San Miguel Food and Beverage Inc – Possibly the New Index Member

So what have I been buying lately? What urged me to sell some of my MER shares that I love so much? Well, its San Miguel Food and Beverage Inc (FB). Why? Here’s why.

San Miguel Corp, the parent company, transferred all the food and beverage business into Purefoods. Purefoods now became FB and inside it, all the food and beverage business, including the packaging business of San Miguel. The previously 600 million per year in net income of Purefoods will now earn 33 Billion per year in net income. Majority of that coming from the beer business.

In 2017, counting only the food businesses of San Miguel, earned:

Division Net Income in B
Beer 20.7
Spirits Gin 0.602
Food 6.9
Packaging 3
Total 31.202

In 2018, it is expected to earn 33 Billion. Around 6% increase.

Company’s debt is at 23 billion. They can pay all the debts in 1 year if they wanted to.

With the increase of capital stock (5.9 billion outstanding shares). FB would have an EPS of 5.55 per share. I have bought the company at P62 per share on the open market. That’s a P/E of 11. Earnings yield of 8.9%. Is this cheap? Comparing with other consumer companies, yes. It is cheap. Its a big company so growth has already slowed. But its still there.

The increase in capital stock would make FB fall below its required public float. So, the company would have to issue shares. The follow on offering would be at 79. This is my guess. As far as interviews go with Mr. Ramon Ang and the disclosures that have been filed where the transfer of shares has a price of 79. I think its safe to assume that it would be at 79. A 30% increase from my purchase price.

At 4% public float, I doubt there are institutions or fund ownership yet. So the follow on offering would first and foremost protect the 79 pesos per share if they bought at the follow on offering. Simply because funds won’t be selling at such a low price for a long term stock. Second, FB is a potential index contender. Which would prompt more institutional buying. With its market cap at the 300 billion, it is already above and beyond the lowest companies in the index. And third, this is just a guess, since FB is owned by SMC and SMC needs capital for its large infra projects. I am guessing, they will give it out as dividends. So its a high possibility that we could get a very good dividend.

On the down side, there’s a lot of things that could happen. There’s a lot of uncertainty. But if we purchase the stock at a low enough price to account for those uncertainties. Looking at the downside, I think this is a good investment. Can it go down from 62? Yes, its possible. The amount of shares issued at follow on offering would also increase the risk and uncertainty. We don’t know how much shares would dilute our stake.

So all in all, I sold my MER shares so I could buy a cheaper company. MER is at 19 P/E and FB is at 11. Is there a risk that I may be wrong? Yes! Of course. If FB went down after the suspension has been lifted, that would be unfortunate. But I would like to buy more at a lower price if possible. If the public embraced the follow on offering price of 79 and trade at that new price, then I just have a 30% increase in my investment, just by doing some simple addition.


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