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

Hello, and welcome to the Deutsche Bank Depository Receipt Virtual Investor Conference, dbVIC. I'm pleased to announce that our next presentation will be from First Pacific Company Limited from Hong Kong. [Operator Instructions] On a final note, all today's presentations will be 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, First Pacific Commissioner Indofood. First Pacific trades on the Hong Kong Stock Exchange under the symbol 142 and on the OTC market as FPAFY. Welcome back, John.

Thank you kindly, Zaf. And thank you all listeners for your attention during this presentation. I'll talk for 15 or 18 minutes, and I'll leave plenty of time for questions. Now just as a reminder, First Pacific's 3 core holdings consist of Indofood, the biggest food company in Indonesia; Metro Pacific Investments, the biggest infrastructure holding company in the Philippines, with investments in electricity distribution and generation, water distribution, toll roads, hospitals and other smaller businesses; and the last of our 3 core holdings is PLDT, the biggest telecommunications company in the Philippines, which under it has the smart brand in the mobile phone space. The other companies, logos that you see on this page here are either smaller investments that we hold or they are units we hold through those 3 core holdings. Now let's have a brief recap of our first half earnings, which we reported in August. In Hong Kong, we report only twice a year. However, if you consider these numbers, they suggest that we will have a very strong full year for 2021 as a whole, not least because Indofood and PLDT delivered their highest ever first half revenues because COVID-19 lockdowns boosted demand for the food that Indofood produces and the telecommunication services that PLDT provides. And that demand has continued on through the full 9 months, and as you'll see later on. Now this has led to First Pacific seeing its contribution from operations rising 26% to almost USD 0.25 billion versus $200 million, a bit less than that a year earlier. Nearly all our operating companies, as you can see on the column chart on the top right, delivered stronger contribution to us. We have paid some attention to our balance sheet, and that has resulted in a sharply lower interest expense with costs being improved by $6 million. Our net profit was $181 million versus just over $100 million a year earlier. And if you were looking at a share price graph of First Pacific over the past 12 months or so, you will see that we had a bit of a pop after we reported our August number -- our numbers in August because we surprised everyone with an increase in our interim distribution to shareholders by HKD 0.02 to HKD 0.09 a share. Now that came as a surprise, but it shouldn't really have. We're in our 11th, 12th year of distributing a guaranteed 25% of our recurring profit to shareholders, and the 1Q numbers have shown that our recurring profit was likely to continue growing through the course of the year. So that, of course, implied we would increase our distribution or our dividend payment to shareholders. Now in addition to that shareholder return, since the end of March, we've had the beginning of a 3-year share repurchase program with a budget of $100 million. That money will be fully accounted for on buying shares and canceling them. And that, of course, will raise by canceling shares, the earnings per share and value per share of First Pacific. We're very pleased with this program. We've been wanting to do it for some time. But as our earnings have grown so steadily over the past year or 2, we've had the confidence in our cash flows that we would launch that program. Cash flows, as you can see, are illustrated in the bottom-right column chart on this Slide 3, and our dividend income -- dividend and fee income of $68 million for the half year does not yet include the dividend payment from Indofood, the biggest food company in Indonesia. And with the full dividend income for the full year, we would expect to see perhaps as much as $200 million. Now moving on in this presentation. Let's have a look at our balance sheet management. As you can see, we've got some borrowings, column chart there on the bottom part of the page. And I'm terribly sorry, but we've had to put lots of little footnotes all over this place because as you can see, we've got $300 million of bank borrowings following June 2022. And if you read the footnotes, we've got all the agreements, all been signed ready to trigger them to move those borrowings way out along our maturity profile. And that will result in our average maturity will extend beyond 3.4 years as it was at the half year. And our blended interest cost of 3.5% is going to decline quite sharply, not least because a few weeks ago, we called our most expensive ever borrowing, and that's the 5.75% $120.5 million bond, which you see in the blue box there in the middle. We called it, I believe, at the end of October, and that was replaced with some bank borrowings, as you can see, following due there in 2026. Our interest coverage ratio is now 3.5x at the half year. And that means the dividend income we received after we pay our head office cost is 3.5x bigger than our interest bill. That's been improving over the past couple of years. And I would be terribly surprised if it's not closer to 4x by the time we reach the report of our full year numbers in next March. Now our investment criteria and management approach are described very briefly on this page. Basically, we're focused on Southeast Asia. We're focused in some key industries, consumer foods, infrastructure, telecommunications and followed by natural resources. We have an investment in a mining company producing copper and gold, and we've got some very small investments in oil and gas. Now a brief word about sustainability matters because they are becoming increasingly important -- pardon