Pepsi Cola Philippines is Undervalued

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Pepsi’s numerous vice presidents and directors should consider handing out more dividends

Stock: Pepsi-Cola Products Philippines Inc. (PCOMP: PIP) 

Pepsi Cola Products Philippines, a ₱11.08 billion (Philippine peso) Muntinlupa-based beverage company, currently trades near its one-year low at ₱3 per share. Pepsi trades at 14.3x P/E (vs. 16.41x sector) and 1.2x P/B (vs. 3.44x sector). Pepsi also had a 2.3% dividend yield.

Founded in 1989, the 28-year-old Pepsi sells several products including Pepsi Max, 7 Up, Gatorade, Lipton, Cheetos, Lays, and etc. Only 0.05% of the company’s sales were generated from abroad.

Major Pepsi shareholders include a 38.9% ownership by a Korean conglomerate, Lotte Chilsung Beverage, and another 25% is owned by Dutch-based Quaker Global Investments.

In its recent six months of operations, Pepsi reported -1.7% decline year over year in its revenue (vs. 3-year average growth of 10.52%) to ₱17.9 billion, and -16.3% profit drop (3y ave. -1.89%) to ₱468.1 million.

Pepsi reasoned out that it experienced the slowdown in its business brought by ‘overlap of last year elections’ and ‘unrest in Mindanao.’ The beverage company also stated it spent more on manufacturing footprint thus leading to lower profits for shareholders in the period.

In particular, Pepsi’s carbonated soft drinks business (73% of revenue) experienced -2.5% revenue decline and maintained segment margin profitability of 23.3% compared to its year-earlier operations. The carbonated soft drinks business, which includes brands Pepsi-Cola, 7Up, Mountain Dew, Mirinda, and Mug, has consistently been the revenue generator of more than 65% for Pepsi in recent years.

Pepsi’s non-carbonated beverages, which include Gatorade, Tropicana/Twister, Lipton, Sting energy drink, Propel fitness water, Milkis and Let’s be coffee, delivered weak -4% revenue growth while also having maintained 23% segment profitability.

More interestingly, a consistent loss-generating business—Pepsi’s snacks segment (Cheetos and Lays)—delivered significant 79% jump in revenue but still delivered a loss of ₱7 million in the period vs. ₱18 million losses a year earlier.

Meanwhile, Pepsi had ₱551 million in cash and ₱4.2 billion in debt (+₱54 million vs. one year earlier) with debt-equity ratio of 0.45x (vs. 0.47x last year). Overall equity rose ₱518 million to ₱9.38 billion in June.

In the past three years, Pepsi allocated ₱8.7 billion in capital expenditures, raised ₱931 million in debt/other financing activities (net repayments), and provided ₱488 million in dividends representing 19.6% of its accumulative ₱2.49 billion in free cash flow.

COL Financial, a leading brokerage in the Philippines, recently (10/3/2017) recommended for investors to ‘SELL INTO STRENGTH’ without providing any target price. Applying three-year revenue growth and PS multiple averages and a 15% margin indicated a per share figure of ₱3.86 a share vs. ₱3 at the time of writing, indicating a possible 28% upside.

Pepsi does exhibit steady business growth in recent years except for its recent six months of operations. The company’s decision to mention ‘unrest in Mindanao’ affecting its business makes some investors question management’s competence in transparency as NO exact figures were provided—geographically—in how much Pepsi exactly makes in the island.

Meanwhile, the presence of Pepsi’s major shareholders would hopingly keep the company from diluting its existing shareholders from issuing more shares as it never did in recent years, while its strong balance sheet and plentiful cash flow should raise shareholders demand of more dividend payouts.

Pepsi has kept its allocation to dividends flat in recent years.

Brought by good upside to a conservatively calculated per share figure of ₱3.86, somewhat reliable management (to mention 11 vice presidents and seven directors), and potential dividend payouts in the future, Pepsi is a buy.

Disclosure: I have shares in Pepsi Cola Products Philippines.

*If you are one of the Pepsi Philippines board members/directors/vice presidents, I urge you to consider raising the idea of allocating more cash flow to dividends in your next board meeting as this would better serve not only the minority shareholders but also lift confidence in your major shareholders, Lotte and Quaker. This blog and its contents also have been forwarded to the aforementioned major shareholders as of its publication date (10/12/2017).

Letters including this blog were printed and sent to your office addressed to the Korean CEO Yongsang You; Quaker European Investments @Zonnebaan 35, 3542 EB Utrecht, Netherlands; and Lee Jae-hyuk of Lotte Chilsung Beverage @269, Olympic-ro, Songpa-gu, Seoul, Korea.

