SBS Philippines has a GOOD Business, but..: A review

First, let us CLARIFY things

Being subscribed to numerous foreign newspapers kept me from reading any local (Philippine) business newspapers; only recently when I read about a writing done by Mr. Emeterio Perez of the Manila Times entitled “Paying debt with other people’s money” that was published on Oct 22, 2015 (take note of the date)

Quoted on para. 15:

Really? Why didn’t SBS use the net proceeds of P829.3 million for, among others, “product expansion,” as it said so in its posting on the website of the Philippine Stock Exchange? It would appear to the public that the company needed the money only to be able to pay its debt with BDO which, at five percent interest per annum, “carried higher interest rates compared to other credit facilities.”

Further, para. 19 and 20:

“The public investors should not be satisfied with SBS’ own presentation because they should have been told that the company had yet to deduct P22.1 million, which it chose to defer to the “last quarter of 2015.” By proceeding with their own computation, they would arrive at net IPO proceeds of P807.22 million.

Here are two questions that the public stockholders of SBS should ask: How much of the IPO money did it invest outside the company? What happened to the purpose of the offering?

First, his title seems to have a buried intention to somehow discredit SBS. (Correct me if I’m wrong)

Second, his last query about ‘what happened…’ had already been answered by the company had he reread SBS’ 158-page prospectus that was published on July 24, 2015. If not, maybe just browse through the company’s Powerpoint slides published on July 27, 2015.

This is page 41 of SBS Corporation’s prospectus indicating the use of the IPO’s proceeds:1

This is slide 41 of the company’s Powerpoint presentation:

1

So I do not give weight on this writing of Mr. Perez about questioning ‘where’s the money now, SBS?’

One more thing, para. 18 of his article:

“In April last year, SBS Philippines sold to the public 420 million shares at P2.75 each. From this public offering, it grossed P1.15 billion. Minus “IPO-related expenses” of P42.75 million, the company had P1.11 billion in net proceeds. After paying BDO P282.9 million, it still had P829.3 million left.”

April last year (2014) he said. I know I live with CST (Central Standard Time) in Texas, USA with 13-14* hour delay, but I am pretty much sure that SBS enlisted their share in the PSE (Phil. Stock Exchange) on August 10, 2015.

Here is the proof video with their enlisting and ringing the bell and so on that was held on August 10, 2015 and NOT April LAST YEAR.

1

Link (https://www.youtube.com/watch?v=kPeriVtA1nk)

Okay, enough of this refuting. I apologize to Mr. Perez, but sometimes, the public take the headline as it is and with added information may judge a company instinctively as what was said in the paper.

Now, Why I said SBS has a good business.

Warren Buffett once said, “I am a better investor because I am a businessman and a better businessman because I am an investor.”

Let us try then to look at the business or fundamental aspects of SBS’s business.

I hope I had simplified this as much as possible. Nevertheless, it took me at least an hour and a half to read the company’s prospectus and presentation and had gotten some of their numbers to form my fair value.

Start,

Here is the company’s history in one slide:

1

Okay, long history of business is a plus.

Here is the management team:

1

Consider this as a family business now willing to ‘share’ their future profits with the public at the same time asking for the public’s money to fund their operations as well. Thus, the IPO-listing happened.

There are only four things how a listed company is able to payback its shareholders (at least from what I mostly consider):

  1. Dividends
  2. Share repurchase (not well practiced in the Philippines)
  3. Continued earnings (net profits) growth
  4. Capital appreciation of its stock price

The company included this slide showing their competitiveness:

1

Finally, this is their business model:

1

Okay, I do not very much try to understand what’s going on inside the company… as long as it shows continuous profits and shareholder return.. so let’s just label these stuff as ‘GOOD TO KNOW’

Let’s go ahead and dissect its numbers and see why it is a ‘good’ business

(An important note: you see, SBS only can put in their prospectus whatever they’ve had during the filing. So, for this year’s (2015) total amounts—I relied on a conservative approach by multiplying its declared earnings by March 31, 2015 by the number 4. Why? A year has four quarters: Jan-Mar, Apr-June, July-Sept, Oct-Dec. So this is my way of estimating its revenue that other analysts may have other ways. Nevertheless, I believe this is conservative given SBS ‘fluctuating’ numbers.)

