San Miguel Beer gets ‘strong buy’ rating

A leading investment house has rated San Miguel Brewery Inc. stock a “strong buy,” citing high profitability, strong brand loyalty, market dominance, and unmatched distribution as major deciding factors.

SMBI is set to debut in the Philippine Stock Exchange (PSE) on Monday, after a successful initial public offering (IPO). The offering is over-subscribed.

In a circular issued to investors recently, Asiasec Equities, Inc. said it gave its strongest recommendation for the 118-year-old brewer for several reasons.

“There is no doubt that the San Miguel Beer franchise stands out in terms of growth potential and profitability. Amongst other comparable businesses, it is actually priced at the lower end of the range,” the statement said.

It added that “in contrast to companies that priced themselves out leaving nothing for equity investors, SMB management’s decision to price at the low-end and to proceed with the IPO despite weak market conditions demonstrates that is not “greedy.”

The investment house, which is among the PSE’s top 10 brokerage firms, said the stock is worth “at least twice” the listing price.

“SMB is a cash cow with significant upside potential. It is a debt-free company with annual free cash flows in excess of $250 million. At 13x price earning ratio, and expected dividend yield of seven percent, the company is a strong buy,” the statement said.

It added that San Miguel Beer’s business is a highly profitable franchise and that the beer business has not yet reached its full potential.

With a population growth rate of 2.3 percent, an estimated one million beer drinkers enter the beer market annually.

With per capita consumption of 15 liters, the Philippine beer market still has room to grow before reaching consumption levels in neighboring countries, presently at 25-30 liters.

At its height in the 1990s, beer per capita consumption was 25 liters, until the excise tax system was drastically altered, affecting affordability.

Using the historical peak of 25 liters, the beer market potential of the Philippines is 22 million hectoliters, nearly double what it is today.

The report also stated that higher farm incomes due to rising commodity prices have had a very positive effect on San Miguel’s beer business, as reflected by its first quarter volume growth of 18 percent.

It added that earnings before interest, taxes, depreciation, and amortization (EBITDA) of $100 million also rose 31 percent year-on-year, confirming the business’ high operating leverage.

“The lower per capita consumption coupled with the fact that the Philippines still has one of the lowest prices for beer in the region will mean greater pricing flexibility to continue enjoying EBITDA margins in excess of 30 percent,” it said.

Consumer loyalty to SMBI’s iconic brand San Miguel Pale Pilsen and other market-leading brands, also plays a major role.

Over the past 20 years, competitor Asia Brewery has brought in well-known foreign brands such as Carlsberg, Budweiser, and Colt 45. All have failed to make a substantial dent on SMB’s market share which, from 82 percent in the late 90s, has increased to 95 percent to date.

Aside from consumers’ strong affinity for San Miguel brands, the excise tax and SMB’s unmatched distribution system have been the main barriers to entry for competitors.

In the current excise tax system, new brands fall in the highest tax category. New entrants are also likely to compete in the premium category, which is only three percent of the total beer market.

The efficiencies of SMB’s distribution system would also be hard to duplicate, the report said. Its returnable bottle system significantly reduces packaging costs, giving it the flexibility to offer beer at highly competitive prices.