Nothing bright over the horizon

Transcription

1 TUESDAY, 15 DECEMBER 2015 Universal Robina Corporation: Nothing bright over the horizon Slower growth and margin guidance for FY16. During its FY15 earnings briefing, URC s management announced disappointing guidance for FY16, citing concerns over competition in the coffee business and the impact of El Niño. Management said it expects revenues to grow by 8-9%, considerably slower than the mid-teens growth over the past three years. This is also slower than our own growth forecast of 9.8% and consensus growth forecast of 12.8%. Margins are also expected to be flat to slightly lower due to competition, currency weakness against the US dollar, and higher prices of some raw materials. Consequently, FY16 EBIT is expected to range from Php18.5Bil to Php19Bil. Coffee matures, competition remains intense. From 90% in FY13 and 49% in FY14, revenue growth of URC s coffee business slowed to 14% in FY15. We expect growth to slow down further to single-digit level as URC s highly successful white coffee product is already mature. Competition in the coffee segment also remains intense. Aside from making it difficult to grow revenues, it also puts a downward pressure on margins. The slowdown in the growth of URC s coffee business is expected to have a significant impact on overall sales growth. Although coffee currently accounts for only 15% of total sales, it s the only domestic branded consumer food segment that has been growing rapidly during the past few years and was largely responsible for the mid-teens growth of revenues. Reducing forecasts. We are reducing our core income forecast by 6.1% to Php17.6Bil for FY16E, by 7.2% to Php19.6Bil for FY17E, and by 5.8% to Php22.0Bil for FY18E to reflect slower sales growth and lower EBIT margin largely due to the less attractive outlook of URC s coffee business. Our FY16E forecast is in line with management s guidance of 8-9% sales growth and EBIT ranging from Php18.5Bil to Php19Bil. As a result of our lower income forecast, we are reducing our FV estimate by 4.6% to Php199/sh. Maintain HOLD rating. We are maintaining our HOLD rating on URC. Although we like the company for its leadership in the local branded foods market and its growing presence in ASEAN, the company is currently in a tough position. The fast growth pace of its coffee business is already over and we do not expect its new ventures to contribute significantly in the near term. Valuations also remain unattractive despite the stock being sold down by 11% from its recent high. At its current price, upside to our new FV estimate of Php199/sh is limited at only 10%. Additionally, at 28.3X FY16E P/E, URC is trading at a premium relative to the 23.1X average P/E of regional peers despite slower EPS growth over the next two years. FORECAST SUMMARY Year to September 30 (Php Mil) E 2016E Revenues 71,204 80,995 92, , ,352 % change y/y Operating Income 7,810 10,279 14,119 17,404 18,671 % change y/y Operating Margin (%) Core Profits 8,377 11,263 14,214 16,364 17,601 % change y/y Core Profit Margin (%) Net Income 7,763 10,045 11,559 12,531 13,922 % change y/y Net Profit Margin (%) EPS % change y/y RELATIVE VALUE P/E(X) P/BV(X) ROE(%) Dividend Yield (%) Source: URC, COL estimates SHARE DATA HOLD Rating Ticker URC Fair Value (Php) Current Price Upside (%) SHARE PRICE MOVEMENT Sep Oct Nov Dec-15 URC PSEi ABSOLUTE PERFORMANCE 1M 3M YTD URC PSEi MARKET DATA Market Cap 384,598.79Mil Outstanding Shares 2,181.50Mil 52 Wk Range Mo Ave Daily T/O Mil Jed Frederick Pilarca jed.pilarca@colfinancial.com

2 Slower growth and margin guidance for FY16 During its FY15 earnings briefing, URC s management announced disappointing guidance for FY16, citing concerns over competition in the coffee business and the impact of El Niño. Management said it expects revenues to grow by 8-9%, considerably slower than the mid-teens growth over the past three years. This is also slower than our own growth forecast of 9.8% and consensus growth forecast of 12.8%. Margins are also expected to be flat to slightly lower due to competition, currency weakness against the US dollar, and higher prices of some raw materials. Consequently, FY16 EBIT is expected to range from Php18.5Bil to Php19Bil. Coffee matures, competition remains intense From 90% in FY13 and 49% in FY14, revenue growth of URC s coffee business slowed to 14% in FY15. We expect growth to slow down further to single-digit level as URC s highly successful white coffee product is already mature. Competition in the coffee segment also remains intense. Aside from making it difficult to grow revenues, it also puts a downward pressure on margins. One of the main reasons why URC was able to defend its 30% market share despite aggressive competition is the successful launch of twin packs (two smaller servings sold together). However, this new format is eroding total category value as selling price per gram is 14% lower compared to single serve packs. Moreover, major competitors Kopiko and Nescafé have likewise started selling twin packs. The twin pack format also yields lower margins. According to URC, margins on the twin pack are ~10% lower compared to single serve. URC also increased advertising and promotion spending to defend its market share amidst intense competition (although URC said that it only reallocated its advertising and promotion spending away from other products). This trend is expected to continue going forward. The slowdown in the growth of URC s coffee business is expected to have a significant impact on overall sales growth. Although coffee currently accounts for only 15% of total sales, it s the only domestic branded consumer food segment that has been growing rapidly during the past few years and was largely responsible for the mid-teens growth of revenues. Reducing forecasts We are reducing our core income forecast by 6.1% to Php17.6Bil for FY16E, by 7.2% to Php19.6Bil for FY17E, and by 5.8% to Php22.0Bil for FY18E to reflect slower sales growth and lower EBIT margin largely due to the less attractive outlook of URC s coffee business. Our FY16E forecast is in line with management s guidance of 8-9% sales growth and EBIT ranging from Php18.5Bil to Php19Bil. As a result of our lower income forecast, we are reducing our FV estimate by 4.6% to Php199/sh. Since the guidance was announced, consensus has already reduced sales and EBIT forecast by 3.2% and 4.6%, respectively. Further downgrades remain possible. The average sales forecast for FY16E is still 3-4% higher than guidance while the EBIT forecast is 4-6% higher than guidance. TUESDAY, 15 DECEMBER 2015 page 2

