First Pacific Company Limited (142) Earnings Call Transcript & Summary

Hello, this is Zaf Aziz speaking, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, DBVIC. I'm pleased to announce that our first presentation will be from First Pacific Company from Hong Kong. Before I introduce our speaker, a few points to note. Please submit your questions in the Ask a Question box below the slides. Once the Q&A session has ended, don't log out. You will automatically be transferred to the first Pacific booth, where you can continue to ask questions via chat and access shareholder materials. On a final note, all of today's presentation will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome John Ryan, Associate Director, The First Pacific Company, which trades on the Hong Kong Exchange under Symbol 142, and in the U.S. on the OT Markets (sic) [ OTC Markets ] as FPAFY. Welcome back, John.

Thank you, Zaf. You're really a prince to your clients. Okay. Let's turn to our presentation now. For those of you familiar with us, you'll know many of the logos on this front page of the investor presentation we're walking through here today. These are many of the companies that First Pacific is invested in. We're an investment management and holding company based in Hong Kong. And as you see here, our assets are slotted into 4 different categories, ranging from consumer foods through to telecommunications. Pardon me. Now the person speaking to you is me, John Ryan. I'm there in the middle right-hand side of the top row. Our management team has been broadly together for many years. I, myself, have been in First Pacific for 10 years. Now a first word about the COVID-19 response. It's had an impact in all of the markets that we operate in, but we are nevertheless expecting that our results for the full year will not be too badly affected. Okay. We focus on our core assets, and they consist, really, of Indofood, PLDT and MPIC, and we have some smaller investments. I'll tell you about these 3 major companies and the other ones beginning on the next slide, which shows the valuation of the shares in these companies that we own as of the end of October. So as you can see, we own just over half of Indofood, and it takes -- those shares take up 40% of our gross asset value. Indofood, for those of you who don't know, is the biggest food company in Indonesia. It's the world's biggest producer of wheat-based instant noodles. And earlier this summer, it took a big step on to the global stage by investing in a Middle East and Africa-based noodle maker called Pinehill. Now the interesting thing as we get into Indofood's earnings going forward in this presentation is that the COVID-19 epidemic has had a very special effect on the consumption of instant noodles. Rolling around, we've got about 42% of MPIC rolling through this pie chart. That stake is worth about USD 1 billion at the end of last month. That company itself is a holding company, with assets in the Philippines, mostly in infrastructure. And of all our assets, that's been hit hardest by the epidemic. And PLDT is the biggest phone company in the Philippines. It's been surging in earnings growth and market share lately because it is reaping the fruit of 5 years of very extensive CapEx. If you've got a mobile phone in Manila, you've got very fast-timed downloads and a high-quality connection. Now towards the end of our pie chart here, you've got the Philex group of companies. They consist of: a mining company, which produces copper and gold, up in the north of the Philippines, in Luzon; and a slightly small, but very interesting oil and gas exploration company. Now via these assets, we control these assets, which are worth a grand total of just under USD 30 billion, right? So our $1 billion or so in MPIC, it's 42% of the grand total of its market cap of $2.6 billion here, as we show in this pie chart here. There is a reasonable breakdown between the sectors that we're invested in. For those of you who aren't so familiar, Meralco is the biggest electricity distributor in the Philippines. And ICBP is short for Indofood Consumer Branded Products, and that's the packaged food division of Indofood. Indofood owns about 80% of that. Now let's have a quick look at our own results for the first half of the year. And as you can see, looking at the recurring profit column chart on the top right of this slide, you can see that everyone really did pretty well, except for MPIC, which saw traffic on its toll roads plunge. Its light rail system was forced to close for several weeks during the summer. And consumption of electricity and water via the 2 utilities it controls shifted from commercial and industrial more to residential as many people stopped going to work and stayed home. Volumes were more or less unchanged. The residential tariffs for both water and electricity are lower than they are for industrial and commercial customers. So MPIC saw a great big fall in its earnings. Nevertheless, when we looked back on our first half performance, we were confident enough that we edged up our interim distribution, as you can see in the bottom bullet point, to HKD 0.07 per share. And we have held the final distribution unchanged for quite some time. And if we were to do that again for 2020 full year, you would see that we'd be one of the very few listed companies anywhere