth in China’s expansive growing canned food market. Source: Company Information
16 APPENDIX B-7: CNPF’S ACCREDITATIONS AND AWARDS
EVENT YEAR AWARDS
Agora Awards 2011 Century Canning Marketing Company of the Year
Readers Digest Trusted Brand 2011-2016 Readers Digest Trusted Brand - Century Tuna
Readers Digest Trusted Brand 2012-2013 Reader’s Digest Trusted Brand – Argentina Meats
International Seafood Sustainability Foundation First Filipino Member Company to be admitted into the 2013 (ISSF) Admittance ISSF Marine Stewardship Council Recognition 2013 CNPF recognized as MSC Partner
Gregory Banzon (VP and GM), Awardee for Marketing Agora Awards 2014 Excellence
The Asset’s Triple A Awards 2014 CNPF IPO, Deal of the Year
Asia Marketing Federation Recognition 2016 CNPF, Asia’s Marketing Company of the Year
Source: Company Information
Appendix C: Industry Overview and Competitive Positioning
APPENDIX C-1: PORTER’S FIVE FORCES ANALYSIS To distinguish the wide array of industries that CNPF operates in and the key buyers the company transacts with, a Porter’s Five Forces Analysis was separately made for CNPF’s branded and export businesses, as seen below:
PORTER’S FIVE FORCES ANALYSIS FOR CNPF’S BRANDED AND EXPORT BUSINESSES
The consumer packaged foods industry is analyzed by taking manufacturers and distributors of the canned and processed, canned meat, powdered milk and condensed milk as players. As for the buyers, consumers exert moderate buying power due to low cost and ease to switching to different variations of the same product. By maintaining long-standing relationships with their independent suppliers, coupled with forward integration for their fish and tin can inputs, suppliers have moderate bargaining power to the business. Despite ASEAN integration, threat to new entry is low because of the presence of strong brands in the market, high fixed costs, high investment costs and low accessibility of suppliers and distributors. There is significant threat to substitutes due to low switching cost to more beneficial alternatives. These factors, coupled with established competitors and low product differentiation results in significant rivalry amongst competitors.
The agricultural exports industry is analyzed by taking exporters of skipjack tuna, yellowfin tuna and coconut as players. As for the buyers, firms who source their skipjack and yellowfin tuna, as well as coconut water, coconut copra, or desiccated coconuts exert moderate bargaining power because of large order sizes, low differentiation in products and price sensitivity of exports. By transacting with small tuna vendors and small coconut farmers, and as suppliers themselves, CNPF maintains low bargaining power with its suppliers. Threat to new entrants is also low because of high investment costs, high fixed costs, limited accessibility to suppliers and distributors. There is a low threat to substitutes since there would be a high cost to switch raw materials in their products, and limited number of cheaper alternatives to tuna and coconut. There is moderate rivalry between existing competitors because of limited number of large tuna and coconut exporters who have low product differentiation.
MODERATE BARGAINING POWER OF BUYERS FOR BOTH BRANDED AND EXPORT BUSINESSES
17 Consumers in the packaged foods industry have a significant tendency to switch because of their independence to the companies and their sensitivity to prices. Thus, companies in the packaged foods industry compete with price wars, product segmentation or trade penetration in order to become more accessible and relevant to consumers and their needs. Overall, buyers have moderate bargaining power in the consumer packaged foods industry.
Firms may have large order sizes and financial muscle, however they don't have the flexibility to switch suppliers because of the costs they incur when doing so. Therefore, companies in the agricultural export industry must price their products at competitive prices while maintaining their product quality. Exporters, especially in the tuna export industry have to adhere to an international standard for them to compete in the market. Overall, buyers have moderate bargaining power in the agricultural export industry.
MODERATE BARGAINING POWER OF SUPPLIERS FOR BRANDED BUSINESS AND LOW BARGAINING POWER OF SUPPLIERS FOR EXPORT BUSINESS
Suppliers for their canned meat and dairy are independent because inputs for those segments are imported from New Zealand. Regardless. CNPF has numerous longstanding relationships with small scale suppliers, effectively allowing CNPF to purchase raw materials at competitive prices. By engaging in short term supply contracts, CNPF also maintains product quality and freshness. In addition to this, CNPF engages in forward integration practices for their canned and processed fish segments, effectively making suppliers have moderate buying power.
Even if there is pressure to maintain product quality, CNPF has numerous longstanding relationships with small scale suppliers, effectively allowing CNPF to purchase raw materials at competitive prices. By engaging in short term supply contracts, CNPF also maintains product quality and freshness. On top of all of this, since CNPF itself is a supplier for tuna and coconut and engages in forward integration practices, bargaining power for suppliers is low.
