p. 1

stock pick da market securities inc smc the april offer april 12 2011 unit 6 3f fort strip bldg btc fort bonifacio taguig city phone 6328876407 fax 6328875457 web broker204.tumblr.vom

[close]

p. 2

2 smc the april offer smc s growth is a play on philippine economic growth smc is one of the largest and highly diversified conglomerates in the philippines the company accounted for 3 of the philippines gdp in 2010 from marketleading beverages food and packaging with a globally recognized beer brand it transformed itself into market-leading businesses and investments in the philippines fuel and oil power infrastructure telecommunications banking and mining industries while adjusted ebitda is at $2.3b p101.2b after including results from petron pcor and smc global power holdings corp smcgp proforma ebitda translates to $3.1bp136.4b smc is targeting $5b p220b in 5 years the share sale and exchangeable bond issue is expected to raise approximately $850 million about $500m of which will be used for infrastructure businesses and the balance for working capital and other general corporate purposes the announced offer size today is much lower from smc s previous plan to raise up to $5b however the offer may still be adjusted when asked about the price rsa assured investors that stock price will not fall below offer price indicated price has ranged from as low as p150 to as high as p250 when asked to comment about the megamerger between telco giants pldt and dgtl rsa replied that smc s already has a capability to provide nge next generation ethernet services a pioneering service that is just currently being planned by his competitors san miguel and its partner qatar telecom qtel currently offers wi-tribe the first 4g broadband in the country and the core technology of the middle eastern firm other highlights include 500 more service stations to pcor s existing 1700 within 2011 increase production of higher margin products in its refinery while enhance operational efficiencies to increase conversion capability double its power generating capacity in 5 years to 3000mw synergies across all businesses lending to improved profit margins and new revenue sources beyond the current infrastructure projects smc plans to bid on all ppp initiative projects to be bid out by the government without a doubt smc is a long-term buy we anticipate the final details of the share sale by april 20 as price point and float level are key see at end of report a study on different p/e levels based on float current and projected income at a conservative pirce offer estimate of p140 ­ 150.

[close]

p. 3

3 smc s growth is a play on the philippine s growth smc the april offer 1 one of the largest and highly diversified conglomerates in the philippines 2 revenues equal to 3 of the philippines gdp in 2010 3 from market-leading beverages food and packaging with a globally recognized beer brand it now has market-leading businesses and investments in the philippines fuel and oil power infrastructure telecommunications banking and mining industries financials smc s sales gross profit and adjusted ebitda were p246,109 million p72,203 million and p52,536 million respectively in 2010 smc s pro forma sales gross profit and adjusted ebitda including the results of petron from january 1 2010 to december 14 2010 and the results of smcgp from january 1 2010 to july 31 2010 were p474,609 million p97,515 million and p71,646 million respectively in 2010 a leader in industries businesses description beverages smc and ginebra in the philippines its beer brand has a total market share of approximately 94 in terms of volume products are also internationally sold smc is the world s largest gin seller and the world s third largest distilled spirit seller by volume also has a growing non-alcoholic beverages business which produces non-carbonated ready-to-drink tea and fruit juice products magnolia food pure foods food business holds numerous market leading positions in the philippine food industry offering a broad range of high-quality food products and services to both household and food service customers the business is organized into business clusters agro-industrial poultry feeds and fresh meats value-added meats processed meats milling flour and flour-based products and dso dairy products spreads oils ice cream food service retail and miscellaneous businesses packaging has one of the largest packaging operations in the philippines producing glass metal plastic aluminum cans paper flexibles pet and other packaging products smc s packaging business is the major source for packaging products for smc s other businesses also supplies to major multinational corporations in the philippines and customers across the asia-pacific region the united states africa australia and the middle east conducted through san miguel yamamura packaging corporation smypc san miguel yamamura packaging international limited smypil and its subsidiaries san miguel yamamura asia corporation smyac and mindanao corrugated fibreboard inc mincorr smypc and smypil are joint venture companies in which smc holds a 65 equity interest while smc holds a 60 equity interest in smyac mincorr is a wholly-owned subsidiary of smc fuel and oil owns 68.3 of pcor which is the largest integrated oil refining and marketing company in the philippines supplying more than a third of the country s refined oil requirements and is the largest liquefied petroleum gas lpg distributor with a 33.3 market share as of june 30 2010 pcor has the most extensive oil distribution infrastructure in the country with more than 30 depots and terminals and over 1,700 service stations in the philippines.

