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| SUBSCRIBE |
| by Charisse G. Nierra |
25 January 2008 |
| Company description |
Pepsi-Cola Products Philippines, Inc. (PCPPI) is the licensed bottler of PepsiCo beverages in the Philippines. PCPPI manufactures a range of carbonated and non-carbonated beverages and distributes these to retail outlets throughout the Philippines. PCPPI's portfolio of products includes cola and flavored carbonated beverages, including low-calorie derivatives, as well as juices, iced teas, sports and energy drinks. PCPPI has established a brand that includes Pepsi, Diet Pepsi, Pepsi Light, Pepsi Max, 7Up, Diet7Up, Mountain Dew, Gatorade, Lipton Iced Tea, Tropicana, Propel and Sting. For fiscal year ending June 2007, PCPPI sold 120.4mn of 8oz.case equivalents of carbonated beverages, 12.1mn 8oz. equivalents for non-carbonated beverages.
PCPPI manufactures and packages products through 11 production facilities nationwide, and distribute these via 101 warehouses and 99 sales offices (generally co-located). The firm has an extensive 3rd party distribution system that covers approximately 275,000 outlets, comprising supermarkets, restaurants, bars, and small grocery stores. Most of PCPPI's products are sold in returnable glass bottles (RGB) - items that are returned to the retailer for repayment of deposit, and are subsequently collected, washed and reused.
PCPPI has been continuously manufacturing beverages in the Philippines since 1946. The company traces its roots 03 May 1989, when the business was acquired by interests associated with the Lorenzo family.
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| Competitive Strengths |
PCPPI believes its competitive strengths are:
- Strong relationship with PepsiCo;
- Strong portfolio of non-carbonated beverages;
- Established manufacturing and distribution platform;
- Experienced management team;and
- Stable financial base.
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| Business Strategy |
PCPPI's principal strategic goals are: (1) Extract greater profitability out of existing brands and production assets by improving PCPPI's market share; and (2) Diversify its product portfolio through new product launches, capitalizing on the growing demand for beverages tied to health and wellness.
The key elements of PCPPI's strategy include:
- Increase market share in carbonated beverages;
- Improve production capacity; and
- Expand non-carbonated beverage portfolio.
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| OFFER DETAILS |
| Offer price/share |
P3.50 |
| Offered Shares |
| Primary |
380,782,893 |
| Secondary |
761,565,787 |
| Over-allotment option |
171,352,302 |
| Total Shares Offered |
1,313,700,982 |
| Distribution of Offer Shares |
| International Offer |
70% |
| Trading Participants (TPs) |
30% |
| Local Small Investors (LSI) |
10% |
| Start of Offer |
21 January 2008 |
| End of Offer |
28 January 2008 |
| Target Listing Date |
01 February 2008 |
| Estimated Primary offer proceeds, excluding over-allotment |
P1,332.74mn |
| Add non-carbonated beverage production facilities |
50% |
| Expand carbonated production |
25% |
| Add PET production capacity in plants |
25% |
| PCPPI's Top shareholders as of 04 January 2008 |
| |
Pre-IPO |
Post-IPO |
| Shareholder |
Shares |
% equity |
Shares |
% equity |
| Quaker Global Investments B.V. |
1,089,101,362 |
32.9 |
1,089,101,362 |
29.5 |
| Guoco Group |
|
|
|
|
| Guoco Assets (Phils.), Inc. |
477,340,000 |
14.4 |
255,594,964 |
6.9 |
| Hong Way Holdings, Inc. |
857,788,628 |
25.9 |
857,788,628 |
23.2 |
| Orion land, Inc. |
149,841,502 |
4.5 |
149,841,502 |
4.1 |
| Micky Yong |
20,000,000 |
Less than 1% |
20,000,000 |
Less than 1% |
| PCPPI employees |
1,974,500 |
Less than 1% |
1,974,500 |
Less than 1% |
| Pepsi-Cola Far East Trade Dev. |
100 |
Less than 1% |
100 |
Less than 1% |
| Public |
|
|
1,313,700,982 |
35.6 |
| Total |
3,312,989,386 |
|
3,693,772,279 |
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PEPSI-COLA PRODUCTS PHILIPPINES, INC.