me, it's on this slide here. We have signed up to the United Nations Global Compact, the International Labor Organization, of course, UNPRI. And this has been in large step with our operating companies. We're reducing emissions at Hong Kong head office of First Pacific, and we are working very hard to improve the scores that are delivered by proxy advisers to the fund management industry who are increasingly paying very hard attention to how corporates are managing sustainability. Now Hong Kong and Asia broadly are rather behind either United States and Europe in putting sustainability into how they regulate equities. And we will see Asia following in the years ahead. It has been our policy to try to be 1 or 2 steps ahead of the regulators so that when these rules come into force, we've already been following them, much as a requirement to publish our sustainability report at the end of April and setting reporting boundaries and so on. Now forgive me, I've skipped over a very important slide, which describes our holdings that we directly hold by at First Pacific. As you can see, our 3 core holdings, PLDT, Indofood and MPIC, make up the bulk of our gross asset value. That was $5.2 billion as of the end of October. It might be a little bit better now because I think share prices improved in the couple of weeks since then. And as you can see, we've got a pretty fair balance with food, telecommunications and infrastructure there. Philex is much less of a core investment. But as you'll see later on, we're getting some very good returns from that investment, particularly because of a huge surge in the price of copper that Philex produces. Now I would like to turn to the first and biggest of our holdings, Indofood, which produces instant noodles. It's the biggest maker of sweet instant noodles in the world with a production capacity probably about 30 billion packets a year, about 20 billion domestically and then 10 billion through its Pinehill asset, which has markets in Africa, the Middle East and Southeastern Europe. I mentioned I believe that they're heading towards record revenues for the full year of 2021. I would be very surprised, I would be astonished if they also didn't have record earnings as well for the full year because the acquisition of Pinehill, which they completed in August last year, has been feeding right through to the bottom line for the past 9 months of the year. As you can see here, with sales up 20%, and core profit increased almost double that to a record high for the 9 months driven by sales group and Pinehill and stronger profit margins. There are some margins here in the blue box here, on the bottom right of this slide. Noodles are the biggest thing that Indofood sells, I believe, about over half of their revenues come from instant noodles, and as you can see, their EBIT margin on noodles is at a record high. It's over 25%. And as you can see, most of the other products that they produce are also seeing improved margins. Now bear in mind that Bogasari, the flour business, the agri business, which is mostly palm oil, but also includes other things like tea and a little bit of sugar as well as the dairy business are heavily influenced by commodity prices. So when wheat prices get high, Bogasari, as you can see, sees a little dip in their margins as they did in the 9 months -- first 9 months of the year. And dairy was hurt a little bit by expensive milk powder and so on. Now looking ahead, we see Indofood continuing to have steady earnings growth over the next several years, a prior investment -- investor sitting on the fence, looking at First Pacific and the assets it owns, I'll be very tempted to buy Indofood rather than First Specific. But Indofood, let's remember, is denominated in rupiah. So you're taking on a little bit of emerging market risk. Now First Pacific, of course, is quite happy to take on that emerging market risk. And if you were to buy First Pacific shares, well, the Hong Kong dollar has been tied rigidly to the United States dollar since I believe October 1984. Now let's have a quick look at Indofood's single biggest holding, the separately listed Indofood Consumer Branded products company. As you can see, surging growth in sales of noodles largely driven by the acquisition of Pinehill, which they completed last year for $3 billion. That was a very fine investment. It was so big that independent shareholders of First Pacific had to vote on it, in past, I think, by a couple of percentage points. It was quite hotly contested, and I feel personally extremely confident in the fullness of time will show that the acquisition price of 23x projected earnings for 2020 and 2021 will prove to be an absolute bargain. Now we're getting a little behind ourselves, I'm 13 minutes into the presentation. So we'll finish with Indofood and go to PLDT, which again, the biggest telecommunications company in the Philippines. PLDT has got 3 main businesses. The first of them called Individual, is mobile phones in the hands of retail customers like you and me. The second is the enterprise business, which is everything that a phone company can offer to businesses, whether it's racks, landlines, bulk mobile phone subscriptions, lease lines to international destinations and so on. And then the third main business is the Home business, which has been delivering the strongest earnings growth this year, the home business has been seeing sales of contracts to people wanting WiFi connections in their homes explode this year. Let's have a closer look at that. And we can see the Home business saw their installation rate increase to over 100,000 installations per month. And that has seen their revenues rise 25%, far and away, the strongest of all the 3 main businesses. The individual business is the biggest of the lot. They saw their revenues rise rather more slowly at a 3% rate, but it's still nearly half of all service revenues. And the enterprise business, even though work from