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

Hello, and welcome to the Deutsche Bank Depositary Receipt Virtual Investor Conference. My name is Zaf Aziz from the DR team. I'm pleased to announce that our next presentation will be from First Pacific group from Hong Kong. Before I introduce our speaker, a few points to note. Please submit your questions in questions box below the slides. Once the Q&A session has ended, don't log out. You will automatically be transferred to the First Pacific company booth, where you can continue the conversation via the chat facility and access shareholder materials. On a final note, all of today's presentations are recorded and can be accessed by the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome John Ryan, Associate Director from First Pacific, who is currently Group Chief Investor Relations and Sustainability Officer, and also a Commissioner for Indofood. First Pacific is -- trades on the Hong Kong Stock Exchange under the symbol, 142. And in the U.S. on the OTC Market as FPAFY. Welcome back, John, and over to you.

Thank you very much, Zaf. Right. Let's jump right into Slide 2, where we've got a snapshot of the main holdings of First Pacific. For an investment management and holding company, most of our assets that you see, the logos up here on this slide, are based in Southeast Asia, specifically Indonesia and the Philippines. We are invested in these 4 sectors, which we feel offer stable growth through difficult times and stronger growth through excellent times because they provide essential goods and services that people need. Note also that we like to have great influence or control over our investments. So you'll see that we often are the majority or largest investor in these companies, and many of them have monopolies such as the roads business under Metro Pacific and its water business, or they're the largest in their sector, such as PLDT, the phone company in the Philippines, or Indofood, the food company in Indonesia. Now let's have a quick look at our performance in 2020. Unlike many companies, we did fairly okay during the difficult months of COVID last year. As you can see, our recurring profit rose by about $30 million with most of our main investments performing fairly well. The one which did not, as you can see on the top right column chart, was MPIC, which suffered during a enhanced community quarantine, as they describe it in the Philippines, when the authorities essentially shut down movement and society as much as they could to slow down or prevent the spread of that illness, COVID-19. So there is less traffic on their toll roads. The consumption of water in their water company, Maynilad, switched from commercial and industrial over to residential, people were staying at home. Similar story with the electricity business, people's air conditionings at homes were used and the ones at work were not. Now let's have a look at our cash flow. As you can see, we paid down some debt, just under $250 million, in the bottom right-hand chart. And that was offset to a great extent by our dividend and fee income of close to $200 million. Now our performance last year was such that we were confident enough to raise our dividend payout to shareholders by a full HKD 0.01. We distributed HKD 0.145 per share for the full year, up from HKD 0.135 in 2019. And a new strategy that we introduced, much to my personal great pleasure, was the beginning of a 3-year share repurchase program with a budget of $100 million over 2021, '22 and '23. Now the operating companies that you see there are all looking to have better year in 2021 than in 2020. So we're feeling quite positive. Now as we look at our balance sheet management and borrowing slide here, you can see why we were so confident to spend $100 million on the share repurchase program. As you can see from the column chart at the bottom, which lays out our debt maturities, we've got nothing maturing this year, and we've got $300 million of bank loans maturing in 2022 and our first bond maturity follows a year later. Now that bond, as you can see in the blue box at the top of the page, is a 10-year bond paying 4.5% coupon maturing in April. Now we expect the 2022 bank borrowings to be rolled over to longer maturities perhaps in 2026, where you see there are no repayments due, or 2028. Now by the end of 2020, our interest coverage ratio lifted to above 3x for the first time in a few years. Now that ratio is essentially the amount of money we bring in divided by the interest bill. Our interest bill has shrunk quite a bit over the past few years. In 2016, I think it was about $96 million. And this year, we expect it will be just a little over $50 million. So of course, with the reduction in the interest bill like that, we've got an improvement in the interest coverage ratio. We like that number to be over 3x. At the end of last year, as I say, it was 3.1x, and we expect it to move higher towards the end of this year. As you can see, we've got an average maturity that's fairly out there, just under 4 years and our interest cost is quite low, thanks to some very excellent work by our treasury team. Now let's move on to a few words about our strategy, how we run the company. We focus on our 3 core assets, which are Indofood, perhaps the biggest maker of wheat-based instant noodles in the world. It has the brand Indomie, which is very well regarded. Then we have PLDT, the dominant telecommunications company in the Philippines, think mobile phones, fixed line, data centers. And then, of course, there's MPIC, the only one of those core holdings, which saw a profit decline last year. Again, that was because of COVID. Now we expect those 3 companies going ahead to grow very well over the medium term. And hence, we've launched that 3-year share buyback program, which is detailed here in the bullet points on the left-hand side. Now as you can see, those 3 core investments are fairly big. Indofood got gross annual revenues of not quite -- over $5.5 billion, pardon me. PLDT, a little bit less in MPIC. Their 2020 revenue figure was hit quite hard. They're generally