Asia Pacific Equity Research 27 April 2014 Initiation Overweight Universal Robina Corp URC.PS, URC PM A true pan ASEAN consumption play; Initiate with OW Price: Php148.50 Price Target: Php170.00 Initiate on Universa Robina Corp with OW, Dec-14 PT of Php170 – the Philippines best pan ASEAN consumption proxy: Universa Robina Corp (URC) is ASEAN Consumer Staples one of the fastest growing pan ASEAN consumer plays in the region with Ying-Jian Chan, CFA AC exposure to a strong domestic market in the Philippines and steadily (65) 6882-2378 growing regional presence in ASEAN and China. [email protected] Strong market share in the Philippines: URC has established a very Bloomberg JPMA YCHAN <GO> J.P. Morgan Securities Singapore Private strong presence in the Philippines, with a leading market share in many of Limited the products that it is involved in, i.e. snacks (39%), candies (36%), Jeanette Yutan chocolates (24%), RTD tea (51%). Its unparalleled penetration in both the (63-2) 878-1188 modern and general trade channels allows easy introduction of new [email protected] products. J.P. Morgan Securities Philippines, Inc. JV with Calbee a positive: Its recent 50:50 JV with Calbee to manufacture Ebru Sener Kurumlu high quality snack products in the Philippines with targeted sales of Php2 (852) 2800-8521 billion by 2020 further taps into the rising purchasing power in the country, [email protected] J.P. Morgan Securities (Asia Pacific) Limited as evident from the strong growth in OFW remittances and IT-BPO revenue, which saw a 5-year CAGR of 7% and 21% respectively. Price Performance International Branded Consumer Foods adds new growth: BCF 150 international has already demonstrated a 5-year revenue/EBIT CAGR of 130 Php 18%/33%, outpacing domestic. Furthermore, URC will be best positioned to 110 take advantage of the lowering of intra-regional import tariffs under the 90 ASEAN Economic Community by 2015, which will allow it to better Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 manage its sourcing, production and distribution decisions for better URC.PS share price (Php) efficiency and margin. PSE (rebased) YTD 1m 3m 12m Share price driver: We believe continued earnings growth, especially from Abs 23.7% 3.9% 19.3% 22.8% Rel 10.6% -2.9% 6.9% 27.8% overseas, coupled with margin expansion will help to drive the share price. Valuation, PT and risks: Our Dec-14 PT of Php170 is based on 30x CY2014E P/E. We believe a premium is justified for its pan ASEAN branded consumer exposure and the non-BCF segments may be misunderstood, as they deliver steady profits. Agro-Industrial consumes low capex while Commodity Foods employs minimal working capital and has higher margin than BCF. Universal Robina Corp (Reuters: URC.PS, Bloomberg: URC PM) Php in mn, year-end Sep FY12A FY13A FY14E FY15E FY16E Company Data Revenue (Php mn) 71,202 80,995 94,599 113,708 136,702 Shares O/S (mn) 2,182 Net Profit (Php mn) 7,763 10,045 11,669 14,335 17,434 Market Cap (Php mn) 323,953 EPS (Php) 3.70 4.60 5.35 6.57 7.99 Market Cap ($ mn) 7,242 EPS (Recurring) (Php) 3.70 4.60 5.35 6.57 7.99 Price (Php) 148.50 DPS (Php) 1.90 2.40 2.94 3.61 4.40 Date Of Price 24 Apr 14 Revenue growth (%) 6.0% 13.8% 16.8% 20.2% 20.2% Free Float(%) 43.9% EPS growth (%) 64.1% 24.4% 16.2% 22.8% 21.6% 3M - Avg daily vol (mn) 2.82 EPS Recurring Growth 64.1% 24.4% 16.2% 22.8% 21.6% 3M - Avg daily val (Php mn) 378.00 ROE 17.8% 20.7% 21.9% 24.2% 26.3% 3M - Avg daily val ($ mn) 8.5 P/E (x) 40.1 32.3 27.8 22.6 18.6 PSE 6731.33 P/BV (x) 6.7 6.4 5.8 5.2 4.6 Exchange Rate 44.73 Dividend Yield 1.3% 1.6% 2.0% 2.4% 3.0% Price Target End Date 31-Dec-14 Source: Company data, Bloomberg, J.P. Morgan estimates. See page 24 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com [email protected] Tony Archer 04/22/15 02:04:14 AM American Century Investment Management, Inc. Ying-Jian