[close]

p. 4

4 smc the april offer petron also exports various petroleum products and petrochemical feedstock including high sulfur fuel oil naphtha mixed xylene benzene toluene and propylene to customers in the asia pacific region power smc global power holdings corp smcgp a leader in the philippine power generation industry in terms of installed capacity administers three power plants namely the sual power plant coal the ilijan power plant natural gas and the san roque power plant hydroelectric with a combined capacity of 2,545 mws smc also owns and operates a fourth power plant the limay power plant diesel oil with a capacity of 620 mw as of end 2010 smc was one of the largest electricity suppliers in the philippines and held a 29.2 market share of the total installed power generation capacity for the luzon power grid and a 21.7 market share of the national grid smc also owns a 33.2 equity interest in manila electric company mer the biggest power distributor and private sector utility in the philippines which accounted for almost half of all electricity sales in the philippines in 2010 infrastructure current projects include an 88.58 km two-lane expressway from tarlac through pangasinan to la union tplex caticlan airport and manila s mrt-7 rail and road project smc operates with partners in its investments in most other operations and investments interests and investments in coal mining telecommunications banking and property development table shows contribution of each of smc s businesses to its revenues for the periods indicated and the pro forma contribution of each of smc s business assuming in each case the business had been held for all of 2010

[close]

p. 5

5 strengths broad exposure to the growing philippine economy smc the april offer philippines is the fifth largest economy in southeast asia in terms of gdp as of 2009 with an average real gdp growth of 4.9 over the last five years world bank estimates average 4.5 over the next 2 years further growth can hinge on the country s young population comparably literate and growing operating businesses provide sustainable stream of income and cash flows beverages food and packaging businesses remained resilient through the 2008 financial crisis providing sustainable stream of income and cash flows paving h way for its diversification strategy some of smc s newly acquired businesses such as petron and the power business are cash flow positive and are accretive to the revenues and adjusted ebitda of smc platform for significant future growth established businesses in beverages food and packaging provide for stable growth annually while its new businesses are expected to contribute further to this growth beverages increasing affluence and population growth in the philippines international beer business is experiencing increased sales through increasing brand recognition in selected overseas markets such as indonesia thailand singapore and hong kong food aims to become the lowest cost producer by securing a stable raw material supply and developing alternative raw materials as well as streamline operations to improve profitability maximize synergies across operations and improve margins through outsourcing non-core activities packaging trade liberalization and globalization in the asian region to increase its exports to new markets furthermore rising environmental awareness provides opportunities for the production of more environmentally friendly products plans to improve margins by developing alternative sources of raw materials and optimizing recycling efforts to lower its material costs fuel and oil the philippines is a net importer of refined petroleum products and is expected to remain dependent on imports significant growth is seen in underserved less-urbanized areas and in a growing domestic economy smc plans to continue its service station network expansion additional 500 this 2011 and seek growth in complementary non-fuel businesses smc also plans to increase the production of higher margin products petron is currently embarking on phase 2 of its refinery master plan rmp-2 which includes further enhancements to the refinery s operational efficiencies an increase in conversion capability and the minimizing of the production of lower value fuel oils power -