home restrictions in the Philippines have really restricted investment in this area, nevertheless, managed to see an increase in revenues to $31 billion. Now they dominate very strongly in the enterprise business with about 70% of the network provision in racks and so on market share of the entire industry in the country. They are building out very heavily, and we will continue over the medium term to see earnings growth there. In fact, we see medium-term earnings growth at all of those main businesses at PLDT. The earnings growth we see from this company really comes from the quality of the network that it's been building out. Over the past 5 years or so, they've spent over USD 5 billion, building up the network, both the cables in the ground and the cell towers and everything connecting them in between even to international cables going overseas, where they've got enormous investments to make sure capacity is there. Or when millions of Philippine people want to connect to Facebook or YouTube and the like. Now these 2 line charts at the bottom of the page illustrate the strength of their domination -- pardon me, in both the fixed line and the wireless. As you can see, the wireless delivered by Smart, the download speeds are far and away better than the #2 wireless telco, which is Globe and then a very much smaller detail, they've got about 3 million or 6 million subscribers compared to over close to 70 million for us. But as you can see, we've got almost double the speeds -- more than double the speeds of Globe, the next fastest provider. And on the fixed line space, you saw Converge in new entrants, they do nothing but home broadband surge to head in download speeds, couldn't keep the pace and they've knocked back a little bit. And I would expect that going forward, our advantage in fixed line customer experience quality will maintain at a very high level. Now CapEx for this year is said to be PHP 88 billion to PHP 92 billion. And when you consider the exchange rate is around about PHP 50 to a U.S. dollar, that's pushing off of close to $2 billion. Now that's been the highest ever, and we rather expect that next year and going forward, we'll see a gradual decline in the amount of CapEx that they're spending because as you can see, they've built up so many cell towers just in the wireless space that they're covering pretty much everybody who can afford a mobile phone. Now let's go to MPIC, which is a little more complicated. It's a holding company just like First Pacific, and it's main investments, #3, really, just like us, electricity where Meralco is the biggest electricity distributor in the country. They distribute electricity to most of Luzon and providing about 55% of the entire country's gross domestic product. They've also got a generation business under MGEN, which plans to build out up to 1,500 to 1,700 megawatts of renewable capacity over the next 5 to 7 years. They are building out like crazy. And over the next few years, you'll see that the share of revenues that they're getting from electricity production will grow very, very strongly and push towards what they get from distribution. It is one of the biggest companies in the Philippines and pays an enormous amount of dividends. In fact, its contribution to MPIC, as you'll see in a moment, is far and away the biggest. The toll roads business is the biggest road network in the Philippines, well over 200 kilometers and building out very fast. Maynilad is the biggest water utility in the Philippines, and it covers the west zone of Manila. Now Metro Pacific owns only 20% of MPHHI, the biggest private hospital network in the country. And the hospital network itself is growing so fast that its revenues now in total, exceed those of Maynilad. There are smaller investments now in a logistics company called Metropac Movers, a Light Rail company, a metro both Light Rail and Manila. And then more recently, a purchase of petroleum product storage company in Philippine Coastal storage. Those very small investments which do not contribute in a big way to MPIC but may in the future. Now the COVID-19 pandemic knocked MPI for a loop for 8 years in a row up until 2019. Each successive year delivered record revenues, record profit. And then in 2020, as you can see, they took a bit of a hit. It's there in the revenue and core income column chart on the bottom right-hand side of the page. Now as you can see, things have begun to turn around in the first half of 2021 with core income rising 13%, and that was driven by toll roads and power. Let's have a closer look here in the change in contribution. As you can see, toll roads improvement was almost PHP 1 billion, followed by power and then others. The water business because so many people were staying at home, industrial water consumption, which pays at a far higher rate per cubic liter was down quite a lot. So while people were consuming more water at home, the overall revenues declined, so the contribution of the water business was smaller than it was a year ago. But they've got lots of cash on hand well over PHP 20 billion, and their confidence about future earnings growth is such that notwithstanding difficulties last year and the slight improvement this year, they've kept their dividend payment to shareholders unchanged. Now a brief word about the last 2 companies, then we'll move to some Q&A. The first of these is -- well, let's go with Pacific Light. Pacific Light is an electricity generator in Singapore, which has had a difficult time in recent years because it's an extremely competitive market. But the recovery from COVID-19 has seen electricity demand surge to record highs in Singapore, and they've managed to benefit from that, swinging from losses in earlier years to profit in the first half of this year and likely to do the same in the full year as a whole. More recently, they've joined a consortium to import 100 megawatts of solar-generated electricity to Singapore from