well over $1 billion of their revenues. Now when you want a snapshot of what our assets look like, you can see that the shares we own in these companies are worth about $5 billion as of the end of April market valuations. Indofood's the single biggest holding, about $2 billion, followed by our infrastructure -- and our telecommunications investment in PLDT and infrastructure. Now the gross asset value has been growing quite strongly, as you can see, from end 2003 to the end of last year. It had a compound annual growth rate of 9%. And importantly, to us, as an investment management company, our dividend income had a CAGR almost twice as big at 17%. Now let's quickly discuss sustainability and ESG matters. Now in my 10 years or so of interacting with shareholders of First Pacific, most of that time, there wasn't a lot of attention paid to sustainability and climate change. That is beginning to change extremely rapidly. We've got fund managers who are now drawing the line on investment in coal, for example. People are looking to sustainability proxy advisers like MSCI and ISS to provide a better understanding of how the companies they want to invest in are performing on sustainability matters. So they go through their checklists and they award scores. As you can see for the Hang Seng Sustainability Benchmark Index, we've got a decent score of AA-. And our ISS governance quality score is the figure of 1, and you cannot get better than that. So that suggests that our governance is quite strong. We've got a Prime status from ISS ESG, but they give us a C rating. So that's one we're looking to push up. We've just produced our 2020 ESG report a week or 2 ago at the end of April. And we're hopeful that as these ESG proxy advisers review that report, all of those scores, which are lower than we would like, will move up. So for example, I'd like to see MSCI perhaps lift us to BB+ and so on. ESG is very much moving to the heart of our strategy as we look ahead, and we're hopeful that the investor universe will begin to see First Pacific as a leader in our region in this area. Now a brief word about our response to COVID-19. Essentially, all our big companies did what they could to help their communities as has been done in all these jurisdictions around the world, which have been so badly affected by this terrible pandemic. It's resurging again in the Philippines, and our companies are again having to dig in and help their neighbors. But COVID-19 has really taught us that our stakeholders are critically important, and they include all the people around this, the customers, the staff and extending on down to our shareholders and the wider investor universe. Now let's have a look at Indofood. Indofood is really one of my most favorite companies. As you can see from the pie chart down on the bottom right here, most of its revenues come from CBP, that's consumer-branded products. And when you're thinking about that, we've got a slide coming up on that. It's mostly noodles, followed by dairy, snack foods, beverages and other things. That is growing at an extraordinary pace. And if you have the risk appetite to invest in a stock denominated in an emerging market currency, the Indonesian rupiah, then Indofood might be something you want to look at, if you're not attracted by the security of the Hong Kong dollar value at First Pacific. Of course, we're denominated in a currency which has been fixed to the U.S. dollar since, I think, October 1984. Now back to Indofood. It sales rose very strongly during 2020 for 2 key reasons. One is, as people were shut into their homes, they didn't go to cafes, they didn't go to restaurants, they cooked at home. And in many cases, they cooked instant noodles, which are low cost, easy to prepare and delicious. I really like Indofood's noodles. We've got many varieties of them on sale here in Hong Kong. And they're in the United States and the larger cities, I think you might be able to find them, too. They've been reviewed in American media, and I think we've got a link on one of our subsequent slides regarding that. Now as you can see, most of the businesses of Indofood did pretty well in 2020. And before I forget, the second key item underneath the increase in sales is that Indofood bought an instant noodle maker based in the Middle East and Africa called Pinehill, and the addition of those noodle sales provided a big boost to their overall sales. Now let's have a closer look at Indofood consumer-branded products. The earnings surged on the acquisition of Pinehill, which contributed to sales in the last 4 months of the year, September through December. So in 2021, we're looking for a whole 12-month contribution from Pinehill, again, based in Africa and the Middle East, they've got a toehold in Southeastern Europe. So we're looking for some continuing growth there. Now if you look down into in Indofood's ICBP sales, you can see that the big surge there is in the noodles business, largely because of people being confined at home because of -- in COVID-19 and the acquisition of Pinehill. The beverages business has been struggling for a few years, but we're hopeful that it will be able to turn around, as you can see. It's EBIT margin still negative, but better than it was in 2019. Now one last quick word about Pinehill. As you can see on the map here, the home markets are in yellow and the exports to these markets colored in green. Now the thing about instant noodles is the margin on them is very high, over 20% in the case of Indofood. It's extraordinarily profitable business. It's very low cost, and as I said, it's delicious. Now instant noodles in these markets has got very low penetration. People will eat maybe a couple of packs in a month, whereas by contrast, in Indonesia, the home market, each person in the country is eating on average 1 pack of noodles a week. Now Pinehill companies in these markets, they dominate these very tiny markets and those tiny markets are growing very fast. So we expect Pinehill to be a strong engine of growth for Indofood in the years ahead. I really do love this company. Now let's move on to another