3 Exhibit 1: Summary of changes in forecast in PhpMil FY16E FY17E FY18E Old New %Change Old New %Change Old New %Change Revenue 122, ,352 (4.2) 132, ,870 (4.8) 142, ,617 (5.2) Operating Income 19,730 18,671 (5.4) 21,853 20,492 (6.2) 23,931 22,723 (5.0) Core Income 18,749 17,601 (6.1) 21,069 19,551 (7.2) 23,375 22,024 (5.8) Net Income 14,866 13,922 (6.3) 16,743 15,503 (7.4) 18,607 17,501 (5.9) Fair Value Estimate (4.6) Source: COL estimates Possible downside risk from El Niño Management expressed caution over the impact of El Niño in FY16. The weather bureau has warned of sever dry conditions coinciding with the first half of FY16 for URC. The impact of El Niño will be more harshly felt in the Visayas-Mindanao regions where consumption is more dependent on agriculture. These regions account for 20% of domestic branded sales or 10% of total company sales. According to URC, it is already seeing weaker demand from these areas. Growth in Visayas- Mindanao area was ~10% in FY14 but growth slowed to ~7% in FY15. Not expecting positive surprises from Griffin s in the short term We have a positive outlook on URC s newly acquired Griffin s as the new products from Griffin s complement URC s existing portfolio and allows the company to capitalize on the trend towards premiumisation. However, our outlook is moderated by the size of Griffin s relative to the entire company. We estimate that Griffin s currently contributes only 8% to total sales and 6% to total EBIT. Moreover, it is still uncertain whether or not Griffin s will be successful in Asia. URC only started selling Griffin s products in Singapore last October and in Hong Kong this December. It will still have to make some adjustments to packaging size to begin selling in other cities such as Manila, Bangkok, Kuala Lumpur and Jakarta sometime in FY16. To bring Griffin s to other markets, URC will have to do more extreme adjustments to packaging which the company says will take 18 to 24 months. Our current forecast assumes that Griffin s sales would increase by a CAGR of 4% through 2020E (in line with historical performance), while EBIT margin would improve from 16% to 20%. Maintain HOLD rating We are maintaining our HOLD rating on URC. Although we like the company for its leadership in the local branded foods market and its growing presence in ASEAN, the company is currently in a tough position. The fast growth pace of its coffee business is already over and we do not expect its new ventures to contribute significantly in the near term. Valuations also remain unattractive despite the stock being sold down by 11% from its recent high. At its current price, upside to our new FV estimate of Php199/sh is limited at only 10%. Additionally, at 28.3X FY16E P/E, URC is trading at a premium relative to the 23.1X average P/E of regional peers despite slower EPS growth over the next two years. TUESDAY, 15 DECEMBER 2015 page 3

4 Exhibit 2: Relative valuation vs regional peers P/E Ratio EPS Growth Ticker Company Name FY16E FY17E FY16 FY17 CPF TB Charoen Pokphand Foods % 18.3% TU TB Thai Union Group % 8.7% INDF IJ Indofood % 16.1% ICBP IJ Indofood CBP % 14.7% MYOR IJ Mayora Indah % 17.2% UNVR IJ Unilever Indonesia % 12.7% 151 HK Want Want China Holdings % 3.1% 322 HK Tingyi (Cayman Islands) % 8.7% 220 HK Uni-President China Holdings % 17.6% 2319 HK China Mengniu Dairy % 15.7% NEST IN Nestle India % 25.6% HUVR IN Hindustan Unilever % 15.0% URC PM Universal Robina Corp % 11.3% Average ex-urc % 14.5% Source: Bloomberg, COL estimates TUESDAY, 15 DECEMBER 2015 page 4

5 Investment Rating Definitions BUY HOLD SELL Stocks that have a BUY rating have attractive fundamentals and valuations, based on our analysis. We expect the share price to outperform the market in the next six to twelve months. Stocks that have a HOLD rating have either 1.) attractive fundamentals but expensive valuations; 2.) attractive valuations but near term earnings outlook might be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely inline or underperform the market in the next six to twelve months. We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to twelve months. Important Disclaimers Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the judgment of COL s Equity Research Department as of the date of the report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, 1605 Philippines Tel: Fax: Website: TUESDAY, 15 DECEMBER 2015 page 5