TUESDAY, 11 AUGUST 2015

Universal Robina Corporation:

Slowing growth prospects already priced in, upgrading to BUY

3QFY15 core income up Php10.8% to Php3.9Bil. URC reported 3QFY15 core income of
Php3.9Bil, higher by 10.8% y/y. This brought 9MFY15 core income to Php12.2Bil, higher by
14.1% y/y. Results missed estimates, accounting for 73.7% of our full year forecast due to weak
sales from the domestic branded segment during 3QFY15. Domestic branded sales grew by
only 1.7% during the quarter due to high base effects, lower sales in the Visayas-Mindanao
region, and PET capacity constraints. However, the weakness in revenues was partially offset
by better-than-expected margins. Operating margin improved by 100 basis points to 16.0% in
3QFY15 due to sales mix and higher volumes leveraging on the fixed expense base.
Domestic sales flattish in 3Q as coffee comes off a high base. URC reported that sales
of the domestic branded segment grew by only 1.7% in 3QFY15. This was partially due to
coffee coming off a high base. Recall that URC implemented a 12% price increase for coffee in
May 2014. Trade loading ahead of the price increase also contributed to tougher year-on-year
comparables. Nonetheless, despite heightened competition, URC was able to defend and even
increase its market share in coffee by one percentage point to 30%. Management highlighted
that it will deploy resources as necessary to defend its share but that it will be prudent in doing
so.
Slower growth outlook priced in, upgrading to BUY. We are reducing our sales growth
forecast to factor in decelerating market share growth in coffee. Assuming URC grows its coffee
business in line with the industry, we estimate that domestic branded foods to grow at a 5-year
CAGR of 8%. This is already conservative in our view given that domestic branded sales growth
has averaged 14.8% over the past 10 years. At the same time we are rolling over to end-2016
estimates. Consequently, our FV estimate fell slightly to Php228/sh from Php230/sh. Our new
FV estimate implies a 2016E P/E of 33.5X. We are also upgrading our rating on URC to BUY
as we believe much of the risk has been priced in. Note that since it reached a high of Php234/
sh last April, URCs share price has gone down by 14.5% as investors were already bracing
for a disappointing set of second quarter earnings results. However, even after factoring in a
conservative growth outlook for domestic sales growth, capital appreciation potential based on
our reduced FV estimate remains significant at 14%.
FORECAST SUMMARY

Year to September 30 (Php Mil)

Revenues
% change y/y
Operating Income
% change y/y
Operating Margin (%)
Core Profits
% change y/y
Core Profit Margin (%)
Net Income
% change y/y
Net Profit Margin (%)
EPS
% change y/y

RELATIVE VALUE
P/E(X)
P/BV(X)
ROE(%)
Dividend Yield (%)
Source: URC, COL est imat es

2012
71,204
6.0
7,810
13.0
11.0
8,377
17.6
11.8
7,763
66.8
10.9
3.70
63.7

2013
80,995
13.8
10,279
31.6
12.7
11,263
34.4
13.9
10,045
29.4
12.4
4.60
24.3

2014
92,376
14.1
14,119
37.4
15.3
14,214
26.2
15.4
11,559
15.1
12.5
5.30
15.2

2015E
111,577
20.8
17,580
24.5
15.8
16,382
15.2
14.7
12,944
12.0
11.6
5.93
12.0

2016E
122,478
9.8
19,730
12.2
16.1
18,749
14.5
15.3
14,866
14.9
12.1
6.81
14.9

54.7
9.2
16.8
0.9

43.4
8.6
19.8
1.2

37.7
7.8
20.7
1.5

33.7
7.1
21.1
1.7

29.3
6.4
21.9
1.9

SHARE DATA

BUY

Rating
Ticker
Fair Value (Php)
Current Price
Upside (%)