LOW THREAT OF NEW ENTRANTS FOR BOTH BRANDED AND EXPORT BUSINESSES
Foreign competitors may pose as a threat to businesses in the consumer packaged foods industry, considering that consumers don't incur costs when switching between brands. However, the consumer packaged foods industry is very capital intensive with heavy importance on economies of scale, and established value chain. High fixed costs associated with equipment, machineries and plants in order to manufacture and store the packaged foods. Thus, threat of new entrants is low in the consumer packaged goods industry.
The barrier to new entrants in the agricultural exports industry is very high due to capital intensity and the importance of economies of scale. High fixed costs are associated with equipment and machineries in order to harvest and store their exports. Also, a highly integrated value chain which leverages on strategic locations for supply and distribution is also needed to ensure the freshness and quality of products. Thus, threat of new entrants is low in the agricultural exports industry.
SIGNIFICANT THREAT OF SUBSTITUTE PRODUCTS AND SERVICES FOR BRANDED BUSINESS AND LOW THREAT OF SUBSTITUTE PRODUCTS AND SERVICES FOR EXPORT BUSINESS
18
Pre-prepared meals or healthy fast food may be competitive alternatives to canned food because of the convenience and flavor they offer. However, canned food still remain to be cheaper than the alternatives mentioned. Thus, threat of substitutes is significant in the consumer packaged foods industry.
Firms who switch their raw materials will incur high switching costs because of how it would affect their product quality. Also, tuna and coconut are healthy products that already satisfy basic dietary needs, so there would only be a limited number of alternatives. Salmon and sardines are possible alternatives to tuna, but tuna contains the most protein and the least fat, effectively making it the best choice among its alternatives. And since there limited number of cheaper alternatives to coconut, the threat of substitute products and services is low in the agricultural exports industry.
MODERATE TO SIGNIFICANT RIVALRY OF EXISTING COMPETITORS FOR BRANDED BUSINESS AND MODERATE THREAT OF RIVALRY OF EXISTING COMPETITORS FOR EXPORT BUSINESS
The consumer packaged foods industry has numerous established players in the market such as Purefoods, CDO, and Ligo for the canned food segment and Alaska and Nestle for the dairy and mixes segment. The presence of key competitors, low switching costs and low differentiation among products leads to significant rivalry among competitors.
Although there are large players in the tuna and coconut export industry which offer products with low differentiation, there is moderate rivalry among competitors because there are limited players in the market. Firms would also incur high costs when switching suppliers to ensure product quality is maintained.
APPENDIX C-2: SWOT ANALYSIS Presented below are the strengths, weaknesses, opportunities, and threats we have identified for CNPF.
FIGURE 30: PH CONSUMER WELL-BEING STRENGTHS WEAKNESSES EXPENDITURES (IN PHP BN) (2013A-2018F) • Leading and high-quality brands • 100% of meat and dairy raw materials sourced • Multi-brand, multi-channel strategy abroad
• Extensive distribution network • Marketing expertise to build brands
• Strong research and development for innovation
• Price Leadership (see Appendix C-9)
Source: Euromonitor OPPORTUNITIES THREATS
FIGURE 30: PH RETAIL VALUE • Regional wealth expansion (see Figure 29) • Increasing competition both locally and globally (IN PHP TN) (2013A-2018F) Foreign exchange risk • Rapid urbanization • • Rising input costs • Increasing consumer disposable income • Execution risk of new product acquisitions • Health and convenience trends • Corporate governance risk • (see Figure 30) • Lessening tuna supply • Improving modern trade penetration (see • Political risk Figure 31) • Environment and calamity risk • Low refrigeration penetration rate • Philippine relations with China for exports Source: Euromonitor • Slowdown in Philippine BPO sector growth