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Tempted Juicy Dividend Yields: Huaneng Power International

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Significant payouts accompanied by other unappealing findings make Huaneng a pass

Stock: Huaneng Power International Inc (ADR)(NYSE:HNP) 

Huaneng Power International, $13.9 billion Beijing-based and one of the China’s largest independent power producers, has a very appealing 6.8% dividend yield with a 118% payout ratio in the recent 12 months.

The 23-year-old power producer recently reported its first half operations that ended in June whereby it delivered a 34% (vs. 3-year ave. -5.34%) revenue increase year over year to ¥70.8 billion (Chinese Yuan) and a contrasting 96% drop (vs. 3-year ave. -6.51%) in profits to ¥244 million compared to its year-earlier period.

Huaneng recorded 29.4% higher in operating expenses resulting in lower profits. In particular, the company had 90% higher fuel expenses or ¥20.84 billion more in the recent period compared to one year earlier.

Looking at its balance sheet, Huaneng had ¥12.2 billion in cash and cash equivalents, and ¥241.5 billion in debt (¥77.3 billion higher vs. last year) with debt-equity ratio 3 times (vs. 1.95 times a year earlier). Overall equity also declined by ¥2 billion to ¥82.2 billion.

In the recent half, Huaneng’s free cash flow declined to ¥1.08 billion compared to ¥12.1 billion a year earlier brought by lower profits in the period.

In the past three years, Huaneng allocated ¥64.9 billion in capital expenditures, reduced its debt by ¥27.7 billion (net issuances and other financing activities), raised ¥7.1 billion in share issuances, and provided ¥18.08 billion in dividends representing 42.8% of its free cash flow ¥42.3 billion.

Analysts have an average hold recommendation with $27.75 target price vs. $24.81 at the time of writing. Meanwhile, declining revenue, higher expenses, and leveraged balance sheet makes Huaneng a pass.

Disclosure: I do not have shares in any of the companies mentioned.

Take a Pass on Office Depot

1Dividend yield and discounted valuations do not compensate of dire outlook for the brick and mortar operator

Stock: Office Depot Inc(NASDAQ:ODP)

Office Depot, a $2 billion retail store operator, recently experienced a share price drop of 17% after its announcement of its $1 billion takeover of CompuCom. According to Bloomberg, Office Depot also announced a 7-8% decline in same-store sales (critical metric for retail store operator) in the recent quarter and another 5-6% drop in the next quarter brought by the company’s affinity to Florida and Texas post-hurricane aftermath.

Meanwhile, Office Depot has an appealing 4.4x P/E ratio (vs. industry 44x), trades at its book value with a dividend yield of 2.5% with 9.4% payout ratio. Including share buybacks, however, payout ratio rose to 39% in the recent 12 months.

Taking a look at the retail store’s recent six months operations, the company had experienced 25.5% revenue decline to $5.04 billion and a more disappointing 45.3% drop in profits to $140 million. Comparable store sales, which relate to stores that have been open for at least one year, fell 5% in the first half compared to 1% decline a year earlier.

Office Depot’s balance sheet carried a cash of $763 million in cash and cash equivalents and $1.16 billion in debt ($300 million less vs. its year-earlier period). Meanwhile, equity rose $115 million to $1.98 billion. The company’s cash also fell by 25% brought by lower profits, capital expenditures, and borrowing repayments.

In the past three years, Office Depot allocated $397 million in capital expenditures, reduced its debt by $327 million, paid out $158 million in dividends and share repurchases, while having generated $377 million in free cash flow.

Analysts have an average hold recommendation with a target price of $4.53 vs. $3.97 at the time writing. Conservatively, I’d personally wait for the share price to trade about 30% discount off the current book value prior to considering purchasing Office Depot shares.

Despite the focus on debt reduction and a recent acquisition, Office Depot is a pass.

Disclosure: I do not have shares in Office Depot.

 

Consider Steel Partners Holdings’ Preferred Shares

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Company placed reasonable clause surrounding dividend payouts

Stock: Steel Partners Holdings LP(NYSE:SPLP) 

Steel Partners Holdings LP, a $480 million New York-based private investment firm, currently traded at 20% discount its book value (about same as its 3-year average). The firm does not pay a dividend on its common shares but has an attractive fixed 6% dividend yield on its preferred units (ticker SPLP-A).

In its recent six months operations, Steel Partners’ revenue increased 28.7% (vs. 3-year ave. 13.1%) year over year to $681.7 million and a contrasting 36.4% decline (vs. 3-year ave. -30.2%)  in profits to $7.2 million.