in the world to deliver to their shareholders a stronger dividend during this terrible pandemic year of 2020. Now a word about our cash flow and our borrowings. How much do we owe? You can see in the bullet points here, our gross debt is about $1.7 billion, and our net debt is about $1.3 million. So cash on hand around about $300 million. These are all end-June figures, by the way. They will, by now, have changed rather a bit because we retired 1 bond in September and issued another one almost at the same time. So this data is a little bit out of date. However, as you can see from the lifting of our interim distribution to shareholders, dividends payments in common parlance, we're very confident on our cash flows. Our interest bill is currently about 1/3 of our free cash flow after we receive our dividend income and pay our interest bill and head office costs. So that interest coverage ratio of about 3, 3.1x is where we begin to feel rather comfortable, and we begin to consider a long-enduring but as yet unfulfilled promise to launch a medium-term share repurchase program for our shareholders. Because First Pacific trades rather less than the value of the assets it owns, we can talk more in the chat later about that, our share price is about 2/3 discount today at today's close to the value of the assets we control, which means if you spend $1 buying First Pacific shares, you actually are with that dollar controlling $3 worth of assets. Crazy, isn't it? Okay. A brief word now on ESG. We've seen in the recent years that environment, social and governance concerns of institutional shareholders based in Europe, in particular, are increasing in importance with a great deal of acceleration. Listed companies in Asia, I believe, are rather slower out of the gate to respond to this new alertness to the wider issues that our stakeholders face in the world. And we are hopeful that by moving as forcefully and urgently on these questions as we can, we'll be getting an edge on slower-to-move Asia-listed corporates when it comes to delivering promise on ESG. So as you can see, I'm very, very proud that ISS, formerly known as Institutional Shareholder Services, has given us a governance quality score of 1. And there are only about 20 out of the 2,400 companies listed in Hong Kong that have that perfect score. You can't have a higher score than 1. So we're better than 99% of everyone else listed in Hong Kong. And we're hopeful of continuing progress on ESG matters going forward. Forgive me for rambling on, but it's so important to many shareholders. It may not be important to you, but other shareholders who buy us heavily because we're good on ESG, will lift our share price, and that's a benefit to you. Okay. I've been speaking for 10 minutes. Let's go into some of the companies. Indofood, our biggest holding. As I said, it's the biggest wheat noodle maker in the world, and it makes a variety of other products, as you can see on the column chart on the lower right-hand side of this slide. Indofood's noodles are the biggest item itself. They're about 50% of all sales. So that's not entirely clear here. They had sales growth everywhere, except for Bogasari, a big decline there. That's the flour business. They're the biggest flour producer in Indonesia. And that business depends quite heavily on commodity prices, particularly, of course, fleet. So it will move along with commodity prices. The Beverages business was launched a few years ago, and it's having a bit of a struggle turning to profit because, frankly, the capital expenditure on the factories to build these bottled water plants was a little bit too heavy. So we're taking a little while to turn to earnings growth there. For various varieties of drinks for sale, Indofood is about #2 or #3 in most categories. Now Indofood has saw during the COVID pandemic people not going to work as much, being stuck at home, not being able to go out. That has seen demand for instant noodles surge. They've got very strong sales growth in terms of volume and sales, which means they've been able to lift the prices and people are still buying more noodles anyway. Their model in this market is to always make a packet of noodles cost competitive with a bowl of rice. So as rice gets expensive or people's incomes get hurt by being unable to work, they will spend less money on rice and more money on noodles. Their brand, Indomie, is the first globally recognized food brand from Indonesia, and it's one to be very proud of because as they moved -- we're going to skip over CBP because I'll be running out of time otherwise. ICBP has bought Pinehill for just under $3 billion. As you can see on this map, it manufactures noodles in these beige- or orange-colored markets like Egypt, Turkey, Saudi Arabia, and exports these noodles to these green countries. Now per capita consumption of instant noodles in these countries is low, but it is growing remarkably fast. And in all of these markets, the Pinehill manufacturers have a #1 market share. So it's a fast-growing business. They're the #1 market share, and it is a very high-margin business. The margins on instant noodles are easily 20% to 30%. So it's fast growing and extremely profitable. This transaction closed at the end of August, and we'll begin to see -- at the end of November when they report their 9-month numbers, we'll