URC
228.00
200.20
13.89

SHARE PRICE MOVEMENT

110

100

90

80
11-May-15

11-Jun-15
URC

11-Jul-15

11-Aug-15

PSEi

ABSOLUTE PERFORMANCE

URC
PSEi

1M
8.22
2.41

3M
0.10
-2.67

YTD
2.86
4.70

MARKET DATA
Market Cap
Outstanding Shares
52 Wk Range
3Mo Ave Daily T/O

436,736.69Mil
2,181.50Mil
159.88 - 234.00
552.15Mil

Jed Frederick Pilarca

jed.pilarca@colfinancial.com

PHILIPPINE EQUITY RESEARCH

3QFY15 core income up Php10.8% to Php3.9Bil

URC reported 3QFY15 core income of Php3.9Bil, higher by 10.8% y/y. This brought 9MFY15 core
income to Php12.2Bil, higher by 14.1% y/y. Results missed estimates, accounting for 73.7% of our
full year forecast due to weak sales from the domestic branded segment during 3QFY15. Domestic
branded sales grew by only 1.7% during the quarter due to high base effects, lower sales in the
Visayas-Mindanao region, and PET capacity constraints. However, the weakness in revenues was
partially offset by better-than-expected margins. Operating margin improved by 100 basis points to
16.0% in 3QFY15 due to sales mix and higher volumes leveraging on the fixed expense base.
Exhibit 1: Results Summary
in PhpMil

3QFY14 3QFY15 %Change 9MFY14 9MFY15 %Change

Revenue
Operating Income
Operating Margin (%)
Core Earnings
Core Margin (%)
Net Income
Net Margin (%)

23,496
3,515
15.0
3,555
15.1
2,387
10.2

26,298
4,208
16.0
3,937
15.0
3,104
11.8

11.9
19.7
1.0
10.8
-0.2
30.0
1.6

69,239
10,525
15.2
10,692
15.4
8,553
12.4

81,943
13,059
15.9
12,195
14.9
9,526
11.6

18.3
24.1
0.7
14.1
-0.6
11.4
-0.7

% of Forecast
COL Consensus
70.5
71.5
73.6
70.8
73.7
72.9
68.6
-

Source: URC, COL estimates, Bloomberg

Domestic sales flattish in 3Q as coffee comes off a high base

URC reported that sales of the domestic branded segment grew by only 1.7% in 3QFY15. This was
partially due to coffee coming off a high base. Recall that URC implemented a 12% price increase
for coffee in May 2014. Trade loading ahead of the price increase also contributed to tougher yearon-year comparables. Nonetheless, despite heightened competition, URC was able to defend and
even increase its market share in coffee by one percentage point to 30%. Management highlighted
that it will deploy resources as necessary to defend its share but that it will be prudent in doing so.

Also faced weak VisMin sales and capacity constraints

Additionally, URC cited other factors that affected domestic sales. The company saw weaker sales in
traditional trade in the Visayas-Mindanao region. URC believes this may be due to El Nio affecting
the agriculture-based economy in that region. Capacity constraints for PET continued to hound URC
but additional lines will be ready in the next few quarters. URC will also be augmenting Philippine
PET supply from its facilities in Vietnam.

TUESDAY, 11 AUGUST 2015

URC

EARNINGS ANALYSIS

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PHILIPPINE EQUITY RESEARCH

Branded margins continue to improve

URCs EBIT margin continued to improve in 3QFY15, expanding 100 basis points to 16.0%. This is
higher than our full year forecast of 15.3%. Prices continued to be subdued across many commodities.
Prices of palm oil and PET in particular have fallen in tandem with oil prices. Cocoa seems to be
the only commodity product that is increasing in price. However, URC has already hedged its cocoa
requirements for up to next year.

International still facing headwinds

International sales grew by 40% in 3QFY15. However, this was largely due to the consolidation
of Griffins. Pace of growth in its URCs key markets was sustained up 9% in Vietnam, 13% in
Thailand, 39% in Indonesia, and 6% in New Zealand and Australia. However, weak consumption in
Vietnam and Thailand remained an issue. Additionally, devaluation of some currencies, particularly
the New Zealand Dollar and the Indonesian Rupiah, hurt URCs performance. According to URC,
excluding Griffins, sales grew by 7% in peso terms and 12-13% in local currency terms. Performance
was below expected.