• Decrease in OFW remittances
Source: Team Analysis
19 APPENDIX C-3: KEY ECONOMIC FIGURES
GDP GROWTH FORECASTS 2016E 2017F 2018F 2019F 2020F DESCRIPTION C 6.2% 5.1% 5.3% 5.5% 5.7% I 10.0% 9.0% 12.0% 11.0% 13.0% G 15.0% 17.5% 11.0% 10.0% 7.0% X 5.0% 7.0% 8.0% 10.0% 11.5% M 7.5% 8.5% 9.5% 11.5% 13.0% Y 6.8% 6.6% 5.2% 6.6% 4.2% Agriculture 4.0% 3.0% 2.8% 2.4% 2.5% Industry 7.4% 7.2% 8.1% 8.4% 9.1% Services 6.9% 6.8% 6.5% 5.8% 5.7% Y 6.8% 6.6% 6.7% 6.4% 6.6% Base Case Real 6.8% 6.6% 6.7% 6.4% 6.6% GDP Growth Accelerated consumption from regional Bull Case Real 6.8% 9.2% 10.5% 9.4% 8.6% wealth expansion. better than expected GDP Growth export recovery Slowdown in OFW remittances and BPO Bear Case Real 6.8% 4.3% 3.8% 3.1% 3.5% contributions, delays in comprehensive tax GDP Growth reform and pipelined infra projects
KEY HISTORICAL ECONOMIC FIGURES 2009 2010 2011 2012 2013 2014 2015
Real GDP Growth (YoY) 1.1% 7.6% 3.7% 6.7% 7.1% 6.2% 5.9% CPI (YoY) 4.3% 3.8% 4.7% 3.2% 2.9% 4.2% 1.4% Unemployment Rate (%) 7.5% 7.3% 7.0% 7.0% 7.1% 6.8% 6.3% Current Accounts (% of GDP) 5.0% 3.6% 2.5% 2.7% 4.2% 3.8% 2.6% Consumption (% of GDP) 72.1% 69.2% 70.5% 70.5% 69.5% 69.1% 69.3% Government Expenditures (as % of GDP) 17.0% 20.8% 20.6% 18.5% 22.1% 21.9% 23.8% Capital Formation (as % of GDP) 10.4% 10.0% 9.8% 10.7% 10.5% 10.2% 10.3% Exports (as % of GDP) 45.0% 50.6% 47.6% 48.4% 44.8% 47.1% 48.5% Imports (as % of GDP) 44.4% 50.6% 48.5% 48.0% 46.8% 48.2% 51.9% Food and Non-Alcoholic Beverages (as % of C) 42.0% 41.9% 42.0% 41.9% 41.8% 41.5% 41.3% Source: Philippine Statistics Authority, Bloomberg, Team Estimates
APPENDIX C-4: CONVENIENCE PRODUCT DEMAND AND PREMIUMIZATION EFFECT We conducted a regression analysis and discovered a high correlation between the Philippines’s average regional GDP per capita and consumption of canned and processed fish, canned meat, and dairy products. The results of this analysis are supported by the improvement in the consumer confidence index (see Figure 6), which is based on economic outlook and household income, as well as higher growth in areas ouside NCR. These findings support CNPF’s strategy of expanding to premium, higher-margin segments.
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.981453667
R Square 0.963251301
Adjusted R Square 0.955901561
Standard Error 1178770465
Observations 7
ANOVA
df SS MS F Significance F
Regression 1 1.82107E+20 1.82107E+20 131.0592384 8.9078E-05
Residual 5 6.9475E+18 1.3895E+18
Total 6 1.89054E+20
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -4126413282 5207534487 -0.792392886 0.464051075 -17512806841 9259980278 -17512806841 9259980278
X Variable 1 900014.0548 78616.81976 11.44811069 8.9078E-05 697923.0859 1102105.024 697923.0859 1102105.024
20
APPENDIX C-5: CNPF MARKET SHARES IN BRANDED AND EXPORT SEGMENTS
CNPF CLOSEST COMPETITOR SEGMENT MARKET DIFFERENCE CNPF’S COMPETITIVE ADVANTAGE MARKET SHARE SHARE
Canned & Marketing expertise combined with excellent multi-brand, multi- Preserved Food 35% – Rank 1 11% – Purefoods (PF.PM) 24% segment strategy that takes advantage of a nationwide Industry distribution network
Canned & Established Century Tuna brand and sheer scale over 54% – Rank 1 19% – Liberty Gold 35% Processed Fish competitors
Canned Meat 37% – Rank 1 30% – Purefoods (PF.PM) 7% Multi-brand presence from mass market to affluent segments
Excellent advertising and promotions combined with renowned Corned Meat 46% – Rank 1 18% – CDO Foodsphere 28% Argentina brand
Luncheon Meat 34% – Rank 1 15% – Maling 19% Expansive distribution network