see some information about how that acquisition has gone during the month of September. And then in the spring, we'll get the full year numbers. We expect Pinehill to lift earnings at Indofood by perhaps as much as 20% because of its great scale. And it has turned Indofood, as I said before, into a global food company, one to be really, really proud of. Now to another favorite of mine, let's go to PLDT. The mobile phone business where PLDT gets about half of its revenues is, by its nature, very, very cutthroat. I know it doesn't seem that way sometimes when you get your mobile phone bill, but prices for the data and the voice minutes and the texting have all been coming down in recent years owing to competitive pressures. Now that meant for PLDT declining market share, declining profits. So they decided to fight this by expanding their spending on CapEx massively, beginning from the summer of 2015 when they hired a Chief Technology Officer from Siemens, who's done a remarkable job. They've spent close to about $5 billion in this period. They are still expanding their CapEx. And before that alarms you, let's have a look here. In the first half of this year, if you look at the mobile data revenues, an increase of PHP 10 billion there, a very remarkable performance by PLDT, which has seen its mobile service revenues decline for each of the past 7 years. So during the COVID time, people were on their phones more. They were sitting at home. They were phoning up to get WiFi installed in their houses, businesses. Were spending more money to get work-from-home options available for their clerical staff. And as you can see, their service revenues had very strong growth in the first half of the year. Look at that, 7%. They are forecasting that their core profit for 2020 full year could be around PHP 27 billion. My money is on that figure being higher. And that's quite important to First Pacific because PLDT pays 60% of its core profit to shareholders in the form of dividends. So the bigger that number is, it goes straight on an automatic basis into the pockets of the shareholders, of which we are the biggest one and the controlling one. So PLDT is going to the second half of the year much like the first half of the year. And honestly, if you don't want to get First Pacific because it comes with a whole bunch of package of things that you don't want and you want to buy just focusing on one of our companies, you're going to have a tough decision between PLDT and Indofood. Okay. As you can see here, just a brief word about the quality of the network, look at the line chart, at the sideways column chart on the bottom right here. The fixed-line business is just kicking it against all the competitors. And if you look at the column chart on the left-hand side, you can see that of the -- really, there are only 2 mobile phone providers in the Philippines. PLDT is winning very much hands down. Okay, we'll move to MPIC now, which is like First Pacific, a holding company. And as you can see, they're the biggest toll road operator in the Philippines. They've got the biggest electricity distributor in Meralco as well as generation under Meralco and Global Business Power. They've got the biggest water utility in Maynilad; the biggest private hospital network, that's 17 of them; and smaller investments in light rail and logistics, and so on. Now as I mentioned in the introduction earlier, they had a very difficult first half of the year. And their first 9-month numbers, which came out very recently but too late for this presentation, indicate the same. So as you can see, their earnings are down. I've given you the 9-month numbers. That's very good. As you can see, the 9 months numbers are down. The full year numbers are going to be down. Profit will be closer to PHP 10 billion and PHP 15 billion as in the previous year. However, because they sold down their Hospitals business and part of their Light Rail business late last year and in January, they are sitting on a very strong cash pile and will be maintaining their dividend unchanged. How bad has it been for Metro Pacific? Let's have a look at the consumption of its services over the first 9 months of the year. As you can see, electricity consumption from Meralco declined very sharply in the spring. It has only recently begun to recover. Water consumption has remained fairly steady, but it shifted from industrial and commercial over to residential, similarly with global power. But then look at the toll roads business on the bottom right, a sharp plunge. People just didn't leave home. Big surprise there. Okay. Now our last major asset that I'm going to talk about is Philex Mining It's a very old mining company in the Philippines. It's about 60 years old, producing copper and gold. If you ever want to do an investor visit to Baguio, in the pine-scented hills of Northern Luzon, let me know, I'll bring you. It's quite an experience to go deep down into this mine. It was the first block cave mine in the Philippines. And as you can see from their numbers here, the surge in gold price has really boosted their earnings so far this year, and we think they're going to have a very good 2020. Now that pretty much wraps up the presentation. So I'll go now to some of the questions, which have been coming in, because I'm sure there's been something that I've overlooked.

