The rating reflects URC’s established market position in the Philippines, and its low-cost structure that supports satisfactory operating margins. The strengths are, however, partly offset by weaknesses such as URC’s high capital outlay and execution risks in connection with its international growth strategy, and earnings exposure to volatile raw material costs and supply and foreign exchange movements. The close linkage between URC’s financial policy with that of its parent, JG Summit Holdings, Inc., is another factor that constrains the rating.
"The stable outlook is based on URC’s strong competitive position and low-cost operations, and reflects the expectation that the company will not be required to provide financing or other type of support to related parties," said Standard & Poor’s credit analyst Ee-Lin Tan of the Corporate and Infrastructure Ratings Group.
URC is one of the largest food companies in the Philippines, with a wide range of consumer food products contributing to most of its revenue. In recent years, URC has established operations in several Asian markets, including Thailand, Malaysia, and Indonesia.
URC is 86 percent owned by JG Summit, one of the largest business conglomerates in the Philippines. URC’s diversified portfolio of products and strong brands mitigates the effect of intense competition in the domestic branded consumer food industry. Its wide distribution network also covers diverse regions of the Philippines and contributes substantially to its ability to dominate the market.
The company also enjoys strong bargaining power with its suppliers, economies of scale, low labor costs, and proximity of production facilities to end markets. "These factors support URC’s relatively favorable cost structure and ability to price competitively," said Ms. Tan. The company’s operating margins averaged 16 percent a year in the past three years.
Growth depends on the company’s ability to expand its overseas Asian markets, which could help diversify its earnings and provide good growth opportunities. However, the company faces intense competition and execution risks, particularly in newer markets such as Vietnam and China.
URC’s rating is also constrained by the exposure of its earnings to raw material supply and cost uncertainties. In addition, the company is vulnerable to adverse foreign exchange fluctuations as about two-thirds of its cost base is in dollars, while the majority of its revenue is in Philippine pesos.
The company’s financial policy is closely linked with that of its parent, which has a more aggressive capital structure. Major financing decisions require the approval of JG Summit, which also manages URC’s excess cash. URC’s total debt-to-total capitalization stood at 44 percent at Sept. 30, 2003, while JG Summit’s total debt-to-total capitalization was at 56 percent. Furthermore, certain entities in the group are financially weaker or could incur more debt to fund their expansion, particularly Digital Telecommunications Philippines Inc.
URC has previously been used as a conduit to raise lower-cost capital for the group. However, lending to related companies shrank to P218 million at Sept. 30, 2003, compared with P6.8 billion at Sept. 30, 2001, in line with management’s policy to limit lending between related companies.
URC’s liquidity profile was strong as at Sept. 30, 2003, with current debt of P5.2 billion more than sufficiently covered by total cash and short-term investments of P16.7 billion.