Canned Tuna 84% – Rank 1 15% – CDO Foodsphere 69% Dominant brand equity
Private Label Tuna 34% – Rank 1 31% – Philbest 3% Longstanding relationships and key partnerships Export Source: Company Data, Euromonitor, Nielsen, Bureau of Customs as of Sep 2016
APPENDIX C-6: CNPF BRANDS PERCEPTUAL MAP
Source: Team Analysis
21
APPENDIX C-7: CNPF:PM AND TU:TB COMPARISON
Revenue Breakdown CENTURY PACIFIC FOODS, INC. (CNPF) THAI UNION FOODS (TU)
Domestic 74% 8% Geography
Export 26% 92%
Branded segment 77% 43% Business Private Label OEMs 23% 57%
Strategy Focus Domestic dominance Expanding internationally
Source: Bloomberg, Company Data
Revenue breakdown by geography Revenue breakdown by business Source: Company Data, Euromonitor
APPENDIX C-8: BRICK-AND-MORTAR RETAIL PRICES COMPARISON
Retail Retail Weight Weight prices prices Canned Fish Purefoods 56.5 150 g Surebuy 25.95 150 g Tuna Meat Loaf Century Tuna 33.5 180 g Swift 17.75 170 g Century Tuna Premium Argentina 13.5 100 g Century Tuna Lite Star 18.15 180 g
San Marino 33.95 180 g Sausage Swift 27.95 155 g Surebuy 39 185 g Argentina 25 175 g CDO 31.55 180 g Purefoods 44.3 230 g Ligo 36.75 184 g Surebuy 33.95 114 g Mega 35.95 180 g Libbys 41.1 130 g Dairy Sardines/Mackerel Condensada 555 14 155 g Angel 39.5 380 g Rosebowl 14.8 155 g Alaska 51.25 390 g Jolly Cow 42.5 380 g Saba 14.35 155 g Evaporada
Unipak 13.55 155 g Angel 30.25 410 ml Family's Brand 13.75 155 g Alaska 37 370 ml Master 18.65 155 g Coffee Creamer Angel 34.75 200 g Ligo 15 155 g Cream All 53 300 g Lucky 7 15.95 155 g Coffeemate 38.35 170 g Mega 14.5 155 g Krem Top 34.95 180 g Senorita 14.95 155 g Milk Birchtree 121.5 300 g Meat Alaska 221 700 g Corned Beef Anchor 199.9 655 g Swift 25.25 150 g Bearbrand 105.65 320 g
Star 35.3 150 g Source: Brick-and-Mortar Supermarkets Argentina 32.25 175 g
22 Appendix D: Valuation
APPENDIX D-1: BRANDED SEGMENTS DCF VALUATION To estimate the industry size, we made a multiple regression analysis with industry size (in Php bn) as dependent variable and (1) modern retail, (2) traditional retail, and (3) household expenditures of food and non-alcoholic beverages as drivers (independent variables). Source: Team Estimates
DCF VALUATION ASSUMPTIONS Valuation date 29 Nov 2016 Beta 0.71 Closing price (Php) 17.10 Equity risk premium 6.19% No. of shares outstanding 3,541,028,900 Risk free rate 5.00% Options outstanding - Cost of equity 9.39% Fully diluted shares outstanding 3,541,028,900 Equity risk premium 6.19% Market cap 60,551,594,181 Tax rate 30.00% MV of debt 2,014,000,000 Cost of debt (after tax) 3.50% Debt Weight 10.00% WACC 8.81% Equity Weight 90.00% DCF terminal stage assumptions Terminal growth rate 4.00%
DCF VALUATION (FYE 31 Dec, in PHP mn) 2016E 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F Unlevered free cash flow (FCF) EBIT 3,199 3,540 3,894 4,380 4,921 5,291 5,690 6,064 6,459 6,869 Add amortisation and depreciation 175 218 252 303 357 385 415 443 473 496 Less taxes (941) (1,052) (1,160) (1,309) (1,474) (1,587) (1,707) (1,819) (1,938) (2,061) Less increase / (decrease) in NWC (480) (694) (653) (998) (726) (629) (474) (249) (1,329) (29) Less Capex (780) (409) (384) (450) (523) (326) (355) (333) (356) (314) Unlevered FCF 1,172 1,603 1,949 1,927 2,554 3,134 3,569 4,107 3,309 4,962 Discount period (years) 0.089 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 Discount factor 0.9925 0.9191 0.8447 0.7763 0.7135 0.6558 0.6027 0.5539 0.5091 0.4679 PV of unlevered FCF - 1,473 1,646 1,496 1,823 2,055 2,151 2,275 1,684 2,321 Terminal value 107,379 PV of terminal value 50,242 Enterprise value 67,166 Less total debt (1,761) Add cash 724 Equity value 66,037 Implied price/share 18.65
APPENDIX D-2: BRANDED SEGMENTS REGRESSION ANALYSIS FOR REVENUE GROWTH FORECASTS We used a DCF valuation for the core branded segments of CNPF - canned and processed fish, canned meat and dairy and mixes.