Next,

Numbers

Revenue

1

Safe to say that the company will be in line with its previous years’ revenue of about 900 million peso range. I personally require a company to grow their revenue annually and consistently. SBS’ appears to be ‘flat’. Maybe we can wait until it announces its financials this year end to judge whether my estimates are ‘in line’. Besides, SBS said that they’re on track to reach 1-billion-peso sales.

Okay enough chatting for now, we will run through other metrics I include in my screening process.

Next, Gross Profit Margin (GPM, suggested >40%)

1

With almost half a century in the business, I believe the GPM should at least somewhere be near 40. Buffett also requires 40 or more with this metric. SBS seems to be hovering in the 20-30s area suggesting it is in a competitive business.

Next, Net Profit Margin (suggested >8%)

1

Amazingly, SBS not only met my personal requirement of 8%, but removing my 2015 estimates, it already met it last year (2014). The only thing I want in this metric for SBS to fulfill is for it to be CONSISTENT at >8%. This metric indicates that a company is profitable or not.

Okay, those were the good signs. Now let’s go some of the prospectus’ warning signs.

SBS stated in their business risk that there is inventory risk.

SBS defined it in page 26 of their prospectus as, “The Company is exposed to inventory risk that may adversely affect its operating results on account of limited product shelf life, new product launches, and changes in consumer demand and consumer tastes affecting industries and market sectors supplied by the Company.”

This just means that the company needs to have a good Asset turnover ratio to boost their revenue as well. The more they sell, the better the revenue. Thus, the higher the asset turnover ratio, the better a company does.

Asset turnover ratio

1

It appears that SBS is again in line in this ratio. But, having access to foreign stocks, I chose to compare it with other similar companies located in Canada and the U.S. Nevertheless, this comparison may undermine SBS’, but at least it would help me decide if the company is doing well in this metric.

To be conservative, we’ll use SBS’s 2012-2014 and exclude the estimate and compare it with 10-year averages of three foreign companies.

1

Looks like my $ would be better serve elsewhere with this comparison. Okay, not to take anything away from SBS, SBS stated its competitors (p.24 of prospectus) namely: Himmel Industries, Inc., Neco Philippines, Inc., Alysons Chemical Enterprises, Inc., and subsidiaries of key global chemical distributors such as Brenntag Ingredients, Inc., DKSH and Connell Brothers and chemical producers such as BASF and Dow Chemicals.

I am not sure, but I don’t think not one of those competitors is listed in the PSE. Nevertheless, a related business would be D&L Industries as it is engaged also in food ingredient manufacturing and so on.

1

Wew, now, let’s compare them side-by-side.

1

I pretty much think that despite SBS not stating that D&L is a competitor, otherwise a customer as shown in their slide:

1

SBS still has some catching up to do.

One last metric I want to compare SBS with D&L’s is Inventory turnover.

This metric is more specific to what we’re looking for (higher = better).

Being conservative, I used SBS’ 2012-2014 average, same as D&L’s.

Here’s the graph:

1

Let us make the graph speak for itself.

Valuation

Okay, so how much do I think each SBS share should cost or what is its intrinsic value?

We’ll try to incorporate the PE valuation discussion before see this link

Remember SBS stated that they would want to offer 2.75 per share to the public. Take it or leave it. The company also stated their method of valuation in page on page 49 of their prospectus:

1

TMI (Too much information)? I guess so. Okay, let’s just play with numbers.

Offer price (Market price): 2.75

Earnings per share on March 31, 2015: 0.06; multiplied by 4 = 0.24 (2015 Estimate EPS)

So the company is plainly saying that they are offering their company to the public at a PE ratio of ~11 (2.75/0.24)

2.75 is indeed of a GOOD VALUE. Benjamin Graham likes a company priced <15 PE.

1

But as of 23:59 ET on 10/25/2015, the company has a market price of 6.47 per share.

That makes a PE of ~27. Overvalued.

If I will apply the simple PE average valuation I used in the blog before:

1

I’d arrive with a value of 2.88 per share. Well, that’s less than half of what the current price is at right now.

This valuation is very conservative—one may say, so I’ll include an EBITDA (earnings before interest, tax, depreciation and amortization) approach type of valuation.

The only required numbers that you need to get the value per share are the following:

The company’s EBITDA, multiple, and shares outstanding.

This is easy; we just have to get the company’s EBITDA, which is found on page 20:

1

Where is 2015? Well, SBS is still trying to work on that currently (it’s still 10/25/2015 at this time of writing).