Chan, CFA Asia Pacific Equity Research (65) 6882-2378 27 April 2014 [email protected] Key catalysts for the stock price: Downside risks to our PT: Upside risks to our PT: • Strong earnings growth and margin expansion • Drag on profitability with intensifying • Lower than expected prices of soft commodities competition and increasing advertising costs • Ability to pass on higher input costs • Increase in market share through product • Unfavorable movement in raw material costs enhancements and promotional activities • Overseas expansion to drive the next leg of growth Key financial metrics FY13A FY14E FY15E FY16E Valuation and price target basis Revenues (Php mn) 80,995 94,599 113,708 136,702 Revenue growth (%) 14% 17% 20% 20% Our Dec-14 PT for URC is based on 30x annualized CY14E P/E. EBITDA (Php mn) 13,901 15,377 18,582 22,227 EBITDA margin (%) 17.2% 16.3% 16.3% 16.3% Tax rate (%) 12.4% 12.0% 12.0% 12.0% Net profit (Php mn) 10,045 11,669 14,335 17,434 EPS (Php) 4.60 5.35 6.57 7.99 Valuation summary EPS growth (%) 24% 16% 23% 22% DPS (Php) 2.40 2.94 3.61 4.40 FY14E EPS 5.35 BVPS (Php) 23.28 25.68 28.64 32.24 FY15E EPS 6.57 Operating cash flow (Php mn) 11,619 13,123 15,362 18,231 CY2014E EPS 5.65 Free cash flow (Php mn) 6,073 8,123 10,362 13,731 Applied P/E 30.0 Interest cover (X) 38.6 125.9 156.2 191.1 EBIT margin (%) 12.7% 12.9% 13.4% 13.6% Fair value (Php) 169.64 Net margin (%) 12.4% 20.2% 20.1% 20.2% Price Target 170.00 Sales/assets (X) 1.19 1.35 1.46 1.56 Debt/equity (%) 3.8% 3.5% 3.1% 2.8% FY14E FY15E ROE (%) 20.7% 21.9% 24.2% 26.3% Implied P/E 31.8 25.9 Key model assumptions FY13A FY14E FY15E FY16E Implied dividend yield 1.7% 2.1% Revenue Growth - BCF (%) 16.3% 22.5% 23.2% 22.8% Source: J.P. Morgan estimates. EBIT margin - BCF domestic (%) 13.1% 13.5% 14.0% 14.5% EBIT margin - BCF international (%) 9.3% 9.5% 10.0% 10.0% Source: Company, J.P. Morgan estimates. JPMe vs. consensus, change in estimates Sensitivity analysis EBITDA EPS Net Income (Php mn) FY14E FY15E Sensitivity to FY14E FY15E FY14E FY15E JPMe old NA NA 5 ppt change: BCF revenue growth 2.5% 2.7% 2.9% 3.0% JPMe new 11,669 14,335 1 ppt change: EBIT margin - BCF (D) 3.7% 3.9% 4.3% 4.4% % chg NA NA 1 ppt change: EBIT margin - BCF (I) 1.6% 1.6% 1.9% 1.8% Consensus 11,142 12,803 Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan estimates. Consumer Staples: Peer valuation comparison 2yr EPS As at: 24 Apr-14 Ticker Mkt Cap Price Rtg PT CAGR P/E ROE Div Yld P/B (US$mn) (LC) (LC) 2014-16 CY14E CY15E CY14E CY15E CY14E CY15E FY14E FY15E Philippines Universal Robina Corp URC PM 7,246 148.50 OW 170.00 20.8% 26.3 21.4 21.9 24.2 2.0% 2.4% 5.8 5.2 San Miguel Corp SMC PM 4,359 82.00 NC - 35.7% 16.5 11.4 NA NA 1.3% 1.3% NA NA D&L Industries Inc DNL PM 712 8.91 OW 11.00 21.1% 19.6 16.0 17.3 19.1 2.0% 2.5% 3.2 2.9 Emperador Inc EMP PM 4,194 12.50 N 12.00 23.8% 26.0 19.7 22.3 26.6 2.3% 3.0% 5.6 5.0 Lt Group Inc LTG PM 4,502 18.60 N 17.00 28.6% 21.9 17.1 8.2 9.6 0.0% 0.0% 1.7 1.6 Weighted average 26.2% 23.0 17.9 18.1 20.6 1.5% 1.8% 4.5 4.1 Source: Bloomberg, J.P. Morgan estimates. 2 [email protected] Tony Archer 04/22/15 02:04:14 AM American Century Investment Management, Inc. Ying-Jian Chan, CFA Asia Pacific Equity Research (65) 6882-2378 27 April 2014 [email protected] Investment thesis Universal Robina Corporation We initiate coverage on Universal Robina Corp (URC) with an OW rating and Dec- (URC) is a pan ASEAN food 2014 price target of Php170. player focused on the manufacture and distribution of branded consumer foods, A true pan ASEAN consumption play production of hogs and day-old chicks, manufacture of animal We believe URC is one of the few pan ASEAN consumer plays in the region, which and fish feeds, glucose and is well positioned to capture the rising consumption trends in key emerging ASEAN veterinary compounds, flour markets.