Indonesia, from a small Indonesian island just south of Singapore, and we have every hope this is a small step into a big arena. And we're hopeful that Pacific Light will see more deals like this to import renewable electricity into Singapore from Indonesia. We're very excited about that. Now we move last to Philex Mining Corp. As you can see, their earnings have increased quite a bit with revenues up 22% and core income more than doubling, as you can see in the U.S. dollar translation in the column chart there. Now Philex is heading towards a big cusp in its existence. They've been operating the Padcal Mine for over 50 years, and they are developing a new mine in the south of the country and with the hope that it will come online just as a Padcal Mine see its production in 2024. In the meantime, it's got a very strong earnings growth. They've got a share rights offering that they're working on to help finance development of that mine along with some borrowings. And we are very hopeful that all will proceed well with that. But again, please bear in mind that our core holdings are Indofood, PLDT and MPIC, and we are very confident that contribution and earnings growth from those companies will be strong in the years ahead. Now I've got about 6 minutes left. I'll have to move rapidly through some questions. And there's a question about guidance on buybacks and dividends for FY 2022. In 2022, we will distribute dividends equal to 25% of our recurring profit or higher, but not less than 25%. The buybacks will be, I would expect around about 1/3 of the budget we've got over the 3 years, 1/3 of $100 million. Now another question, are we happy with our current leverage metrics? And do we see room for improvement? Or are we willing to gear up for the right acquisition? We've recently had some unpleasant experiences with borrowing lots of money and then making poor investments. We've got no appetite to do that currently. We are confident, in fact, that over the next few years, our balance sheet will continue to strengthen. We do not see any major borrowings at the First Pacific level. And I believe this kind of answers the next question, how are we viewing new acquisitions in the coming years? What First Pacific will do is they will help advise and guide such activities at the operating company level. We are very, very keen on the digital arena. If PLDT and Indofood perhaps were to do something in the digital space, Indofood has got a very robust electronic network connecting its vast distribution system to the Indomaret chain of stores, which are themselves connected. And there is potential there. And let's not forget that PLDT is one of the very few companies with an e-banking license. In the Philippines, which one analyst valued at USD 2 billion alone. That business is called PayMaya and it's an interesting potential catalyst for surging share price at PLDT in the years ahead. Let's see how the e-finance will go there. The second thing that we're quite keen on is renewable energy. If First Pacific were ever to find the money for a new investment, it would probably be in one of those. My personal preference is renewables because I see demand for renewable electricity generation just surging in the years ahead, notwithstanding the disappointment from Glasgow a couple of days ago. Yes, our ESG actions, as the question asked, are indeed in line with the Hong Kong Stock Exchange guidance. As I mentioned earlier, we try to stay a step ahead. We've issued, I think, 5 ESG reports now. And we are hopeful that our next one for covering fiscal 2021 to be published next spring, will be covering all of our companies with the reporting boundary, not just First Pacific but the entire group because at long last, Indofood is going to publish their own sustainability report for 2021. That will come out by the end of April. I'm very excited to see it because if they are to follow on from what the plantations business is doing with their sustainability policies, reporting and activities, then they are really going to be an enormous leader in Indonesia on that. So I'm quite excited about that. And now a last question, are the impacts of COVID good and bad on the business behind us. And do we see sustainable positive trends? Well, certainly, for example, at the mining business, the COVID business caused a reevaluation of their supply chain and how they're managing it and ensuring that they don't run out of crucial equipment. So that was a good tough lesson for the mining business. And I think to a lesser extent, in all our other businesses as we were all affected in the supply chain by shutdowns and so on because of the pandemic. So probably our supply chain management has been strengthened. We are hopeful that the surge in demand for data services, particularly in PLDT's Home business will result in a higher base of consumers that are taking our services and perhaps a permanent increase in ARPUs, average revenue per user. And in the noodles business, something similar. Per capita noodles consumption in Indonesia is about 1 packet of noodles per person per week, and we would like to see that increase. Now the company is in the Pinehill acquisition, they've got far lower noodle consumption and far lower noodle penetration in that segment of the food market. And we're hopeful that Pinehill will lead growth and Indofood for the next few years. So to wrap up, we believe our company is going to have a terrific time going forward. We're very happy that we've got a 3-year share repurchase program. Our 25% minimum payout to shareholders is strong, and it will be that way going ahead. And if our earnings are going up, while that means cash per share as shareholders will go up too, and I'm hopeful that with the waning of the COVID epidemic, we can go out and see shareholders, non-shareholders in the months ahead, tell them the story, and that will be reflected in our share price. Thank you very much for listening to me today.