SMFB’s high return on equity merits ‘buy’ rating from analysts

Investors in the upcoming equity issue of San Miguel Food and Beverage Inc. — the country’s largest consumer business — can expect some of the highest returns among similar stocks in the region due to its attractive valuations and strong market position, according to analysts.

In a research note, AB Capital Securities said the firm, formerly known as San Miguel Pure Foods Co., stands to benefit from cost savings and synergies from shared infrastructure and group-wide procurement, “providing investors with the opportunity to invest in a huge consumer leader with stable cash generation.”

“[Its] healthy financials translate to higher returns, providing [the company] with a superior return on equity of 27 percent, one of the highest in the region,” the brokerage firm said.

AB Capital said its target price would result in the firm being more expensive than its peers for 2018 and 2019 earnings, but added that this is justified by SMFB’s proven track record as a market leader, especially in the beer business, which accounts for 86 percent of consolidated equity value.

The firm initiated a “buy” recommendation for the firm with a one-year target price of P121.70 per share, representing a 35-percent upside from the close on Oct. 15, 2018. The shares from the follow-on offering will be listed on the Philippine Stock Exchange on Monday, Nov. 12.

“We expect healthier margins over time driven mainly by its cost improvement initiatives and operational efficiencies brought about by shared distribution platform,” AB Capital said. “The company’s under-leveraged position provides flexibility to undertake potential future expansions that could complement current operations.”

The enlarged market capitalization of P535 billion makes SMFB the largest consumer company in the Philippines.

Meanwhile, RCBC Securities also urged investors to subscribe to the issue, citing a target price of P98 per share, which represents a 15-percent appreciation from its offer price of P85 apiece.

The brokerage unit of the Yuchengco-owned universal bank said its investment call was supported by the consumer giant’s “clear earnings visibility supported by steady demand growth in its businesses.”

SMFB is the holding company for key brands such as San Miguel beer and processed meats producer San Miguel PureFoods. The offer size is 461 million shares including an over-allotment option, which could raise a maximum of P39 billion.

According to the firm’s prospectus, 97 percent of the shares would be offered to institutional investors while 3 percent would be sold to Philippine Stock Exchange trading participants. The proceeds from the offer would be used for its expansion program./lb