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Credit Rating: O/P
San Miguel Corporation
- Sector: Manufacturing
- Sub Sector: Diversified Conglomerates
- Country: Philippines
- Region: Philippines
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): O/P
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Fundamental View
AS OF 16 May 2023SMC holds a dominant market position in various sectors of the Philippine economy, has a long operating track record, and a diversified business profile that provides greater earnings resilience.
SMC incurs significant capex, particularly in its power/energy and infrastructure businesses. This could keep SMC’s credit metrics elevated and free cash flows negative.
We remain concerned about the weak credit profile of its power arm SMC Global Power (SMC GP), and see heightened extension/refinancing risk for its $3.3 bn of perpetual bonds that are first callable in 2024-2026.
Business Description
AS OF 16 May 2023- SMC is a massive conglomerate in the Philippines with business interests across six business segments: Food & Beverage (F&B), fuel refining and retailing, power, packaging, infrastructure, and others.
- Its F&B business is operated through San Miguel Food & Beverage, the largest F&B company in the Philippines with three main divisions: Beer and Non-alcoholic Beverage (including beers and juices), Spirits (gin and Chinese wine), and Food (including packaged foods, animal feeds, poultry and fresh meats).
- SMC’s fuel refining and retailing business is operated through Petron Corporation (~68% stake), the largest oil refining and retailing company in the Philippines, and one of the largest in Malaysia. Petron has a total refining capacity of ~268k barrels/day.
- SMC’s power business is operated through SMC Global Power Holdings (SMC GP, 100% stake), one of the largest power generating companies in the Philippines. It maintains a diversified portfolio across coal (62%), natural gas (26%), and renewable energy (12%) sources.
- Through its packaging business, it manufactures glass containers, plastic crates, pellets, bottles and caps, aluminium cans, and other types of packaging products.
- It operates its Infrastructure business through San Miguel Holdings Corp (SMHC), in which it holds a 100% stake. It currently operates ~190 km of toll roads in the country, connecting high-traffic, arterial routes in Luzon.
Risk & Catalysts
AS OF 16 May 2023SMC’s revenues are concentrated in the Philippines (~80%), which poses geographical concentration risk.
SMC incurs significant capex, particularly in its power/energy and infrastructure businesses. In October 2020, SMC began construction of the mega New Manila International Airport (requires ~PHP 750 bn of capex spread over 5-7 years). This could keep SMC’s credit metrics elevated and free cash flows in negative territory.
As a holding company, SMC is reliant on dividend upstreaming from its operating subsidiaries to service its debt, which can be difficult should the operating subsidiaries face cash flow difficulties. We are particularly concerned about SMC GP’s weak financial profile and extension/refinancing uncertainties of its $3.3 bn perpetuals that are first callable from 2024-2026.
SMC operates in the businesses of thermal power generation and fuel refining, which may be looked at unfavourably by some ESG-focused investors.
Key Metrics
AS OF 16 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 65.2% | 66.4% | 72.3% | 66.6% | 70.9% |
| Net Debt to Book Cap | 46.7% | 51.7% | 58.5% | 51.9% | 60.0% |
| Debt/Total Equity | 187.0% | 197.9% | 261.3% | 199.1% | 243.9% |
| Debt/Total Assets | 64.1% | 65.7% | 69.8% | 65.4% | 68.0% |
| Gross Leverage | 10.9x | 8.1x | 9.1x | 7.8x | 8.8x |
| Net Leverage | 7.8x | 6.3x | 7.4x | 6.1x | 7.4x |
| Interest Coverage | 2.1x | 3.1x | 2.8x | 3.3x | 2.4x |
| EBITDA Margin | 15.5% | 17.6% | 12.2% | 14.7% | 12.3% |
CreditSights View
AS OF 16 May 2023We have a Market perform recommendation on SMC. SMC’s Jul-2025 perp (mid-YTW: 10.1%) trades 400 bp wider than Ayala Corp’s c.Oct-2024 perp (mid-YTW: 6.1%), which we think is fair given SMC’s poorer net leverage (7.4x vs. 6.6x), worse liquidity position and heightened extension/refinancing risk of subsidiary SMC GP’s $3.3 bn of perps that negate SMC’s larger scale of EBITDA. We like SMC’s dominant market position in multiple sectors, long operating track record and diversified operations. Yet we acknowledge it incurs sizable capex that would likely keep its credit metrics elevated and free cash flows negative. We are also concerned about how SMC GP intends to refinance its wall of perps that are first callable in 2024-2026, which we think will be aided largely by parental support from SMC.
Recommendation Reviewed: May 16, 2023
Recommendation Changed: April 05, 2023
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