Canned and Processed Fish Regression Analysis
R² 0.999
Adjusted R² 0.998 n 8
R 0.999 k 3
Std. Error 0.098 Dep. Var. Industry Size (in PhP bn)
ANOVA table
Source SS df MS F p-value
Regression 36.8619 3 12.2873 1288.86 2.00E-06
Residual 0.0381 4 0.0095
Total 36.9000 7
Equation = -0.0039X1 + 0.0097X2 + 0.0025X3 - 4.5097
23 Canned Meat Regression Analysis
R² 0.998
Adjusted R² 0.997 n 8
R 0.999 k 3
Std. Error 0.085 Dep. Var. Industry Size (in PhP bn)
ANOVA table
Source SS df MS F p-value
Regression 18.6310 3 6.2103 858.08 4.51E-06
Residual 0.0290 4 0.0072
Total 18.6600 7
Equation = 0.0020X1 + 0.0023X2 + 0.0018X3 + 0.1561
Dairy and Mixes Regression Analysis
R² 0.969
Adjusted R² 0.946 n 8
R 0.984 k 3
Std. Error 1.545 Dep. Var. Industry Size (in PhP bn)
ANOVA table
Source SS df MS F p-value
Regression 298.6966 3 99.5655 41.69 .0018
Residual 9.5522 4 2.3880
Total 308.2488 7
Equation = -0.1418X1 + 0.0703X2 + 0.0198X3 - 35.9843 Source: Team Estimates
Canned and Processed Fish Canned Meat Milk and Mixes
Industry Size (in Industry Growth Industry Size (in Industry Growth Industry Size (in Industry Year PhP bn) Rate Php bn) Rate PhP) Growth Rate 2008 10.5 - 7.5 - 43.6 - 2009 11.3 7.62% 7.9 5.33% 46 5.50% 2010 12.1 7.08% 8.5 7.59% 51.6 12.17% 2011 13 7.44% 9.2 8.24% 53.6 3.88% 2012 14 7.69% 9.8 6.52% 55.6 3.73% 2013 14.9 6.43% 10.5 7.14% 57.1 2.70% 2014 15.9 6.71% 11.3 7.62% 59.8 4.73% 2015 17.1 7.55% 12.1 7.08% 63.2 5.69% 2016E 18.1 5.61% 12.8 5.58% 65.0 2.90% 2017F 19.1 5.56% 13.5 5.43% 67.8 4.22% 2018F 20.2 5.74% 14.2 5.42% 71.4 5.37% 2019F 21.3 5.90% 15.0 5.40% 76.0 6.46% 2020F 22.6 6.06% 15.8 5.41% 81.6 7.34% CAGR 5.77% 5.45% 5.25%
Source: Euromonitor, Team Estimates
24 APPENDIX D-3: TUNA OEM AND COCONUT OEM SEGMENTS P/E RELATIVE VALUATION We used a normalized P/E of the closest peers of CNPF on the tuna and coconut OEM.
Tuna Peers We chose Thai Union and Sajo Seafood Co as tuna OEM peers for: (1) they engage in tuna products and (2) majority of their revenue comes from export sales.
Coconut Peers We chose IJM Corp, PT Astra Argo, United Plantations, TSH Resources, Archer Daniels, and Bunge Limited as coconut OEM peers for because these companies are agricultural producers which engage in export business. We believe that using agricultural processors instead of coconut would be a more conservative estimate as coconut has higher growth than other agricultural crops. COCONUT PEERS Country Normalized P/E Classification IJM Corp Malaysia 17.60 Large Grains & Oilseed Plantations and Processors PT Astra Argo Indonesia 18.52 Large Grains & Oilseed Plantations and Processors United Plantations Malaysia 15.31 Large Grains & Oilseed Plantations and Processors TSH Resources Malaysia 17.59 Medium Grains & Oilseed Plantations and Processors Archer Daniels US 13.92 Global Agricultural Processors and Traders Bunge Limited US 14.94 Global Agricultural Processors and Traders TUNA PEERS Country Normalized P/E Classification Sajo Seafood Co., Ltd. Korea 9.53 Tuna Exporter Thai Union Group PCL Thailand 15.98 Tuna Exporter
APPENDIX D-4: RAW MATERIAL PRICES AND COGS ASSUMPTIONS
25
APPENDIX D-5: SENSITIVITY TO VALUATION ASSUMPTIONS
WACC (%) 7.81% 8.31% 8.81% 9.31% 9.81% 4.50% 25.00 23.15 21.73 20.61 19.70 4.00% 23.55 22.07 20.91 19.97 19.19 3.50% 22.43 21.22 20.25 19.44 18.76 3.00% 21.55 20.53 19.69 18.99 18.39 Terminal Growth (%) 2.50% 20.83 19.96 19.23 18.61 18.08
Milk CAGR 9.79% 11.79% 13.79% 15.79% 17.79% 15.75% 20.76 20.84 20.92 20.98 21.04 13.75% 20.75 20.84 20.91 20.97 21.03 11.75% 20.69 20.78 20.85 20.91 20.96 Coconut CAGR 9.75% 20.57 20.66 20.74 20.80 20.85
Appendix E: Corporate Governance
APPENDIX E-1: CNPF BOARD OF DIRECTORS DIRECTOR YRS AFFILIATED POSITION AFFILIATIONS Ricardo S. Po, Sr. 38 Chairman Emeritus Founder and Chairman of CPG-RSPo Foundation Served as COO of the CPG from 1990 to 2006 Ricardo Gabriel T. Took the Harvard Business School Executive Program 26 Vice Chairman Po Director of Arthaland Corporation Vice Chairman of IP E-Game Ventures Served as Managing Director of Guggenheim Partners Chairman of the Board Served as Management Consultant at McKinsey and Company President Served as Head of Corporate Planning for JG Summit Holdings Christopher T. Po 12 President of the CPG-RSPo Director of Arthaland Corporation Foundation Member of the Board of Trustees of WWF-Philippines Chief Executive Officer Member of the Wharton Penn Alumni Club of the Philippines Graduated summa cum laude from Boston University with a Bachelor of Science degree in Vice Chairman of the Board Manufacturing Engineering Teodoro T. Po 26 Executive Vice President Completed the Executive Education Program at Harvard Business School Chief Operating Officer Designed, built and managed several factories of Century Pacific Group, Inc. Independent Director of IPVG Corp. Leonardo Arthur T. Treasurer President and CEO of MovieClub Systems, Inc. 11 Po Executive Director of CPG CEO of Reality Multimedia Treasurer of Arthaland Corporation Served as President and General Manager of Procter & Gamble Philippines (1995-2006) Served as Manager of Product Development Proctor & Gamble Served as Project Supply at Proctor & Gamble Taiwan Served as Category Manager of