The Philippines: San Miguel Corp. may sell bonds to small investors and cut its dollar-denominated debt

San Miguel Corp., the Philippines’ largest company, may sell bonds to small investors and cut its dollar-denominated debt to tap the country’s growing wealth and shield its earnings from a weaker peso, Manila Bulletin reported on February 15.

The energy, infrastructure and beer company plans to borrow more in pesos and sell preferred shares to refinance existing dollar debt and fund infrastructure projects ranging from rail and power to ports and toll roads, President Ramon Ang, 62, said in an interview Feb. 12.

Marketing bonds to mom-and-pop investors, rather than just to big institutional clients, mirrors a move by the Philippine government and companies including Globe Telecom Inc. and Filinvest Land Inc. Retail investors typically buy bonds in smaller denominations, allowing San Miguel to tap the population’s growing prosperity and flush liquidity from call-center revenue and overseas remittances.

“The retail bond market is very liquid,” making it more attractive at times than bank loans for fundraising or refinancing at San Miguel units, Chief Finance Officer Ferdinand Constantino said on February 12.

San Miguel aims to cut its dollar debts in half over the next two to three years, Constantino said. The company had $8.54 billion of dollar-denominated debt at the end of September, nearly half its total liabilities of 855.8 billion peso ($18 billion), according to its third-quarter filing.

Reducing its dollar-debt exposure is “a necessary move for San Miguel,” Luis Limlingan, head of research at Regina Capital Development Corp., said by phone. “At a time when the dollar is rising, shifting most of its obligations to peso would help shield the company from foreign-exchange volatility.”

Profit at the century-old brewer, which is now heavily invested in oil and electricity, fell by more than half to 6.17 billion pesos for the first nine months of the year as a weaker peso quadrupled foreign exchange losses to 10.3 billion pesos. Falling fuel prices cut sales at its oil ventures, paring revenue 15 percent to 504.5 billion pesos. San Miguel’s pretax profit is eroded by more than 5 billion pesos each time the local currency weakens by one peso against the dollar, according to the company’s latest financial statement.

The peso has depreciated 6.8 percent over the past 12 months. The currency is expected to weaken 2.6 percent to 48.3 to a dollar by the third quarter, from 47.06 at end-2015, according to the median estimate in a Bloomberg survey. It has slumped 0.9 percent this year, the worst performer among Southeast Asia’s most-traded currencies.

To reduce its exposure to exchange rates, San Miguel aims to sell as many as 80 billion pesos worth of preferred shares in three years, with an initial batch of 30 billion pesos to be sold this quarter. In September, the company raised 33.5 billion pesos from a similar fundraising.

San Miguel rose 1.1 percent as of 10:58 a.m. in Manila trading on February 15. The shares have rallied 48 percent this year, the biggest gainer in the Philippine Stock Exchange Index, after falling 32 percent in 2015. The stock slumped 66 percent in the five years through 2015 while the nation’s benchmark equities index climbed 66 percent.

“A reason for the stock’s underperformance in previous years was that investors were nervous about its expansion outside of food and drinks, and the debt buildup that resulted from these new ventures,” Jonathan Ravelas, market strategist at BDO Unibank Inc., said. “San Miguel is showing it’s managing these risks, and some investors are beginning to see value.”

Shares have reached overbought level and may prompt some investors to lock in gains, Limlingan said, citing technical indicators. San Miguel gets more than half its revenue from oil ventures Petron Corp. and Petron Malaysia Refining & Marketing Bhd. That’s followed by the food, beverage and packaging business and its other energy ventures, according to its latest financial results. The company received some offers for its beer business but doesn’t plan to sell it, Ang said.

Petron, the Philippines’ largest oil company, may report record profit of between 16 billion pesos and 18 billion pesos this year as lower oil prices spur demand for fuel and margins improve from a refinery upgrade, Ang said. Its shares rose 7.3 percent as of 10:40 a.m. on February 15.

Falling valuations for assets in the oil and gas industries present opportunities, Ang said, and discussions are ongoing for a possible acquisition overseas. The target is worth about $2 billion now, he said, down from about $5 billion in equity investment terms in 2012, when Ang first began looking at it.

“San Miguel’s problem now is how to look for new investments,” Ang said. “We don’t have a cash problem.”

Ang and Chairman Eduardo Cojuangco Jr. have helped San Miguel, which started as Southeast Asia’s first brewery in 1890, expand beyond food and drink to create a conglomerate in infrastructure, energy and telecommunications. Away from home, it has manufacturing operations in Hong Kong, China, Indonesia, Vietnam, Thailand and Malaysia.

San Miguel is preparing to start a mobile-broadband service as early as the first half of the year, to challenge market leaders Philippine Long Distance Telephone Co. and Globe Telecom Inc. Talks with Telstra Corp. are ongoing, but San Miguel can proceed even without a partner, Ang said.

Standard Chartered PLC and Bank of Commerce will provide financing to San Miguel’s $1.6 billion, 44-kilometer (27-mile) mass railway project from Manila to Bulacan province, to be built by EEI Corp., Ang said. Revenue from infrastructure, which includes rails and toll roads, may reach 100 billion pesos by 2020 and will account for 20 percent of the business, from below 10 percent now, he said.

The company’s earnings before interest, taxes, depreciation and amortization could hit 200 billion pesos by 2020 if its infrastructure projects are completed as scheduled, Ang said.

17 February, 2016