Factoring in slower growth

After coming off a high base in 3QFY15, we expect domestic sales growth to normalize for URC in
the succeeding quarters. The company said that domestic sales were already up by 13% in July
after increasing by only 1.7% in 3QFY15. However, the rapid pace of growth in sales which reached
an average rate of 21% during the past three years would be difficult to replicate in our opinion as
URCs latest block buster product, Great Taste White, is already maturing. We are reducing our
sales growth forecast to factor in decelerating market share growth in coffee. Assuming URC grows
its coffee business in line with the industry, we estimate that domestic branded foods to grow at a
5-year CAGR of 8%. This is already conservative in our view given that domestic branded sales
growth has averaged 14.8% over the past 10 years. The pace of growth fell to single digits only twice
during that period 4.2% in 2010 and 6.8% in 2011. The reduction in our sales growth forecast was
partially offset by our higher EBIT margin forecast. We believe the downside threat to URCs margins
is minimal considering raw material prices have been deflated across the board.
Exhibit 2: Historical domestic branded sales growth
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: URC, COL estimates

TUESDAY, 11 AUGUST 2015

URC

EARNINGS ANALYSIS

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PHILIPPINE EQUITY RESEARCH

At the same time we are rolling over to end-2016 estimates. This will partly offset the negative impact
of our lower earnings forecast on URCs fair value. Consequently, our FV estimate fell slightly to
Php228/sh from Php230/sh. Our new FV estimate implies a 2016E P/E of 33.5X.
Exhibit 3: Change in EBIT forecast
35,000
30,000
25,000
20,000

Original

15,000

Revised

10,000
5,000
0

2015E

2016E

2017E

2018E

2019E

2020E

Source: COL estimates

Exhibit 4: Changes in fair value estimate

Original
Revised estimates
Rollover

FV estimate % Change
230
205
-10.9%
228
11.2%

Source: COL estimates

Strategies to secure long-term growth in place

Although consumption remains weak in some of URCs international markets, the company
continues to invest for long term growth. Its central Vietnam factory will start production in August.
This should alleviate supply constraints for PET. In Thailand, URC has partnered with 7-Eleven. URC
has launched SKUs exclusively for 7-Eleven. We believe the partnership is a huge step towards
penetrating modern retail in Thailand considering that 7-Eleven is the market leader in Thailand retail.
URC also announced that it will begin distributing Griffins products in Asia this year. The first phase,
which will begin in October to December of this year, will involve selling into Hong Kong and Singapore
where no product customization is necessary. The second phase will be to sell in the Philippine and
Thailand markets and is scheduled to begin in March or April next year. For the said phase, URC will
need to customize Griffins products, primarily to reduce pack sizes. The third phase will be to sell
Griffin products in all other countries where URC operates.

TUESDAY, 11 AUGUST 2015

URC

EARNINGS ANALYSIS

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PHILIPPINE EQUITY RESEARCH

Slower growth outlook priced in, upgrading to BUY

Although URC will likely be facing slower sales growth due to limited market share increases in
coffee, we believe much of the risk has been priced in. Note that since it reached a high of Php234/
sh last April, URCs share price has gone down by 14.5% as investors were already bracing for a
disappointing set of second quarter earnings results. However, even after factoring in a conservative
growth outlook for domestic sales growth, capital appreciation potential based on our reduced FV
estimate remains significant at 14%. We are positive on URC in the long run due to its position in PH
and ASEAN branded foods. The company continues to make investments to make inroads towards
long term growth, specifically, more production facilities across ASEAN, joint ventures with Danone
and Calbee, and the acquisition of Griffins.

TUESDAY, 11 AUGUST 2015

URC

EARNINGS ANALYSIS

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PHILIPPINE EQUITY RESEARCH

Investment Rating Definitions

BUY

HOLD

SELL

Stocks that have a BUY rating have attractive

fundamentals and valuations, based on
our analysis. We expect the share price
to outperform the market in the next six to
twelve months.

Stocks that have a HOLD rating have either

1.) attractive fundamentals but expensive
valuations; 2.) attractive valuations but
near term earnings outlook might be poor
or vulnerable to numerous risks. Given the
said factors, the share price of the stock may
perform merely inline or underperform the
market in the next six to twelve months.

We dislike both the valuations and

fundamentals of stocks with a SELL rating.
We expect the share price to underperform in
the next six to twelve months.

Important Disclaimers
Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount
invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are
subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a
security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of
securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report.

2401-B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, 1605 Philippines
Tel: +632 636-5411

TUESDAY, 11 AUGUST 2015

URC

Fax: +632 635-4632

EARNINGS ANALYSIS

Website: http://www.colfinancial.com

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