Proctor & Gamble Philippines Chairman and President of Taibrews Corporation Johnip Cua 3 Independent Director Director of BDO Private Bank Director of MacroAsia Corporation Director of STI Education Systems Holdings, Inc. Agora Awards’ Outstanding Achievement in Marketing Management (1998) Procter & Gamble Global Marketing Organization’s Passionate Leadership Award (2006) Served as Consultant, Mentor and Guest Lecturer of University of Asia & the Pacific Founding Fellow of the Institute of Corporate Directors Fernan Lukban 3 Independent Director International Fellow of the Australian Institute of Company Directors Independent Director of Central Azucarera de Tarlac Independent Director of Arthaland Corporation Chairman of IdeaForma Asia Pacific Group, Inc. Served as President of San Miguel Food and Beverage International, Inc. (2004-2005) Enrique A. Gomez, 9 Board Advisor Served as President of San Miguel Purefoods Company (2001-2004) Jr. President of La Tondena Distillers, Inc. (2000-2001) President of Destileria Bago, Inc. (2000-2001) Source: Company Inofrmation
26 APPENDIX E-2: CNPF SENIOR MANAGEMENT DIRECTOR YRS AFFILIATED POSITION AFFILIATIONS Senior Partner in the Martinez Vergara Gonzalez & Serrano Law Office Served as Director and Corporate Secretary Companies in CPG since 1995 Corporate Secretary Manuel Z. Gonzalez 21 Served as Director and Corporate Secretary to Nomura Securities Philippines Compliance Officer since since 2006 Served as Director and Corporate Secretary to ADP Philippines, Inc Served as Assistant Analyst in the Manila Electric Company Served as Division Chief for Subsidiary Operations Comptrollership Group for Human Settlements Development Corporation Chief Financial Officer Oscar A. Pobre 24 Served as Finance Manager for Commander Drug Corporation Chief Information Officer Served as Budget & Cost Department Manager for Dole Philippines, Inc. Served as Corporate Planning Manager for RFM Corporation Served as Corporate Controller for Cosmos Bottling Corporation Served as Vice President - Marketing of Johnson & Johnson ASEAN Vice President - General Manager (Canned and Gregory Banzon 6 Served as Country General Manager of Johnson & Johnson Indonesia Processed Fish, Tuna Division) Served as General Manager of RFM Vice President - General Manager (Dairy and Mixes Served as General Manager for Pepsico from 2010 to 2012 Edwin Africa 2 Division) Served as Executive Director of Pycor Inc. from 2012 to 2014 Vice President - General Manager (Canned Meat Director of Philippine Association of Meat Processors, Inc. Rex Agarrado 18 Division Served as President of Philippine Association of Meat Processors, Inc. Vice President - General Manager Served as President and General Manager of San Miguel Foods Vietnam Teddy Kho 3 (Tuna Export Division) Served as Plant Manager of San Miguel Hoecheong Served as Area Customer Development Manager for Unilever from 2000 to Vice President - Head of Sales, Trade Marketing and 2006 Ronald Agoncillo 8 Demand Planning Served as National Sales Manager for Cadbury from 2006 to 2009 Served as Head of Sales Division for Century Pacific Food, Inc. from 2008-2012 Vice President - General Manager (Canned and Cezar Cruz, Jr. 10 President of the Sardine Association of the Philippines Processed Fish, Sardines Division) Served as Vice President of Human Resources of Bechtel and Alan Served as Regional VP of Corporate Communications for Asia Pacific for Alcan Vice President - Human Resources and Corporate of Emerson Villarante 9 Food Packaging from 2005 to 2006 Affairs Served as Head of HR and Operations Manager of Petnet Western Union from 2006 to 2007 Vice President and General Manager of The Pacific Meat Company Senior Vice President and General Manager of Frabelle Corporation Vice President - General Manager (Century Pacific Served as Vice President and General Manager of Great Foods Solutions, San Noel M. Tempongko, Jr. 3 Agricultural Ventures, Inc.) Miguel Pure Foods Company from 2003 to 2005 Served as Vice President and General Manager of The Purefoods Hornel Company from 2005 to 2010 Source: Company Data
27 APPENDIX E-3: CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY PRACTICES CNPF’s on social responsibility are focused on their thrusts for environmental conservation and community development. For their environmental conservation efforts, CNPF supports and complies with global regulations, environmental advocates and industry organizations to ensure long term sustainability of their raw materials. Some of the entities they support and comply with include the Western and Central Pacific Fisheries Commission, Bureau of Fisheries and Aquatic Resources, Earth Island Institute/Dolphin Safe Tuna, World Wildlife Fund (WWF) and International Seafood Sustainability Foundation (ISSF). On the other hand, CNPF engages with society in community development efforts through its RSPo Foundation (CPG- RSPo Foundation, Inc.). The foundation has three main thrusts, namely to 1) help in feeding the poor and hungry children and to provide health care (if necessary), 2) help in providing education to deserving students and 3) support other charitable and humanitarian causes, especially