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Sub-sector: Diversified Conglomerates
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 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 16 May 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 16 May 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 Metric
AS OF 16 May 2024| PHP bn | FY21 | FY22 | FY23 | 1Q23 | 1Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 66.4% | 72.3% | 71.6% | 70.9% | 71.8% |
| Net Debt to Book Cap | 51.7% | 58.5% | 60.4% | 60.0% | 60.4% |
| Debt/Total Equity | 197.9% | 261.3% | 251.9% | 243.9% | 254.9% |
| Debt/Total Assets | 65.7% | 69.8% | 68.1% | 68.0% | 67.6% |
| Gross Leverage | 8.1x | 9.1x | 8.4x | 8.8x | 8.2x |
| Net Leverage | 6.3x | 7.4x | 7.1x | 7.4x | 6.9x |
| Interest Coverage | 3.1x | 2.8x | 2.1x | 2.4x | 2.1x |
| EBITDA Margin | 17.6% | 12.2% | 13.8% | 12.3% | 12.5% |
CreditSight View Comment
AS OF 16 May 2024We have a Market perform recommendation on SMC. SMC’s c.Jul-2025 trades 140 bp wider than Ayala Corp’s c.Sep-2026, 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: May 16, 2024
Recommendation Changed: April 05, 2023
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Search topics about wealth insights and investments.Reliance Industries
- Sector: Manufacturing
- Sub Sector: Diversified Conglomerates
- Country: India
- Region: India
- Bond: RILIN 4.125 25
- Indicative Yield-to-Maturity (YTM): 5.531% (Indicative as of March 2)
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): Baa2 / BBB+ / -M/P
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Fundamental View
AS OF 24 Apr 2024We are comfortable with Reliance’s large diversified scale of operations and dominant presence in various key sectors (refining, petrochemicals, retail and telecom), which allows for earnings resilience.
We believe a lackluster oils-to-chemicals outlook is well mitigated by strong outlooks for telecom, retail, and upstream oil & gas.
Plans to ramp up its renewable energy business could provide the next leg of growth and improve ESG perception.
Reliance incurs significant capex that has weighed on free cash flow generation, though we acknowledge its historically prudent financial management and robust credit metrics that provide ample elbowroom for some credit profile deterioration.
Business Description
AS OF 24 Apr 2024- RIL is an Indian diversified conglomerate engaged in oil & gas refining, marketing, petrochemicals, organized retail, telecom and digital services, amongst others. It is the largest company in India by revenue, profits, exports and market capitalization (INR 20 tn).
- It is the second largest refiner in India and produces petroleum products such as petrol, high-speed diesel (HSD), aviation turbine fuel (ATF), LPG and lubricants.
- It is the largest petrochemicals producer in India, boasting production of ~38 mn tons in FY20. Through its integrated Jamnagar refinery complex, it produces Polymers/Plastics, Elastomers (synthetic rubber) and Polyester products.
- It is the largest retailer in India in terms of revenue. It operates 18.8k stores (as of March 2024) to sell products ranging from consumer electronics, fashion and lifestyle, grocery, petrol retail and telecom and digital services. It launched its online retail channel, 'JioMart', in December 2019.
- Reliance Jio is the largest mobile telecom operator by subscriber base (482 mn as of March 2024) in India and boasts the widest 4G wireless network in the country.
- In 2021, RIL announced investments to the tune of INR 750 bn/ $10 bn (for next 3 years) to build a renewable energy ecosystem which will include 4 giga factories. Set to be located in Gujarat, the factories will produce solar modules, hydrogen, fuel cells and battery grid to store electricity. Long-term goals also include building 100 GW of PV solar plants by 2030.
Risk & Catalysts
AS OF 24 Apr 2024Reliance’s O2C (oil-to chemicals) margins remain under pressure from high crude oil input costs, amid global growth slowdown concerns.
Reliance incurs significant capex at historically high levels, particularly from continued investments into its O2C, retail, and nascent renewables businesses, upfront payment on telecom spectrum and acquisition of Disney India. This has weighed on its free cash flow generation, though we take comfort in Reliance’s historically prudent financial management and robust credit metrics.
Reliance faces key-person risk; 65-year old Chairman Mukesh Ambani has begun to hand over the reins of the company’s different business divisions to his children.
Key Metric
AS OF 24 Apr 2024| INR bn | FY20 | FY21 | FY22 | FY23 | FY24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 43.0% | 24.6% | 24.1% | 28.7% | 27.2% |
| Net Debt to Book Cap | 39.2% | 22.9% | 21.0% | 22.8% | 19.6% |
| Debt/Total Equity | 75.5% | 32.5% | 31.7% | 40.3% | 37.4% |
| Debt/Total Assets | 29.9% | 19.7% | 18.8% | 20.8% | 19.7% |
| Gross Leverage | 3.9x | 3.2x | 2.6x | 2.3x | 2.1x |
| Net Leverage | 3.5x | 3.0x | 2.2x | 1.9x | 1.5x |
| Interest Coverage | 3.2x | 3.1x | 5.7x | 5.0x | 7.0x |
| EBITDA Margin | 14.7% | 16.6% | 15.3% | 16.0% | 17.7% |
CreditSight View Comment
AS OF 29 May 2024We have a Market perform recommendation on Reliance (RIL). RIL’s bonds trade fairly to closely rated Indian peers Bharti Airtel and BPCL. We like RIL’s large diversified operations and dominant market shares in key sectors (refining, retail and telecom) that allow for earnings resilience. Its growing renewable business could aid ESG investor sentiment too. While we remain aware of RIL’s elevated capex needs could persist over the next 3-5 years, we think the impact is mitigated by RIL’s prudent financial management and healthy credit metrics that provide ample elbowroom for some credit profile deterioration. While key man risk remains a concern, we take comfort in gradually progressing succession plans.
Recommendation Reviewed: May 29, 2024
Recommendation Changed: June 30, 2021
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