The investment firm recorded 31% higher costs and expenses resulting in lower profitability in the period.

Warren Lichtenstein, Executive Chairman of Steel Partners

“Operating results for the second quarter reflected solid performances by our Diversified Industrial and Energy segments, including contributions from acquired operations, along with reduced corporate expense, partially offset by lower contributions from our Financial Services segment.

“While expectations for the quarter and first half of 2017 were achieved, the high end of the Adjusted EBITDA guidance range for the remainder of the year has been adjusted downward to reflect the outlook in our Diversified Industrial segment, including weaker than anticipated demand, a shift in product mix, and expected higher material costs, partially offset by an improved outlook in our Financial Services and Energy segments.”

Steel Partners is managed by an entity called SP General Services LLC (SPGSL) in which five of SPGSL board members are appointed by no other than Warren G. Lichtenstein, Steel Partners’ executive chairman and owns 14.4% stake in the company itself. SPGSL, on the other hand, owns 28.4% of Steel Partners whereby the 51-year-old Lichtenstein also serves as the chief executive.

In addition to annual expenses of SPGSL answered for by Steel Partners, the company pays an annual rate of 1.5% of its capital to SPGSL and was at $8.6 million in the recent fiscal year.

Founded in 1990, Steel Partners owns and operates businesses and has significant interests in companies in various industries, including diversified industrial products, energy, defense, supply chain management and logistics, banking and youth sports.

The company operates through the following segments: Diversified Industrial (86% of 1H unadjusted revenue), Energy (9%), Financial Services (5%), and Corporate and Other.

Steel Partners have several direct/indirect ownerships of companies including Handy & Harman (which will be totally acquired through a merger agreement as of June 26), API Group plc, Steel Excel, and Utah-based WebBank.

For some reason, Steel Partners’ energy business has failed to generate any profits in recent years, including the first half of its operations. The company’s stake in WebBank has help it generated good business in recent years as the bank itself had a healthy Tier 1 Capital ratio of 29.7% as of June compared to 33.3% in December 2016.

As of June, Steel Partners had $338 million in cash and cash equivalents, and $390 million in debt (+$14 million from a year earlier) with debt-equity ratio 0.65 times (vs. 0.65 times a year earlier). Overall capital also increased by $16.5 million to $595.7 million.

In the past three years, the company allocated $86 million in capital expenditures, raised $353 million in debt and other financing activities (net repayments), handed out $202 million in share repurchases despite a free cash flow generation of $171 million in the period.

With a good amount ownership interest and focus on building its diversified industrial business (86% of unadjusted revenue), Steel Partners’ preferred shares seem to be a good pick. The company, nonetheless, should probably eliminate its declining energy business as it only encroaches on its capacity to deliver profitability.

Using recent historical revenue growth and multiples and a 15% margin indicated a per share figure of $21.51 vs. $18.45 at the time of writing.

Dividend investors, meanwhile, might want to take some risk on Steel Partners’ preferreds that currently traded at $21.05 compared to a potential redemption of $25, plus yearly dividends. A caveat, reviewing its clauses triggered some interesting findings that actual liquidation value could be less than $25 depending on the company’s capability on allocating cash to such.

SEC Filings Snippets (link to file)

Distributions

Distributions on the SPLP preferred units will be payable when, as and if declared by the SPLP GP Board out of funds legally available, at a rate per annum equal to 6.0% of the $25.00 liquidation preference per unit. Distributions are payable in cash or in kind or a combination thereof at the sole discretion of the SPLP GP Board. The liquidation preference per unit for purposes of calculating distributions will not be adjusted for any changes to the capital account balance per unit as described below under “— Amount Payable in Liquidation.”

Amount Payable in Liquidation

Upon any voluntary or involuntary liquidation, dissolution or winding up of our partnership (“liquidation”), each holder of the SPLP preferred units will be entitled to a payment out of our assets available for distribution to the holders of the SPLP preferred units following the satisfaction of all claims ranking senior to the SPLP preferred units. Such payment will equal the sum of the $25.00 liquidation preference per SPLP preferred unit and accumulated and unpaid distributions, if any, to, but excluding, the date of liquidation (the “preferred unit liquidation value”), to the extent that we have sufficient gross income (excluding any gross income attributable to the sale or exchange of capital assets) in the year of liquidation and in the prior years in which the SPLP preferred units have been outstanding to ensure that each holder of SPLP preferred units will have a capital account balance equal to the preferred unit liquidation value.