causes that protect the environment. The following are corporate social responsibility projects listed in their 2014 Annual Report: Sustainability • Participation and Collaboration with the International Seafood Sustainability Foundation (ISSF) o Promotes science-based initiatives for long-term conservation and sustainable use of tuna stocks, reduction of by-catch and promotion of ecosystem health. • Support for Regional Fisheries Management Organizations, Government Agencies and environmental advocates such as o Western and Central Pacific Commission o Bureau of Fisheries and Aquatic Resources o Earth Island Institute/Dolphin Safe Tuna o World Wildlife Fund (WWF) • Century Tuna Handline Product • Traceability System audited by the Bureau of Fisheries and Aquatic Resources, International Food Standard (IFS) and British Retail Consortium (BRC). • Honorable Buying Policies • Dolphin Safe Accreditation • Anti-Finning Policy Community Development • KAIN Po Feeding Program: a Feeding initiative that aims to alleviate malnutrition and hunger to nourish children • Partnerships with numerous organizations o Partnership with Habitat for Humanity for Feeding Program o Industrial Technician Program for CITE Students o Donation of Tins for Financial Aid o Indigenous Peoples Feeding Programs and Academic Support with Octo Riders Club o Feeding Program with Project Pearls, Feeding Metro Manila, Pro Labore Dei International, Hapag-Asa, DSWD, St. Joseph’s Orphanage, Consuelo Chito Madgrigal Foundation, Happy2help, Real Life Foundation, IHome Greater Metro Manila o Free Education Program with City Gates Academy o “Adopt-a-Public-School Program” with Developing Family Values Foundation, inc. o Poverty Reduction Programs with Philippine Business for Social Progress • Educational Scholars from UST and children of CPG Employees
APPENDIX E-4: EVALUATION OF CNPF’S QUALITY OF CORPORATE GOVERNANCE To evaluate the company’s quality of corporate governance, each committee of the board is evaluated on a scale of 1 to 4 based on the roles that they have to fulfill and criteria corresponding to these roles as enumerated in CFA Institute Corporate Governance Manual for Investors. The following table summarizes the analysis:
Legend: 1 - The company did not follow the criteria at all, 2 - The company did not follow the criteria, 3 - The company followed the criteria, 4 - The company has excellent policies on thiscriteria. CRITERIA DESCRIPTION RATING COMPANY POLICIES EXECUTIVE COMMITTEE Boards must be willing and able to effectively scrutinize The board of directors is not majority independent, however they follow the regulations Independence strategy and management performance and set 3 set by the Securities Exchange Commission. reasonable compensation Roles among Executive, Non-Executive and Independent Directors are clearly defined in Governance practices should reflect a board that is such a way that evenly distributes the power among members of the board. Aside from Accountability 4 answerable to its owners this, each committee is required to report on issues it has addressed within the year and plans to undertake in the next year. Directors must be responsive to the wishes of its CNPF aims to protect shareholder rights and encourage shareholder participation by Responsiveness shareholders as expressed through elections or votes on 4 disseminating information before the meeting of the board. shareholder proposals and respond accordingly Directors should add value through skills or expertise in a Members of the board have an average of 20 years of experience, 11 years of tenure in Competence 4 particular field the company and come from diverse backgrounds and fields of expertise, The nomination committee screens candidates for the board based on requirements Elections Annually Elected Directors 4 needed to become a board member. Board Attendance Adequate attendance at board and committee meetings 4 All board members have attended all board meetings. There are 7 members in the board, with a board advisor that provides consultation when Directorship Reasonable number of board directorships 4 needed. The vote required for the election of directors is majority of the outstanding capital stock. Elections Majority voting in director elections 4 Based on the Final List of Candidates, directors are elected by shareholders individually. CNPF engages in related party transactions, however they conduct these transactions on Related Party Transactions Absence of material related party transactions 2 an arm’s length basis by hiring third party consultants and auditors. Board Members Board of at least 5 but no more than 15 members 4 The board consists of 8 members, which is within the criteria for good governance. Board must have greater of: 2 independent directors or Independent Members 4 CNPF has 2 independent board of directors, namely Johnip Cua and Fernan Lukban 20% independent members of the board Christopher T. Po is both the Chief Executive Officer and Chairman of the Board. Role Delegation Role of CEO and Chair should be separate 2 However, the company ensures independent views are taken into account in its decision- making process.
