Sizzling: Tanduay shares surge 50%, hit trade ceiling

Shares of hard liquor firm Tanduay Holdings Inc. surged on Wednesday on news that it will be transformed by taipan Lucio Tan into a P200-billion conglomerate that will hold his interests in the beverage, cigarette, banking, airline and property sectors.

Shares of Tanduay, the fourth-most actively traded stock at the local market, surged by 50 percent to P7.65 per share, giving it a market capitalization of P20.3 billion.

This was after its directors agreed to fold into the company major assets such as: 90 percent stake in beer brewer Asia Brewery, at least 83 percent of cigarette manufacturer Fortune Tobacco Corp., 98.1 percent of Eton Properties Phils., 49.84 percent of flag carrier Philippine Airlines, 50.97 percent of budget carrier Air Philippines Corp., 34.79 percent of Philippine National Bank and 27.62 percent of Allied Bank.

Tanduay will be renamed LT Group Inc., which will be under the leadership of Tan’s son, Michael G. Tan.

This infusion of businesses into Tanduay also marked the anointment of a successor in Michael, described by one family member as someone who would “do much better than anyone else in the whole clan.”

With this development, some analysts valued Tanduay at between P16 and P18.41 per share.

Given the reported P200 billion valuation of assets to be pooled into Tanduay and maximum of P60 billion in total debts to be assumed, Campos Lanuza & Co. head of research Jose Mari Lacson said this could value the future LT conglomerate at around P16 per share.

“The creation of LT Group Inc. via Tanduay completes the conglomerates sector in the sense that practically all the major family-owned and -controlled business groups will now be represented in the PSE. At the reported size, LT Group should be the seventh-largest conglomerate in the Philippines in terms of assets,” Lacson said.

The main benefit of the transformation of Tanduay, Lacson said, would be that investors would now be able to enhance their portfolios as they would have access to previously inaccessible businesses such as Fortune Tobacco and Asia Brewery.

“The consumer tobacco market has been growing steadily in Asia and the Philippines. And given the dominant market share of Fortune Tobacco-Philip Morris locally, investment funds that do not have restrictions on tobacco and alcoholic beverage stocks should see Tanduay’s transformation as a major opportunity to diversify,” Lacson said.

The analyst said the key risk to investors, however, would be the potentially severe dilution—which he estimated at 125.5 percent—as the company only had 3.9 billion shares at the moment.

“It’s almost like taking the company private. The investment also will reduce the public float of THI below 10 percent, which means that the company or (controlling stockholder) Tangent (Holdings Corp.) will eventually have to sell shares in the near future,” Lacson said.

Campos Lanuza withheld conclusion as to whether this was a good or bad development. “The severe dilution seems unrealistic and too aggressive; we believe Tanduay will eventually have to accommodate minority investors,” he said.

AB Capital Securities, in a research noted, estimates that the LT Group is currently trading below book value of P11.58 per share.

It assumed about 8.98 billion in shares outstanding and a debt-to-equity structure of 0.92x (conglomerate average).

“Given that the conglomerates trade at 2.13x price to book value (2011), the proper P/BV valuation for the LT group is around 1.59x if the same method is applied. Thus, this leads to a target price of P18.41,” AB Capital Securities said.

“We recommend a trading buy of Tanduay for the short term since valuations are based on the company disclosures and our rough estimates. Changes in capital structure will be the main risk to our valuations,” the brokerage added.