favorite of mine, PLDT. It's the biggest telco in the Philippines. It held that position for many years. Before in the decade of the 2010, they underinvested in CapEx as 3G came out and people began doing MMSs and other kinds of things apart from voice and text. They made all their money from long distance phone calls denominated in hard currency U.S. dollars and text messaging. They lost lots of market share when a competitor came in and spent much better on CapEx as 3G rolled out across the country. They lost market share. However, since 2017, they have spent on average of $800 million to $1 billion a year on CapEx. And now they've got the strongest network in the world, whether it's fixed line or wireless. And as you can see, service revenues surged to a record high in 2020. And if they don't reach another record high in 2021, I'm going to give away all my shares in First Pacific to charity. I'm very confident the earnings growth in PLDT is going to continue. Why? Look at those little green columns in the bottom right-hand chart. Mobile data is going through the roof. When people are confined to their homes and they're bored, they turn on the phones and they watch videos, go on Facebook and so on. And PLDT has got the best network in the country as you can see from these column charts on the bottom of this slide here, much better than the competition. They are cheaper than the competition. ARPU is just a little bit lower. So it's offering lower cost, better value and better quality. And that's why they've been expanding their market share this year. And I expect they will continue to do so moving forward. Now remember, the Philippines, a country of about 100 million people. There are about 150 million SIM cards out there, lots of people have 2 SIM cards. The average revenue per user, ARPU, is very, very low. It's about $1.50. Again, it's a poor country, but it's growing fast as people get used to what they can get from their smartphones. Now let's move on to Metro Pacific, which was the only 1 of our 3 core holdings to suffer a little bit during the COVID pandemic in the Philippines. Now as you can see, its investments are divided among toll roads, electricity, distribution, [ MGeneration ]. Water, they've got the biggest water company in the country called Maynilad. They've got a 20% stake in the country's biggest hospitals business. They used to have 80%, but they sold down in 2019 to pay down borrowings, which they used to expand the toll road network. And then we've got some smaller businesses, which hopefully will deliver growth in the years ahead. Now a quick look at how the performance was last year. As you can see, contribution from all of their main companies fell quite a bit, particularly among the toll roads, people just didn't leave home and the toll roads were quite empty. The power contribution also fell because the residential tariff is a lower tariff than that charged to industry and commerce and the demand shifted from those 2 over to residential. And so while volumes were not changed too much, the revenues came in and that meant lower contribution. Very similar story with the water business there as well. Overall, contribution from operating companies fell by more than a quarter. That hammered core profit, it was down by over 1/3. Nevertheless, because they're in such a strong cash position of PHP 22.5 billion at the end of the year, they've got a bit now -- a bit more now, about PHP 26 billion as of the end of the first quarter, they felt confident enough in the outlook -- in the post-COVID outlook, that they held their dividend unchanged. And they expect now after seeing their core profit fall to PHP 10 billion in 2020, that they can lift it up to perhaps PHP 12 billion in 2021. Now a quick drill down into some of the other companies under Metro Pacific. As you can see, the toll roads business saw its earnings fall by almost half as revenues collapsed with the lower traffic. The water business similarly suffered with core income down 15%. And because they've got a difficulty with their regulator, they've been unable to continue borrowing for CapEx to improve water quality and sewage in their service area and they suspended dividend payments to MPIC. But that is going to be sorted out over the next couple of weeks, and we expect that Maynilad will again be able to contribute dividend flow to its shareholders going forward after that. Now we've skipped ahead now to Philex Mining because I want to leave a bit of time for questions at the end. Philex Mining is a large copper and gold producer. Their mine is called Padcal. It's in the north of Luzon Island, which is the big one at the top of the Philippines. It's in the pine-scented hills of Baguio, an extraordinarily beautiful part of the country. If you ever want to visit that mine, give us some plenty -- give us plenty of warning. And we'll take you there. You can stay at the Country Club. If you like golf, you can play golf, and we can take you down to the mine. But that mine is scheduled to close at the end of next year, so you need to plan soon. We are looking at extending the mine life by another couple of years while they prepare to bring into operation a much richer mine down in the south, in Mindanao. That mine is called Silangan. And as you can see in the blue box at the bottom right hand of this slide, it's got very rich copper and gold resources. It's got 2/3 of the gram per ton of ore of gold in it and very high concentration of copper, about a little over 0.5%, as you can see the figures there. Now with surge in gold prices, their earnings did pretty well last year. They lifted their profit, as you can see on the chart, in U.S. dollars from $2 million to $11 million. They kept their cash production cost level, which meant that, that higher price fed right down to the bottom line. There's a slight offset there because the peso strengthens during the course of 2020. And of course, gold being denominated in U.S. dollars, the stronger peso had a consequence for the peso value of their earnings. That brings me to the end of this presentation. I'm ready for questions now.