SUMMARY OPERATING DATA
Fiscal year ending June 30 (in Pmns) |
| |
2006 |
2007 |
2008F |
2009F |
2010F |
| Revenues |
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| Net sales |
10,992.80 |
12,916.20 |
15,459.42 |
16,607.67 |
17,998.13 |
| Cost of Goods Sold |
7,252.80 |
8,760.00 |
10,167.74 |
10,877.01 |
11,674.79 |
| Gross Profit |
3,740.00 |
4,156.20 |
5,291.68 |
5,730.66 |
6,323.33 |
| Operating Expenses |
|
|
|
|
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| Selling and distribution |
1,434.70 |
1,594.30 |
1,842.07 |
2,119.83 |
2,430.50 |
| General and Administrative |
536.30 |
598.50 |
574.34 |
757.27 |
847.60 |
| Marketing expenses |
424.10 |
468.30 |
1,004.86 |
840.82 |
911.22 |
| Income from Operations |
1,344.90 |
1,495.10 |
1,770.41 |
2,012.74 |
2,134.02 |
| Net Finance and Other Income |
(55.30) |
24.50 |
(13.68) |
(2.34) |
14.40 |
| Income before tax |
1,289.60 |
1,519.60 |
21,756.74 |
2,010.40 |
2,148.41 |
| Income tax expense |
420.90 |
518.20 |
614.86 |
703.64 |
751.94 |
| NET INCOME |
868.70 |
1,001.40 |
1,141.88 |
1,306.76 |
1,396.47 |
| Sales Mix (%) |
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| Carbonated beverages (CB) |
92 |
91 |
89 |
87 |
84 |
| Nan-carbonated (NCB) |
8 |
9 |
11 |
13 |
16 |
| Gross margin (%) |
34 |
32 |
34 |
135 |
35 |
| Operating income margin (%) |
12 |
12 |
11 |
12 |
12 |
| Net income margin (%) |
8 |
8 |
7 |
8 |
8 |
| Debt - Equity Ratio |
1.10 |
1.04 |
0.52 |
0.41 |
0.40 |
| A/R Turnover (days) |
22 |
23 |
24 |
24 |
24 |
| Inventory Turnover (days) |
26 |
25 |
25 |
25 |
25 |
| EPS (P) |
0.24 |
0.27 |
0.31 |
0.35 |
0.38 |
| P/E (x) |
14.9 |
12.9 |
11.3 |
9.9 |
9.3 |
| BV per share |
0.74 |
0.90 |
1.73 |
2.08 |
2.46 |
| Price-to-BV (x) |
4.75 |
3.89 |
2.03 |
1.68 |
1.42 |
| RoE (%) |
32 |
30 |
18 |
17 |
15 |
| RoA (%) |
15 |
15 |
12 |
12 |
11 |
| Total Assets |
5,716.30 |
6,785.30 |
9,682.27 |
10,832.83 |
12,696.67 |
| Total Liabilities |
2,993.00 |
3,461.64 |
3,303.41 |
3,150.21 |
3,614.58 |
| Total Stockholders Equity |
2,723.30 |
3,323.70 |
6,378.87 |
7,685.63 |
9,082.10 |
| Pluses |
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Challenges |
Price potential on comparable market P/E
We estimate PCPPI to generate P1.14bn in consolidated net earnings for 2008 (+14% year-on-year) on gross topline of P15.5bn (+20%). Based on the firm's share offer price, that would translate to P/Es of 11x versus market P/E of 16x. The stock's gross profit margin remains in the double-digit range (34% for 2008), even as net income margins remain modest at only 7%. Based on market P/E potential, prospective price potential could be at P4.80-P5.00/share.