So, conservatively speaking, since we don’t know 2015’s EBITDA yet. We’ll just use 2014’s EBITDA, that is 247,710,236.20

Next is shares outstanding, at this time the company has 1,200,000,000. This value can be found on p.53 of its prospectus:

1

So what do we have:

1

What is the Multiple?

You’ll be the one to decide what multiple you’ll use.

**An important note: I derive my intrinsic value using 41 different models, and a couple of those are discussed here. Here is a sample of my 41-different models at work:

1

I was trying to evaluate a U.S. oil company during that time.

Going back..

So, I do not say that performing the two valuation methods above would be enough for me to value SBS, but it would just give me an idea how much I would be willing to pay for each SBS share.

So what multiple? I see the number 9 as a conservative multiple. One can modify this and make it less or higher, it depends on you.

So,

EBITDA x 9 = 2,229,392,125.80

To get the intrinsic value per share using this approach, we just have to divide that huge number with shares outstanding:

2,229,392,125.80 divided by shares outstanding 1,200,000,000 = 1.86 per share.

1

Wow, such a very low value.

Okay, let us try to be less conservative and use 15 instead of 9. (Remember, I am strict on using 9, but we’ll just modify it here)

1

We arrive with 3.10 per share.

So, for the first valuation we have 2.88 and now we have 3.10. Averaging them both would give 2.99 per share. Compare this with its current share price.

*I hope I could spend more time and running SBS’ numbers through my 41 different model, but given its limited historical data (such as cash flow from operation, etc.)–I wouldn’t waste my time estimating other inputs in my models.

Going back to the basic PE valuation, 2.99 would give a PE of 12.45. This is still acceptable with Benjamin Graham’s valuation of PE <15 before engaging with any stock purchase.

1

You judge, if you’d want less math. Just multiply that EST. 2015 EPS with whichever multiple you like and get your own fair value–that’s how I’d do it.

Now, the worrisome picture

*we’re almost done by the way

Funds From Operations

I always take a look at a company’s cash flow if it really does produce positive cash flow from its operations.

Page 19 of its prospectus gave these numbers:

1

In table, this is how it looks like:

1

I always look forward to a company who can show a consistent positive cash flow for the past decade. In this case, negative cash flow is a bad sign for me. In addition, SBS has a limited (just 3 years) historical data that is available.

Nevertheless, the company appears to have a good result in this metric in 2014.

Debt to Equity

This data can be found on p.20 of its prospectus

1

I usually prefer <0.5. In this case the company placed it there as %, we just have to divide those numbers by 100 and have a decimal representation instead. Thus, it will be like this:

1

SBS did not meet my requirement.

One last thing, management compensation (p.117 of its prospectus):

1

Take note: *the majority of the current senior executives of the Company did not receive salaries from the Company prior to 2015.

I believe the company has been doing a good job over the years, why it will last for almost half a century if it has not done so?

Regardless, paying appropriate bonuses and salary is a must to facilitate competent business operations (better to compare with other companies—but I don’t find it worth the time to do it as of the moment). Rather, I would demand for the management to engage in full blast to produce more profit and enhance its asset turnover to increase shareholder return as a result.

*Note: I did not discuss the company’s decision on its dividend policy-another thing to consider.

In addition, it’s not bad that a company of just 87 people (page 95 of its prospectus) can produce a revenue of ~900 million pesos annually. The question is.. when will they show MORE GROWTH.

Doing simple math, each employee is earning ~10,344,827.59 pesos for the company.

1

In summary, SBS Philippines has a GOOD business, but I would not purchase its shares right now.

Maybe this IPO will help the company better its operations therefore rewarding future buyers of its shares.

“If you don’t have that self belief then fear will take over.” Novak Djokovic, the number one tennis player in the world today (mentioned by Howard Marks in his recent letter)

Disclosure: I am long Potash Corporation of Saskatchewan. I would not receive any compensation for doing this article. I am not a professional financial analyst. This is just a hobby. Lastly, my work is not error-free, but I strive for it to be. Do not consider as a buy or sell advice. Invest at your own risk.

If you are interested in this similar approach to investing and would seek updates, I wish to invite you to this Facebook group SEEKING VALUE (https://www.facebook.com/groups/SeekingValue/?ref=bookmarks)

Happy investing.

Mark Y.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s