[close]

p. 6

6 smc the april offer smc is planning to double its power generating capacity to 3000mw over the next five years growing demand for electricity in the philippines to exceed the growth rates of the philippine gdp and a shortage in electricity supply with the industry constrained by aging power generation assets and minimal new capacity furthermore increased margins from higher spot electricity rates on increased demand infrastructure significant opportunities in building or purchasing infrastructure assets in a growing economy that has historically under-invested in its infrastructure in addition smc believes its operating licenses will provide strong and stable long-term income streams as well as serve as a barrier to entry to new entrants to the business telecommunications expects high growth in the telecoms as the philippine population becomes more affluent and spends more on higher margin services recentl acquisitions have a wide bandwidth of spectrum that would enable smc to be competitive in both current 2g/3g and future technologies potential to extract synergies across businesses ancillary business opportunities new growth opportunities i.e infrastructure projects by using the relevant land area to conduct business and activities such as billboards and advertisements as well as building service stations retail outlets rest stops and kiosks along toll roads effective distribution channel extensive retail distribution network provides an effective platform for roll-out of new products and services i.e pcor s 1,700 service stations pfor retail sales of smc products economies of scale size and scale of its distribution network operations will provide significant economies of scale and synergies in production research and development distribution management and marketing substantial leverage and bargaining power with suppliers and retailers integration pursue vertical integration across its established and strategic businesses i.e supplying the fuel and oil and power requirements of its businesses internally strong and experienced management team with an in-depth understanding of the philippines recently successfully directed smc s diversification strategy including retaining key management personnel from acquired companies such as petron in order to retain their expertise and leverage their industry experience -

[close]

p. 7

7 business strategies enhance value of established businesses smc the april offer pursue operational excellence brand enhancement improving product visibility targeting regions where smc has lower market share implementing pricing strategies and pursuing efficiencies continue to diversify into industries that underpin the development and growth of the philippine economy in addition to organic growth will seek strategic acquisition and greenfield opportunities to position itself for the economic growth and industrial development of the philippines identify and pursue synergies across businesses through vertical integration platform matching and channel management further expand and integrate its production and distribution facilities for its established and newly acquired businesses to enable additional cost savings and efficiencies invest in and develop businesses with market leading positions further enhance its market position in the philippines by leveraging its financial resources and experience to continue introducing new products and services including constructing new power plants and expanding its power generation portfolio building additional service and micro-filling stations and expanding food distribution networks smc believes its strong domestic market position provides an effective platform to develop markets for its expanding product portfolio adopt world-leading practices and jointly develop businesses smc has strategic partnerships with global industry leaders including kirin holdings company limited kirin in the beverages business and nihon yamamura glass co ltd nyg in the packaging business these partnerships provide marketing and expansion opportunities and they also potentially provide liquidity and opportunities for smc to divest minority stakes in its businesses as other opportunities arise smc intends to develop additional strategic partnerships recent developments january 13 2011 smpi agreed to acquire a 7.2 equity interest in bank of commerce boc upon completion smc will hold a 39.9 equity interest in boc on january 25 2011 smcgp completed a us$300 million bond offering the 5-year bonds have an interest rate of 7 per annum the proceeds from the bond offering will be applied towards i financing investments in power-related assets ii financing payment or subject to negotiations with psalm prepayment of smcgp s payment obligations to psalm under its ippa agreements and/or iii general corporate purposes on february 2 2011 petron acquired a 35 equity interest in manila north harbour port inc which holds a 25-year concession from the philippine ports authority to operate the manila north harbour philippines busiest domestic cargo port in terms of volume smc plans to use the facilities to establish fuel tanks to serve petron s requirements as well as grain terminals and bulk cement silos for the needs of other smc entities -