The capital account balance for each SPLP preferred unit will equal $25.00 initially and will be increased each year by an allocation of gross ordinary income recognized by us (including any gross ordinary income recognized in the year of liquidation) that is allocated to the SPLP preferred units, as described above in “Material U.S Federal Income Tax Consequences.” We refer to our gross income (excluding any gross income attributable to the sale or exchange of capital assets) as our “gross ordinary income.” The allocations of gross ordinary income to the capital account balances for the SPLP preferred units in any year will not exceed the sum of the amount of distributions paid on the SPLP preferred units during such year and, to the extent the amount of our distributions in prior years exceeded the cumulative gross ordinary income allocated to the capital account balances for the SPLP preferred units in those years, the amount of such excess for all prior years. If the SPLP GP Board declares a distribution on the SPLP preferred units, the amount of the distribution paid on each such SPLP preferred unit will be deducted from the capital account balance for such SPLP preferred unit, whether or not such capital account balance received an allocation of gross ordinary income in respect of such distribution. The allocation of gross ordinary income to the capital account balances for the SPLP preferred units is intended to entitle the holders of the SPLP preferred units to a preference over the holders of outstanding common units upon our liquidation, to the extent required to permit each holder of a SPLP preferred unit to receive the preferred unit liquidation value in respect of such unit. If, however, we were to have insufficient gross ordinary income to achieve this result, holders of SPLP preferred units would be entitled, upon liquidation, to less than the preferred unit liquidation value and may receive less than $25.00 per SPLP preferred unit. See “Risk Factors — If the amount of distributions on the SPLP preferred units is greater than our gross ordinary income, then the amount that a holder of SPLP preferred units would receive upon liquidation may be less than the preferred unit liquidation value.”

DisclosureI do not have shares in any of the companies mentioned.

Singapore’s SIA Engineering’s Stock Fell As JP Morgan Offered to Sell Its Stake

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Bargain hunting leads to a pass

SIA Engineering (ticker S59) 

The share price of SIA Engineering, a $3.6 billion Singapore-based and one of the world’s leading maintenance, repair, and overhaul (MRO) organization, recently fell to its six-year low for reasons not known by the management except for a JP Morgan selling its entire 38.9 million shares of the company.

Interestingly, SIA still exhibited a good premium to its price-book valuation at 2.3 times albeit lower than its 3-year average 3.1 times. The company also had a trailing dividend yield of 4.1% with 79% payout ratio.

According to filings, SIA is a one-stop maintenance facility in Singapore offers world-class MRO services to a client base of more than 80 international airlines and aerospace equipment manufacturers.

The company also has its growing portfolio of 24 joint ventures in 8 countries, forged with strategic partners and leading original equipment manufacturers. SIA also holds certifications from 27 national airworthiness authorities worldwide.

In its recent quarter that ended in June, SAI reported 0.4% revenue growth (vs. 3-year average -2.14%) to S$273 million and profits of S$36 million—a poor 81.8% drop (vs. 3-year average 7.75%) compared to its prior year period.

Nonetheless, the marked decline in the recent period was brought by SAI’s gain from its divestment of 10% stake in Hong Kong Aero Engine Services Ltd to Rolls-Royce Overseas Holdings Limited and Hong Kong Aircraft Engineering Company Limited. Excluding the impact of SAI’s divestment in the quarter ended 30 June 2016, profit for the current quarter was 4.7% lower vs. the initial 81.8% drop.

As of June, SIA had S$47 million in cash and cash equivalents and S$28 million in debt with debt-equity ratio of 0.02 times (vs. 0.02 a year earlier). Overall debt declined by S$8 million while equity rose by S$32 million to S$1.58 billion.

In the past three years, SIA allocated S$164 million in capital expenditures, raised S$42 million in debt, generated S$159 million in free cash flow, and provided $570 million in dividend payouts and share repurchases at an average ratio of 445% of SAI’s free cash flow.

SAI has exhibited still no positive revenue growth as of its recent quarter compared to its prior year of operations, while profits have also been in a little similar trend as of the recent period. Nonetheless, the Singaporean MRO service provider has demonstrated a strong balance sheet accompanied by hefty and generous amounts of payouts to its shareholders.

Using historical revenue decline rate and price-sales multiple averages followed by a 15% margin indicated a per share figure of S$3 vs. S$3.21.

In summary, SAI is a hold.

Disclosure: I do not have shares in any of the companies mentioned.

Investors Are Pissed: Dixons Carphone PLC

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Dividend payouts have not compensated well enough for shareholders of the past year

Stock: DIXONS CARPHONE ORD GBP0.001(OTCMKTS:DSITF) 

Dixons Carphone PLC, a $2.9 billion multinational electrical and telecommunications retailer and services company headquartered in London, United Kingdom, recently traded at a good 30% discount to its book value while having had an attractive 6% dividend yield at a 39% payout ratio.