Okay. First question is a very interesting one and interesting to me, in particular. Can I speak to the sustainability of our dividend payments? And what will lead us to pulling the trigger on buying back stock? This man is singing to the same choir I do. Our interest coverage ratio for paying our bills is now well over 3. We've managed to lift our interim dividend. We promised in March 2017 that the highest priority for our capital allocation would be turning to a share repurchase program when the time is right. And we next report earnings in March 2020, let's see how it looks then. And now a very, very difficult question to answer. How do we ensure that ESG is a focus in all the investee companies? How do we maintain consistency? A number of ways. It's a very collegiate arrangement we have, relationship we have on ESG matters between all these companies. Some of them have very particular issues, like the plantations business with palm oil. So you've got Rainforest Action Network constantly, forgive the pun, shaking our tree. And then in the Philippines, we've got some coal-fired power plants, particularly under Global Business Power. Oh, by the way, the Philippine government recently announced it will, in the future, not authorize any new coal-fired power plants. So those of you who want to invest in coal, you really should have a think. Now how do we ensure consistency? Well, for example, you've got the 8 fundamental conventions of the International Labor Organization, and you've got the 10 principles of the UN Global Compact, just to pick 2 examples. You have a brief survey of the companies in our group, which of the companies have signed up to one or both of these and which have not. And do you see that, over the course of time, more and more of our group companies are signing up to these things. And I would expect that First Pacific itself will be doing that, too. And when head office does that, then that creates significant pressure on what companies, which are not doing these things, to get into gear, get with the program and join the rest of the team. Okay. Let's move on. Why do I expect we're trading at a large discount to asset value? If you've known us for several years, I think you would recognize a couple of names. One is Goodman Fielder, another is PacificLight Power. Those are 2 investments that we made in the middle part of this decade, which, together, cost somewhere around $800 million and proved to be appallingly bad investments. They damaged our reputation for being wise and careful investors, and that discount to our net asset value, I think, is a token of the market's regard for us on this. But I have felt, for quite some time, that this figure at 67%, almost a little under at today's close, I think that's a market failure. They're mispricing it. And once we get into the spring, and we produce our full year numbers, people will see, "Oh, hang on a minute, they're running a very tight ship. Things are looking great." And then I think you'll see our share price accelerating faster than the share prices of our underlying companies. And by simple arithmetic, that will be narrowing the discount. I really think that's what's going to happen. I personally, several months ago, bought First Pacific shares for $1.58, and I'm looking at a gain now of around $1. And I'm just annoyed with myself, I didn't buy more. Okay. Was repayment of bank borrowings in line with expectations? I'm not sure how much I understand that. We've retired a bond. It was our most expensive borrowing towards the end of September. And we had -- let's see if we can find that slide with the column chart on our borrowings. And we have some bank borrowings peaking with the $400 million set of maturities in 2022, as you can see the green column on the bottom left here. Now that $252 million was paid in September. And the $170 million and $400 million on the bank loans, we paid off a whole bunch of that early when we issued a new bond, a 7-year bond, which matures in 2027, which you don't see on this column chart, forgive me, please. We'll update this with our full year numbers in March. So the nice thing about bank borrowings is you can repay them early. They tend to be a lower-interest build on the bonds, which is nice, but they tend to be of a short-term maturity as well. And we generally instinctively have a preference for longer-term borrowing. So as you can see now, the 2020 is all taken care of. The 2021 is, by today, pretty much reduced, same with 2022. And we've got another bond, $300 million maturing in 2027. And I think the coupon there was 4.5%. So that's the story with our bank borrowings. I believe there are no more questions at the moment. I'll give you all a moment to perhaps ask a follow-up. I think I've looked at all of your questions. If you looked at our share price over the past several years, you can see we've come down quite a bit. I think we were over HKD 10 several years ago. And we've bottomed out a little bit lower than when I bought a few months ago, and we're turning up. Indofood is just tearing away in earnings growth. PLDT is tearing away in earnings growth. Those 2 companies are delivering remarkably completely different products, but they are dominating their markets, and they're seeing strong demand growth. And they, I think, are going to be able to sustain their earnings growth that they're showing in their early 2020 numbers for the next several years. I couldn't be more confident of the assets that we've got. Once we got outside this pandemic environment later in 2021, MPIC will return to its old habit of earnings growth for its first 10 years of existence. It had stronger earnings year in, year out. The Toll Roads business, which is -- delivers about 30% or so of contribution to that company, is going to see some major roads come online in the next couple of years. And Toll Road businesses, they're just an ATM. They generate enormous, steady cash returns. So the cash flow out of MPIC to its shareholders is really well placed to ramp up sharply in a couple of years' time when those -- when that road building gets finished. Oddly enough, notwithstanding the shutdown caused by the pandemic, the road business managed to spend more on capital expenditure in the first half of 2020 than they did a year earlier, quite a remarkable performance. We're pretty much close to the end of our half hour. There's just over a minute left. I'm a bit early. I don't want to repeat myself. I don't want to babble. Thank you very much for listening to me. We can do some chat questions when this minute is over. And you can always e-mail me or get in touch on the phone. Look at our investor materials, we update them monthly. And keep an eye on First Pacific. I haven't been as excited about our company, notwithstanding the difficult times we're in like this in really many years since I joined 10 years ago. Thanks again for listening to me.