Region: Philippines
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Fundamental View
AS OF 22 Apr 2024SMC’s FY23 credit metrics and EBITDA improved as we had expected from resilient broad demand recovery, lower power and O&G input costs, and good cost control measures.
We are comfortable with SMC’s large diversified operations and dominant market share in key sectors, which could outweigh its high airport and infrastructure capex.
We remain concerned about non-call risk for SMC GP’s c.2026 perps amid SMC GP’s firmly negative free cash flows and expectations that parental support could be unsustainable in the medium-to-long term.
Business Description
AS OF 22 Apr 2024- 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 22 Apr 2024SMC’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 22 Apr 2024PHP bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 64.9% | 65.2% | 66.4% | 72.3% | 71.6% |
Net Debt to Book Cap | 47.4% | 46.7% | 51.7% | 58.5% | 60.4% |
Debt/Total Equity | 184.7% | 187.0% | 197.9% | 261.3% | 251.9% |
Debt/Total Assets | 58.4% | 64.1% | 65.7% | 69.8% | 68.1% |
Gross Leverage | 6.7x | 10.9x | 8.1x | 9.1x | 8.4x |
Net Leverage | 4.9x | 7.8x | 6.3x | 7.4x | 7.1x |
Interest Coverage | 2.7x | 2.1x | 3.1x | 2.8x | 2.1x |
EBITDA Margin | 15.6% | 15.5% | 17.6% | 12.2% | 13.8% |
CreditSights View
AS OF 22 Apr 2024We have a Market perform recommendation on SMC. SMC’s Jul-2025 perp 140 bp wider than Ayala Corp’s c.Sep-2026 perp, which we think is fair given SMC’s worse liquidity position and persisting extension/refinancing risk of subsidiary SMC GP’s perps (notably the c.2026s) that negate SMC’s larger scale of EBITDA and stronger net leverage. We like SMC’s dominant market position in multiple sectors, long operating track record and diversified operations. Yet it incurs sizable airport and infrastructure capex that would likely keep its credit metrics elevated and free cash flows negative. We also remain watchful of SMC GP’s refinancing progress for its $3.3 bn of perps turning callable in 2024-2026.
Recommendation Reviewed: April 22, 2024
Recommendation Changed: April 05, 2023
Who We Recommend
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Fundamental View
AS OF 11 Mar 2024UnionBank of the Philippines (UBP) is rated Baa2 (neg) by Moody’s. The rating outlook was affirmed at negative in April 2023 due to uncertainty over the bank’s ability to shore up its capital buffers back to levels of domestic and regional peers, after being depleted by its acquisition of Citi’s local retail unit.
The bank has historically generated higher returns than peers, but trading-related income as a key contributor to profits introduces greater volatility to operating performance.
The bank has geared its focus significantly towards the retail segment in recent years, taking the retail proportion of total loans to more than half its total book with the Citi acquisition in 2022. This gives a good boost to core revenues but also brings along higher AQ risks in a growth downturn.
Business Description
AS OF 11 Mar 2024- UnionBank of the Philippines was incorporated in 1968, and listed on the Philippine Stock Exchange in June 1992. Principal shareholders are Aboitiz Equity Ventures (49.66%), Insular Life (16%), & Social Security System (18%).
- UBP undertook mergers with International Corporate Bank in 1994 and International Exchange Bank in 2006. City Savings Bank (a thrift bank) was purchased in Jan 2013. City Savings received merger approval with PR Savings (a bank engaged in motorcycle, agri-machinery, & teachers' salary loans) in Dec 2018 from the BSP. It acquired the Citi Philippines retail franchise in 2022.
- The loan book is broadly split 18% commercial loans, 26% corporate loans, and the remaining 56% retail loans (this includes teachers loans, salary loans and motorcycle loans by the thrift bank subsidiary, City Savings Bank).
Risk & Catalysts
AS OF 11 Mar 2024Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) or reduction of shareholding by Aboitiz Equity Ventures would negatively impact UBP’s credit ratings.
The bank is focusing heavily on the higher yielding retail segments to boost the NIM. This has strengthened topline revenues but brought up normalized credit costs. We have sounded caution given the current macro backdrop of high interest rates and inflation, while the bank’s reserve cover and capital levels are on the thinner side. Credit costs saw a particularly sharp jump in 2H23 and the NPL ratio has risen to ~6.3% from 4.8% a year ago.
We view the Citi acquisition as credit positive in the long term given the latter’s larger scale and greater strength in the upscale consumer market and wealth management businesses, high margins and strong profitability record. The upfront capital impact and integration costs are significant, but the bank benefits from good shareholder support.
Key Metrics
AS OF 11 Mar 2024PHP mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
PPP ROA | 2.26% | 2.68% | 2.59% | 2.17% | 2.31% |
Reported ROA (Cumulative) | 1.9% | 1.5% | 1.6% | 1.3% | 0.8% |
Reported ROE (Cumulative) | 15.3% | 11.5% | 11.5% | 9.7% | 5.6% |
Total Equity/Total Assets | 12.7% | 13.6% | 13.5% | 13.6% | 15.3% |
CET1 Ratio | 13.2% | 15.0% | 16.3% | 11.3% | 13.9% |
Gross NPL Ratio | 3.10% | 5.10% | 5.00% | 4.80% | 6.27% |
Net LDR | 81.2% | 64.3% | 63.1% | 67.4% | 73.8% |
Net Interest Margin | 3.60% | 4.50% | 4.60% | 4.80% | 5.50% |
Liquidity Coverage Ratio | 131% | 207% | 272% | 148% | 163% |
Net Stable Funding Ratio | 106% | 133% | 149% | 124% | 124% |
CreditSights View
AS OF 12 Mar 2024UBP’s NIM and core revenue generation have remained strong despite the challenging operating environment, thanks to its pivot towards higher yielding retail segments via organic growth and acquiring Citi’s local retail portfolio. We see the Citi acquisition as credit positive in the long haul as it provides a significant NIM uplift, but the upfront capital impact and integration costs are significant. We are cautious about asset quality given the heavy focus on growing in high yield retail amid headwinds from high interest rates and inflation, as well as a relatively thin reserve cover. Credit costs have jumped in 2H23 which weighed on the bottomline. We maintain UBP on U/P as it trades tight for its size, and its business model carries higher risks particularly if growth flags.
Recommendation Reviewed: March 12, 2024
Recommendation Changed: April 17, 2020