In its recent 12 months of operations that ended in April, the three-year-old company reported 8.7% revenue growth to £10.6 billion (vs. 3-year average 441%) and profit growth of 83.2% to £295 million (vs. 3-year average 183.2%).

All of Dixons’ segments demonstrated revenue in its recent year. Its UK & Ireland (62% of total unadjusted sales) delivered 2.6% revenue growth, while its business in the Nordics, Southern Europe, and Connected World Services experienced 20% to 40% year over year revenue growth.

Connected World Services, which is 2% of total unadjusted sales, registered an outstanding 40% revenue growth in the past 12 months and an EBIT margin of 9.9% (most profitable) compared to 7.2% a year earlier period.

As of April, Dixon had £147 million in cash and £480 million in debt with debt-equity ratio of 0.16 times (vs. 0.17 times a year earlier). Overall debt declined by £20 million while equity rose £195 million to £3.06 billion.

In the past couple of years, Dixon allocated £463 million in capital expenditures, generated £295 million in free cash flow, reduced its debt by £51 million, and provided £226 million in dividends and share repurchases at an average payout ratio of 79%.

Analysts have an overweight recommendation with a target price of £250.24 vs. £193.40 at the time of writing. Asking 25% margin from Dixon’s book value indicated a per share figure of £224.24 a share.

Meanwhile, Dixons’ shares that trade in the over-the-counter market, would indicate a per share figure of $3 vs. $2.48 at the time of writing.

For sure, this would indicate that Dixon is at good value right now, but sifting through recent events regarding the company. Several shareholders are already wary that the company had cut its profit outlook this fiscal year along with its share price decline in recent years.

In summary, Dixons is a hold at this time.

About Dixons Carphone PLC

According to filings, Dixons’ core retail focus is the sale of consumer electricals and mobile phone products and connectivity.

The company also has a significant services infrastructure focused on maintenance, support, repairs, delivery and installation of hardware and services. In addition, Dixons has developed a business-to-business operation via its Connected World Services division which leverages the specialist skills, operating processes and technology of the business to provide services to third parties.

Disclosure: I do not have shares in any of the companies mentioned.

European Dividend Provider: Klépierre

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Steady business performance ensures dividend security despite generous payouts

Stock: KLEPIERRE EUR1.40(OTCMKTS:KLPEF

 

Klépierre, an $11.8 billion leading shopping center specialist in Europe, exhibited an attractive 5.2% dividend yield with 48% payout ratio.

The 27-year-old Paris-based company with property portfolio made up of 156 shopping centers in 16 countries of Continental Europe recently reported its first half operations.

In the recent six months, Klépierre reported 1.3% (vs. 3 year ave. 6.4%) higher gross rental income to € 611.7 million and a 3.8% (vs. 3 year ave. 181.2%) rise in profits to €570 million—representing a very profitable margin of 93.2%.(vs. 3 year ave 44.5%).

Klépierre records significant profits brought by its income in ‘change in its value of investment properties,’ which was at €400.5 million in the first half compared to €398.4 million a year earlier.

In review, Klépierre experienced steady growth in all of its businesses in the Europe region except for its business in Scandinavia and Germany, ~20.7% of total unadjusted gross income.

The property specialist also recorded a cash position of €461 million and €9.67 billion in debt with debt-equity ratio of 0.98 times (vs. 1.85 times a year earlier). In the period, overall debt fell by €194 million while equity rose €4.52 billion to €9.86 billion.

Klépierre’s cash flow from operations in the first half rose 4.5% year over year to €531 million, capital expenditures were €140 million leaving the company with €391 million in free cash flow (vs. €358 million a year earlier). Dividend payouts represented 143.7% of free cash flow (vs. 71.7% in the past three years).

Klépierre also was a net debt payer in the past three years having reduced overall debt (plus other financing activities) by €2.65 billion. Accumulatively, it also generated €1.7 billion in free cash flow and provided €1.23 billion in dividend payouts.

Meanwhile, analysts have observed that Klépierre has fallen 21% in the past year, and fear that Amazon (ticker AMZN) would further impact overseas sentiment and operations of traditional retailers.

Analysts also have an overweight recommendation on Klépierre with a target price of $41.72 a share vs. $38.35 at the time of writing. Applying past P/S multiple average, 15% margin, and average revenue estimates for this fiscal year indicated a per share figure that would be 11.7% lower than today’s share price.

In summary, Klépierre is a hold right now and trading at its value.

Disclosure: I do not have shares in any of the companies mentioned.