I have been hearing a lot about COSCO Capital for a couple of months now and since I have freed up some time after finishing The Complete Intrinsic Value course, I finally got the time to look into it.
I would like to thank Evan Vanderveer of Vanshap Capital and Ryle for the heads up on this stock. It took me long enough before I actually look into it.
What is COSCO Capital
If I’m going to sum up what COSCO Capital is, its one word, retail. All of their businesses are in the retail business. You can say that they are focused, having synergy with all business segments. They own one of the biggest discount hypermart in the Philippines, PureGold Price Club, which is also listed in the PSE.
PGOLD caters mostly to C and D demographic and small businesses with “sari-sari” stores. While S&R is for more middle to upper middle class, membership shopping.
Their subsidiaries are as follows.
Here are some of the key financial ratios for COSCO:
ROE is at a healthy 16.60% for 2019 and profit margin increasing to 9.27%. Earnings from 2018 to 2019 increased to 14.16% even without taking into account the proceeds of the selling of Liquigaz in 2019. Its 2019 EPS is 0.83754, which gives it a P/E ratio of 6.25 and earnings yield of 15.98%.
COSCO’s Stock Price on the Decline
The stock price has been on the decline for a couple of years now, also the reason why they initiated a share buyback program.. And because of the COVID situation, made it even worse. But is it really that bad?
The main segment in their retail empire, the PureGold and S&R earnings are up 15% during this COVID pandemic. Because of the nature of its business as necessary for life, and because people’s panic buying, they actually benefited from the situation. But its other businesses are not. These includes:
- Special retail – Office warehouse, non essentials so its closed down. But then re-categorized as essentials in the later part of the lockdown.
- Real estate – they have to waive the rents on their malls and rental properties as part of the Bayanihan Act.
- Wine and Liquor – There was a liquor ban during the lockdown.
So the only thing that is keeping it alive is the grocery which is Puregold and S&R. But even then, it managed to increase its earnings at a low single digit rate around 4% even with all the losses from other segments.
Valuation of COSCO Capital
COSCO has a market cap of P38 billion. Its 49% stake in Puregold (PGOLD) already amounts to P68.6 billion, almost double. Just think of it this way, their PGOLD stake, take half of that, and you keep the other businesses for free. That’s how much the market is valuing COSCO right now, around P9 to P10 intrinsic value with only its PGOLD stake, other businesses for free.
Is the conglomerate discount really that bad? Is it rational to have that kind of valuation? I know their other businesses are doing bad this COVID pandemic, but once things get back to normal, those businesses would contribute to the bottom line.
And eventhough COSCO is a diversified conglomerate, its not very much diversified since almost all of their businesses are in retail, except for the real estate where they rent space for retail businesses. Still related to retail.
Insider Purchases and Share Buy-Backs
There’s a P2 billion share buy-back and on top of that, the insiders consists of the family of the founder constantly buying shares from the market. The patriarch even bought shares from the market and gave it to his children. Putting family in the family business.
My Thoughts on COSCO
The main business of COSCO is PGOLD, and it targets the C and D market. With this pandemic, this demographic might increase because of the lack of jobs.
Their main competitors, Robinsons and SM, are based inside malls. Price-wise, PGOLD offers the cheapest price in their goods. In this environment, people will find a way to save money. So COSCO is in a good position to take advantage of that possible trend.
Another risk is with online shopping. Most people are migrating online to buy groceries. Unless other retailers up their game and actually have their own web portal and own delivery network, not to mention warehouses for wet and dry goods, the trend will still continue wherein there would be lots of delivery companies doing the shopping for their customers then deliver it to their doorsteps. For example, Foodpanda/Grab, delivery companies, would shop at Puregold based on customer’s needs then deliver it to their doorstep. COSCO will still be able to take advantage of this trend.
Actually, since going online is still a new trend, I’m not exactly sure who will win in the grocery-online-shopping game. Maybe it won’t be a thing and people would still prefer to shop for their groceries by going to stores. I am not sure. But I do know that, 59% of all grocery demand comes from sari-sari store owners. And those people would still prefer to shop in stores, because of the amount of things they buy, online grocery shopping won’t cut it. And this is actually the target market of Puregold, the sari sari store owners.
And besides, we have a large margin of safety. I’m thinking that COSCO should at least be at P10 to P15 per share just basing the value on their PGOLD stake.. It’s currently at P5 now, very much in line with our value investing principles.. It might take a long time before people realize its value, but I’m willing to wait.
The problem with the other business segments, I think, is just temporary. When things get back to normal, the real estate segment will get their rents, and wines and liquors would continue to grow.
It might not be an immediate recovery, but I’m confident that COSCO would come out of this pandemic mostly unharmed.
COSCO really wants to focus on retail. Their Liquor & Wines segment is a fast grower until this pandemic hit and liquor ban took into effect. PGOLD is growing at a normal rate of 6 to 9%. S&R is also still small and there’s a lot of room for growth.
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