Improving debt-equity mix
PCPPI has established improving operating cash flow given its commitment to settle obligations in a timely manner. The firm's debt-equity (D-E) ratio is seen to decline from 1.04x in FY07 to 0.52x this year. PCPPI will settle P822mn for FY08, covering long-term loans, notes payable/short term debts, operating lease obligations and purchase commitments.
Growth opportunities from NCB
Consumers are developing greater preference to health & wellness beverages, as most veer away from drinks that have high sugar content or artificial ingredients. We believe this thrust would allow PCPPI to further improve margins through development of low-calorie & low-sugar variants, and partake on improved demand growth. Note that 50% of PCPPI's P1.5bn primary offer proceeds will be devoted for additional non-carbonated beverage (NCB) facilities. PCPPI further sees its sales mix to improve to 67%-33%, led by NCB, in the next 2-3 years from 90%-10% for FY07.
EDS & Combi-line
PCPPI has an Entrepreneurial Distribution System (EDS) that comprises Multi-Route Entrepreneurial Distribution System (MREDS) & Pepsi Partner System Agreement (PPSA). In general, the scheme allows for an independent contractor or operator to purchase PCPPI's beverages, & participates in investing in delivery trucks & storage area. Meanwhile, sales volume growth will also be enhanced by PCPPI's facility expansion, where plants will be converted to a 'combi-line' that could handle production of returnable glass, Polyethylyne terephthalate (PET), and NCB. Some of the plants to be expanded are in Cagayan de Oro, Cebu, Iloilo, San Fernando, and Pangasinan, with estimated project cost at P150mn-P300mn per plant. These are seen to provide PCPPI approximate savings of US$2mn.
Leadership in sports drinks
PCPPI's Gatorade leads in sports drink category, holding 91% market share. PCPPI recently launched Sting, an energy drink that contains ginseng extracts. Sports drinks' compounded annual growth rate (CAGR) is at 13.4% for '08-'09.
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Listing timing
Volatile economic swings in the US on protracted recession concerns could influence sentiment on PCPPI's listing, unless net foreign selling trend at home reverses. With about 70% of shares allotted to foreign investors, there might be possibilities for a frail debut for the stock. Others might also take heed of price performance of other listed beverage plays (e.g., AMC, TDY, GSMI, CBC), unless PCPPI succeeds in expanding earnings sources.
Stiff competition within CSD
Within carbonated softdrinks (CSD) industry, ACNielsen estimates PCPPI holds 17% share versus nearest rival Coca-Cola Bottlers' 50% & Cosmos Bottling's (CBC) 23%. Pricing pressures could escalate especially with Pepsi beverages accounting for 53% & 53.7% of sales volume for FY06 & FY07, respectively.
EBA limitations
With PepsiCo owning 29.5% of PCPPI post-IPO, there might be possible conflict of interest in view of PCPPI's parallel commercial relationship with the former. PCPPI is expected to comply with its Exclusive Bottling Appointment (EBA) with PepsiCo, part of which includes an obligation to purchase all concentrate requirements from PepsiCo. Although the move is necessary to allow PCPPI to comply with global beverage standards, this also lessens flexibility for PCPPI to consider cheaper raw material alternatives. The EBA also stipulates PepsiCo may opt to terminate its agreement with PCPPI if certain competitors or any manufacturer or distributor anywhere in the world that competes with beverages licensed to PCPPI acquires 10% of shares.
Clarification on pending litigation
Certain shareholders of PCPPI specifically Orion group, along with Nassim Capital Pte. Ltd., has a pending court claim against Asset Pool A (SPV-AMC), Inc. PCPPI stressed they are not a party in the case as Nassim Fund, being a selling shareholder, is a different entity. Nassim Fund is separate and distinct from Nassim Capital - the party impleaded in the litigation. None of the claims have been decided on final and executory basis & none of selling shareholders have been enjoined from disposing their shares as a result of the case.
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