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WHEN San Miguel Brewery Inc.—one of the best recognized and most
profitable corporate entities in the Asia-Pacific region—made its
debut on the Philippine Stock Exchange yesterday it made predictable
waves, with brokers going dizzy with excitement over the offering
which was heavily over-subscribed.
Leading the bullish charge was top investment
house Asiasec Equities Inc. which rated San Miguel Brewery stock a
“strong buy” citing high profitability, strong brand loyalty,
market dominance, and an unrivalled distribution network as major
deciding factors.
In a circular issued to investors, Asiasec
Equities was unequivocal in its outlook on the stock, stating that
it gave its strongest recommendation for the 118-year-old brewer for
several reasons.
“There is no doubt that the San Miguel Beer
franchise stands out in terms of growth potential and profitability.
Amongst other comparable businesses, it is actually priced at the
lower end of the range,” the statement said.
It further added that “in contrast to
companies that priced themselves out leaving nothing for equity
investors, SMB management’s decision to price at the low-end and
to proceed with the IPO despite weak market conditions demonstrates
that is not greedy.”
The investment house, which is among the PSE’s
top 10 brokerage firms, indicated that the SMB stock is easily worth
“at least twice” the listing price.
“SMB is a cash cow with significant upside
potential. It is a debt-free company with annual free cash flows in
excess of $250 million. At 13x price earning ratio, and expected
dividend yield of 7 percent, the company is a strong buy,” the
statement said, further pointing out that San Miguel Beer’s
business is a highly profitable franchise and that the beer business
has not yet reached its full potential.
With a population growth rate of 2.3 percent, an
estimated one million beer drinkers enter the beer market annually.
And with per capita consumption of 15 liters, the Philippine beer
market still has room to grow before reaching comparative
consumption levels in neighboring countries which presently stand at
25 to 30 liters.
At its height in the 1990s, beer per capita
consumption was 25 liters, until the excise tax system was
drastically altered, affecting affordability. Using the historical
peak of 25 liters, the beer market potential of the Philippines is
22 million hectoliters, nearly double what it is today.
The circular also stated that higher farm
incomes due to rising commodity prices have had a very positive
effect on San Miguel’s beer business, as reflected by its
first-quarter volume growth of 18 percent.
Earnings before interest, taxes, depreciation,
and amortization (EBITDA) of $100 million also rose 31 percent year
on year, confirming the high operating leverage of the business.
“The lower per capita consumption coupled with
the fact that the Philippines still has one of the lowest prices for
beer in the region will mean greater pricing flexibility to continue
enjoying EBITDA margins in excess of 30 percent,” it said.
Consumer loyalty to SMBI’s iconic brand San
Miguel Pale Pilsen and other market-leading brands, also plays a
major role.
Over the past 20 years, competitor Asia Brewery
has brought in well-known foreign brands such as Carlsberg,
Budweiser, and Colt 45. But all have failed to make a substantial
dent on SMB’s market share which, from 82 percent in the late
nineties, has now increased to an impressive 95 percent.
Besides consumers’ strong affinity for San
Miguel brands, the excise tax and SMB’s unmatched distribution
system have been the main barriers to entry for competitors.
In the current excise tax system, new brands
fall in the highest tax category. New entrants are also likely to
compete in the premium category, which is only 3 percent of the
total beer market.
As highlighted in the report, the efficiencies
of SMB’s distribution system would also be hard to duplicate. Its
returnable bottle system significantly reduces packaging costs,
giving it the flexibility to offer beer at highly competitive
prices.
bizzfizz_98@yahoo.com
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