Securities Firms Optimistic on SMC

April 16, 1999 PSE CIRCULAR FOR BROKERS NO. 787-99 April 16, 1999 SECURITIES FIRMS OPTIMISTIC ON SMC Beer and liquor, as well as food and agribusiness, are sources of optimism for San Miguel Corporation (SMC) this year, two recent analyses by leading securities companies show. Merrill Lynch Philippines has upgraded its long-term rating for SMC shares from "Neutral" to "Buy", saying San Miguel Brewing Philippines and SMC subsidiary La Tondea Distillers Inc. still dominate the domestic beer and liquor markets, respectively, while its packing division remains as the industry leader. It added that new distribution and cost savings programs in the beer and liquor businesses are expected to translate into better earnings. cdlex Analysts at Merrill Lynch also noted that the San Miguel Food Group registered revenue growth of 23% to P21.5 billion in 1998, and an operating income of P830 million which is almost double the results in 1997. They expect such rebound to continue this year. "We think San Miguel is the best way for institutional Investors to play the expected rebound in agriculture and consumption growth this year. The other food and beverage stocks remain illiquid," Merrill Lynch said. Separately, the multinational firm Credit Lyonnais Securities Asia said SMC was able to assert its dominance in the market as it is uniquely placed as the biggest mass-based consumer product manufacturer benefiting from buoyant domestic demand and a rich resource base. Aggressive sales and marketing enabled SMC's Philippine beer operations to out perform the market last year, and increase its market share by two percentage points from about 82% to 84%. Inspite of price increased in December 1997 and February 1998, beer sales volume declined only by 4% compared with an industry-wide 7% drop. San Miguel Brewing sales revenue rose 8% to P27.2 billion from P25.2 billion in 1997. Operating income increased by 83% to P4.15 billion from P2.27 billion in 1997. The strength of SMC's beer business cannot be ignored as consumption in the Philippines remains buoyant. Credit Lyonnais said. It added that the scale of economies will work in SMC's favor once the anticipated growth in beer sales volume of 4% to 5% in the next three years is achieved. For LTDI, the securities firm said the SMC subsidiary has stemmed the drop in its market share, and is expected to do better this year, given new product launches in the pipeline. Last year, La Tondea's consolidated revenues rose 11% to P9.74 billion from P8.78 billion in 1997. Operating expenses were maintained at only 2% above 1997 on account of rationalized advertising and promotion spending, and contained fixed selling and distribution costs. Consequently, operating income increased by 67% to P2.07 billion from P1.24 billion in 1997, while net income more than doubled at P515 million from 241 million in 1997 despite higher net interest expense. LLphil Credit Lyonnais recommended a "Trading Buy" for San Miguel shares as it noted other favorable factors going for San Miguel. One of these factors is the company's ability to clean its books through working capital management and provisioning. "This is laudable and unique in the current environment," the securities firm said. Analysts at Merrill Lynch agree, saying that "SMC could sustain a 20% earnings growth in the medium term as new management focuses more on the profitability of the business."