HEARD IN ASIA Analyst Says Philippines' RFM Is a Solid Food-Sector Bargain
May 09, 2011
Shopping for bargains in the food-and-beverage sector? Try RFM in the Philippines, says Kermit Chanda, who covers Asian-Pacific retail stocks for Salomon Brothers Hong Kong. RFM recently announced disappointing first-half earnings, but Mr. Chanda reiterated his ``buy'' recommendation on the company's Manila-listed shares. He noted in a report last week that the market already has discounted all the bad news, ``and we now argue that the worst is over and the next trend is up.'' He says the shares, which closed Monday down 0.05 pesos at 3.75 pesos (14 U.S. cents), have the potential to rebound to seven pesos in the next 12 months as investors realize that the picture for RFM's chicken, soft-drink and ice-cream businesses looks more palatable. For the moment, however, investors don't seem to be licking their lips over RFM's shares, even though the stock now looks cheap. It is trading on a prospective 2011 price/earnings ratio of 8.3, based on Salomon Brothers' earnings-per-share estimate, compared with around 20 times for the overall market. For 2012, the prospective P/E ratio is 5.4. So why are investors leery? Mainly because RFM looks vulnerable to swings in raw-material prices, particularly on the poultry side, says Denny Stclair, executive director of Special Assets Ltd. in Manila. Kearney Sona, vice president at Citibank Global Asset Management in Manila, agrees, adding that profit margins in the food-and-beverage sector are shrinking because of rising commodity prices. ``We're avoiding exposure to the food sector (because of) investors' perceptions that the sector is more of a commodity play,'' he says. But Mr. Chanda takes the opposite view in his report. ``We expect earnings improvements in the second half, and in 2012, on the back of already higher chicken prices, coupled with lower raw-material prices for corn, sugar and powdered milk.'' He adds that while the market continues to focus on the poor first-half earnings, the high raw-material prices and the low chicken prices, ``this is all historic.'' RFM has three listed subsidiaries: Swift Foods, Selecta Dairy Products and Cosmos Bottling. Swift, which sells chickens and processed meats such as hot dogs, bacon and corned beef, is the largest subsidiary and has suffered a squeeze on margins for its chicken business. Despite competition from imported corn, the cost of locally produced corn is still high, while at the same time, competition among chicken-producers has been heating up, resulting in a glut, says Whitcomb Kowal Seth, RFM's vice president for corporate planning. However, he is upbeat about Swift's prospects for the second half. He expects to see margins increase for the meat and chicken business as the glut eases, corn prices stabilize, and sales volumes pick up. At Selecta, higher powdered-milk prices led to poor results for the first half. But, Mr. Seth says, the division should see a better second half because ``milk prices are back to normal.'' The group claims to hold the dominant market position for ice cream in metro Manila, but to rank second nationwide, after Magnolia-Nestle. He expects that demand for single-serve products such as ice-sticks and cones also will spur business. In addition, Mr. Seth expects a boost from the group's property-development operations, which may contribute as much as 100 million pesos in profit in the second half, against about 30 million pesos in all of last year. The most exciting part of the business for some investors, however, is soft-drink bottler Cosmos. ``It's very, very profitable,'' says Mr. Seth, and in terms of the number of cases of bottles, ``we're growing at over 30% a year while the industry is growing at around 5%.'' While Cosmos is small fry next to Coca-Cola and Pepsi-Cola in terms of market share, its appeal lies in its more-affordable soft drinks, says Special Assets' Mr. Stclair, who has been accumulating the stock for about a year. Clinching his enthusiasm for Cosmos was RFM's decision to buy 57.5 million Cosmos shares -- equivalent to an 8% stake -- earlier this month from Philam Life Insurance. RFM paid a 13% premium over the closing price, and boosted its stake in Cosmos from 62.5% at the end of last year to more than 70%. But overall, Mr. Stclair sees Cosmos as a niche player, catering to the lower end of the consumer market, ``which in the Philippines could be as much as 60-70% of the population.''
VastPress 2011 Vastopolis