[close]

p. 8

8 smc the april offer on february 21 2011 smc confirmed that san miguel electric corp would together with the other power generation subsidiaries of the company engage in the business of producing electricity and processing alternative fuels for power generation on march 3 2011 smpfc raised 815 billion in a public offering of 15 million preferred shares on the pse for 81,000.00 per share smpfc s intended use of proceeds from the offering include i repayment of a payable to smc in the amount of 83.6 billion relating to smpfc s acquisition from smc of food-related brands and intellectual property rights as well as smc s food business in vietnam ii investment in opportunities and areas that the board of smpfc may identify and iii general corporate purposes on march 16 2011 the selling shareholder exercised its option to purchase from q-tech alliance holdings inc q-tech a 12.9 equity interest in smc held by q-tech which increased the selling shareholder s equity interest in smc to 67.2 on march 31 2011 smcgp signed a us$200 million 3-year term loan with a syndicate of banks smcgp s intended use of proceeds from the loan include i financing payment or subject to negotiations with psalm prepayment of smcgp s payment obligations to psalm under its ippa agreements ii financing additional capital expenditures to support expansion of existing power generation assets and/or iii financing new investment in power-related assets -

[close]

p. 9

9 smc the april offer smc s consolidated financial statements are reported in pesos and are presented in accordance with pfrs all conversions of amounts in pesos into u.s dollars are provided for convenience only.

[close]

p. 10

10 the offer smc the april offer while flexible to change the company expects to raise $850-million p37.4b through share sale and exchangeable bond $100 million of the secondary shares offering will be earmarked to domestic investors with an option to upsize by 10 in case of strong demand the offer to raise $850m is notably smaller than the $5b originally intended to be raised by smc officials did not indicate how much of the fund-raising will be in the form of bonds which shall be exchangeable into smc s treasury-held shares the pricing and allocation to the overseas market will be made by april 20 while the domestic offering will run from april 25 to 29 the secondary shares placed out to new investors will be crossed at the local stock market on may 5 use of proceeds p22 billion 500m for investments in its infrastructure businesses and the balance for working capital and other general corporate purposes top frontier intends to use the net proceeds of the offer that it will receive to repay advances from its shareholders not including smc which top frontier used to fund purchases of common shares the shareholders receiving repayment from top frontier will in turn use such repayment to repay their respective loans from an affiliate of standard chartered securities singapore pte limited one of the international joint bookrunners.

[close]

p. 11

11 technicals smc the april offer

[close]

p. 12

12 smc the april offer in both 1-year and 2-year charts smc shows significant support at the ff levels 155 150 and a major at 140.

[close]

p. 13

13 conjecturing at what a share price means given available data the facts eps as of end dec 2010 is 8.70 p/e at 160 is approximately at 18.38x smc the april offer current float is 8.1 while the pse-mandated minimum float is 10 notable though were mentioned in several publications that smc intended to increase float to 25-30 at the time they also wanted to raise $5b vs announced offer size of $850m as of yesterday s asm given these scenarios let s consider implications on p/e ratios remember that the offer includes exchangeable bonds to common shares details of which have yet to be disclosed deriving projected income proforma adjusted to include pcor 2010y and energy 1h2010 ebitda should be $3.1b from reported $2.3b based on the $2.3b ebitda p101.2b with earnings at p24b of net income to ebitda is 24 considering they are targeting an ebitda of $5b in 5 years or p220b deriving a 24 would mean a projected net income p52.8b in 5 years how would this translate to p/e smc and other companies ­ p/e price-earnings ratio and eps earnings per share mpi p/e eps dmc eps mer p/e eps smc p/e 26x 0.14 23.46x 2.17 as of end sep 2010 46.50x 7.067 as of end sep 2010 18x 8.70 currently smc registers lower p/e and higher eps given the small float below is a study on p/e ratios showing a mix of different float levels and a conservative offer price estimate of p140 ­ p150 at current income if float is to be increased to 10 p/e will elevated but comfortably compare to other companies at p/e 19-21x at p140 p150 however if float is increased to as much as 25-30 p/e will be elevated to p/e 50-64x at p140 p150 to indulge at a projected 5-year income of p52.8b with a float of 10 p/e can come down to an attractive 7.5-10x and with a float of 25-30 p/e will range at comfortable levels of 18 25x.

[close]