Okay. Let me look in the Q&A box here. And we have a question, which suggests that both Indofood and MPI are trading at discounts to their NAV. Any plans to address this, particularly MPI? That is a very good question because discounts in net asset value is what keeps me awake at night when I'm not dreaming about the fantastic outlook for these companies in the years ahead. Now First Pacific has been laboring under a NAV discount of our own. It's generally hovering lately about 60%. And that is the reason why we launched our 3-year share repurchase program, and we're hopeful it will help us to narrow that discount. Now MPIC's own discount is an issue to us as well. Just ahead of the COVID pandemic, they were operating their own share repurchase program in a bid to address that. As you may have noted, looking at news flow from MPIC, they reorganized their portfolio quite a bit over the past 1.5 years or so, selling down in the hospitals business from 80% to 20%. And they've sold off their toll road in Thailand, the Don Muang Tollway. And they've also sold down their stake in Light Rail Manila, the public transport utility there in the Philippine capital. So it is to be hoped that with the cash coming in there and being directed towards investments in roads and improving their balance sheet that this will move towards improving our NAV discount. Now the NAV discount at Indofood is a very strange creature because Indofood, I remind you all, owns about 80% of separately listed ICBP. They're both listed in Jakarta, but the market cap of Indofood is far less than the value of its stake in ICBP. And I think the reason there is Indofood, not only does it have that fabulous consumer branded products business, it's also got a flower business whose earnings fluctuate driven by commodity prices, particularly meat, and a plantations business, which again is buffeted by the wind of prices of palm oil, which go up and down according to demand. And ICBP presents a pure food play to a lot of investors. So that, I think, pushes up its valuation by comparison with Indofood, hence creating the NAV discount. How is Indofood addressing that? They are not as focused on this, I must admit, as MPIC. They are hopeful that strong earnings growth and news of the increasing contribution from Pinehill this year and in the years ahead will increase the investor appreciation of the value that Indofood as the holding company there brings to the party. I, myself, if I'm compelled to choose between buying shares in Indofood or ICBP, I would take Indofood because I think there's more upside there. Right. On to the next question, what is driving the growth of the food seasonings business? Well, that's a very inside baseball question there. And it is, frankly, there was a joint venture with a Western food company, which was wound up. And in the process of that winding up, there is a one-off jump in the food seasoning sales. That's really quite a small part of the overall sales of consumer-branded products for our growth there. Look at the noodles business, look at dairy and possibly followed by snack foods. Now a question dear to my heart is how do I ensure that ESG -- sorry, how does First Pacific -- that ESG is a focus in all portfolio companies, how to maintain consistency? This perhaps has been submitted by a reader of our ESG report because it's one that we try to confront every year. Basically, we're engaged in a gradual process of aligning the ESG outlook and strategies of First Pacific, and these operating companies in those emerging markets of Philippines and Indonesia. An enormous handicap that we have is the great poverty in these countries. For illustration, in the Philippines, coal is far and away the cheapest source of electricity. It's the cheapest fuel for all the power company, and that's why coal is a huge part of the supply mix. I think it's about 40% in that country. Now I firmly believe there is no resolution of the climate change problem without addressing the question of coal. That is increasingly coming up in meetings with investors. And I am hopeful that pressure from investors, acceptance of the science will help shift the understanding, but we need the buy-in of the regulators in the markets in which we operate. And in the Philippines, so far, there's no buy-in. They signed the Paris Agreement back in 2015. They were late to describe their national contribution. They delivered it only a couple of weeks ago, about a year late. And they said, essentially, we'll do huge cuts in our carbon emissions, but those huge cuts are going to be delivered by aid from foreign powers. So there's a long journey to go. And it's my greatest worry, frankly, not just for shareholder value, but for the sake of our grandchildren. Right. We are asked, are there any plans to change our mix of investments perhaps into more fast-growing consumer products and maybe less infrastructure? I'm going to answer that briefly because my time is running out rapidly. Our core holdings will remain unchanged. The phone company, the food company, the infrastructure and holding company, we may invest more broadly within those 3 areas. We're going to stick to our geography. Thank you very much, everyone, for listening to my presentation. We can carry on our dialogue in the chat box.