28 Established Risk, Compensation, Executive, Nomination The Audit Committee accounts for the risks. Compensation, Executive, Nomination and Committees 4 and Election Committees Election Committees are established. AVERAGE SCORE 3.6
AUDIT COMMITTEE
Auditor should provide an impartial and professional CNPF has an Audit Committee who reviews the performance of an external auditor. They Independent Audit opinion. Independence is compromised when the author 4 pre-approve all auditing and non-audit services. The Audit Committee is also led by an receives significant payments for non-audit work independent member of the board.
Independent Audit Board’s Audit Committee should be independent 4 The chairman of the Nomination Committee is independent.
Company’s financials should have integrity. (Items that The Audit committee is assisted by the Internal Audit Department in ensuring the raise concerns include changes in auditors, irregularities reliability and integrity of financial and operating information. Any issues raised against Integrity of Financials over many years, material weaknesses in the company’s 3 the audit plans and performance are reported and addressed accordingly. In addition, controls, certain restatements, and excessive fees paid company financial statements are disclosed with notes that help investors understand for non-audit work) how accounts were settled.
The Audit and Risk Committee recommends to the BOD the appointment, re- Company should allow shareholders to ratify the appointment and removal of any auditor. BOD and stockholders approve of the Selection of Auditor 4 selection of the auditor recommendation. Recommendations and changes are also reported in their company disclosures.
AVERAGE SCORE 3.75
COMPENSATION COMMITTEE Performance metrics should encourage executives to Compensation is determined by their attendance in board meetings. However, the BOD’s Performance Metrics 3 make decisions that benefit shareholders variable compensation is subject to objection or ratification of the stockholders. Performance Metrics should be communicated to The Annual Corporate Governance Report outlines the performance metrics used in Performance Metrics 4 shareholders order to determine the BOD’s compensation. A substantial amount of an executive’s pay should be “at Directors receive reasonable per diems for their attendance at each meeting of the Performance Metrics 4 risk” board. A portion of executive compensation should be in the Performance Metrics 1 The company does not grant stock rights, options or warrants over company shares. form of equity The company complies with Sec. 30 of the Corporation Code of the Philippines, which Shareholders should have an advisory vote on executive Performance Metrics 4 states that compensation other than per diems may be granted to directors by the vote of compensation shareholders representing at least a majority of the outstanding capital stock.
AVERAGE SCORE 3.2
PROTECTION OF SHAREHOLDER RIGHTS Election One share, one vote 4 All stock stockholders are entitled to vote using the one share, one vote system. Stockholders are entitled to receive dividends subject to the discretion of the Board. Shareholder Rights Right to Dividend 4 Dividends are declared when the company’s retained earnings are in excess of 100% of its paid-in-capital stock. In all meeting of stockholders, a majority of the outstanding capital stock must be present Shareholder Rights Absence of supermajority vote requirements 4 or represented in order to constitute a quorum. If no quorum is constituted, the meeting shall be adjourned until the requisite number of stock shall be present. In the Code of Ethics, shareholders (also the minority) are allowed to propose a meeting Shareholder Rights Right of shareholders to call special meetings 4 and the items in the agenda of the meeting, provided the items are for legitimate business purposes and in accordance with law, jurisprudence and best practice. All shareholders have the right to inspect corporate books and records in accordance Shareholder Rights Information 4 with the Corporate Code of the Philippines. They also have the right to ask for periodic reports about officers as well as matters for which management is accountable. Stockholders may exercise their appraisal right or the right to dissent and demand Shareholder Rights Appraisal Rights 4 payment of the fair value of their shares pursuant of Section 81 of the Corporate Code of the Philippines. AVERAGE SCORE 4
29 Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securi8es of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publica8on of this report. Receipt of compensa8on: Compensa8on of the author(s) of this report is not based on investment banking revenue. Posi8on as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securi8es. Disclaimer: The informa8on set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representa8on or warranty, express or implied, as to its accuracy or completeness. The informa8on is not intended to be used as the basis of any investment decisions by any person or en8ty. This informa8on does not cons8tute investment advice, nor is it an offer or a solicita8on of an offer to buy or sell any security. This report should not be considered to be a recommenda8on by any individual affiliated with CFA Society of the Philippines, CFA Ins8tute or the CFA Ins8tute Research Challenge with regard to this company’s stock.
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