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

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. I'm pleased to announce that our first presentation today will be from First Pacific Company Limited from Hong Kong. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box below the slides. Once the Q&A session has ended, don't log out, you'd also have to be transferred to the First Pacific Company booth and you can continue to ask questions via chat and access shareholder materials. On a final note, all of today's presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome back John Ryan, Associate Director and Chief Sustainability Officer, also Group Head of Investor Relations and Commissioner at Indofood. On First Pacific, which trades on the Hong Kong Stock Exchange under the symbol 142 and in the U.S. on the NYSE market as PAFY. Over to you, John.

Thank you very much, Zaf. Now let us speak again, with a reminder of what First Pacific is? We're an investment holding company listed in Hong Kong as Zaf said. Most of our assets are located in Southeast Asia. The biggest of them is Indofood, which is the biggest food company in Indonesia, and it is the biggest global manufacturer of wheat-based instant noodles and its most famous brand is called Indomie. Its food products are made by CBP, which is separately listed in Jakarta. Now in telecommunications, we are the biggest shareholder in PLDT, which is the largest and most sophisticated telecommunication company in the Philippines and its mobile brand is called Smart. Both OpenSignal and Ookla consistently rate their networks as the best in the country by a significant and growing margin. Now for infrastructure, we are the biggest shareholder in a company called Metro Pacific Investments, which has controlling stakes in the country's biggest water distributor, biggest electricity distributor and they also generate electricity and the country's biggest toll road network. Separately, we are 1 of 2 shareholders in PacificLight Power. That's an LNG-fired power plant in Singapore. MERALCO is the power generation brand under Meralco, which is the power of distributor that we own in the Philippines. And moving over to natural resources. Philex Mining Corporation is 1 of the biggest copper and gold mining companies in the Philippines. PXP Energy is very big for the Philippines, oil exploration company. And IndoAgri is the plantation farm under Indofood. It's 1 of the biggest producers of palm oil in the world. Now moving on, let's have a brief recap of our first half earnings results. Following on from record high profit in 2021, we gathered some acceleration in the first half of the year with contribution up by over 1/5 to a record high and PLP in Singapore, after years of losses, saw its contribution rise tenfold, and it's delivered dividend income to us during 2022 for the first time ever, and that's been a significant figure about $25 million. Now as you can see, the change in recurring profit graphic on the top right shows that PLP, as mentioned, was the biggest contributor to the increase to the record high, and that was followed by MPIC, recovering from COVID lows and then Philex, PLDT and so on. Now as an investment management and holding company, we produce -- we manufacture nothing. And the only service we provide is management of our investee companies. So our cash flow is critically important. As you can see, our big source is dividend and fee income with some occasional new borrowings, as you see there in the other green box. And our biggest spending, of course, is on the interest bill followed by head office costs. Now let's have a little bit more about the balance sheet and the interest bill. As you can see in the bottom column chart, this is a graphic of our maturity profile of all our borrowings. We've got 2 bonds outstanding there in blue, and there's 1 due in 2023, that's in April that's about 5 months away. But we've already lined up banks financing to pay off that maturing volume of money, a bit under $360 million. And we had wanted to replace that bond with another bond about a year or so ago. We lined up Moody's and S&P to give us a credit rating and both of them, bless them, gave us investment-grade ratings. And unfortunately, the market went away. And we were looking for 10-year money, as you can see, this 2023 bond was a 10-year bond, but to borrow, 10 years in the bond market, it would have cost us [ 6.5 ] or even more, whereas going back to banks we're able to get LIBOR plus [ 2 ], [ 2.5 ], much, much cheaper, but those are not fixed rate borrowings. So if interest rates go up, that interest build will rise. This year, we expect to pay maybe $55 million, $56 million in interest. And over the next couple of years, we expect it will max out at about $70 million. Now how much is too much to borrow? We look at it through our interest coverage ratio, which you see is about 3.8x at the end of last year. We expect it to be the same or a little bit better by the end of 2022 and going down a little bit in '23 and then back up in 2024. Now the ICR simply means we have, after we pay our head office costs, almost 4x more cash in hand than the interest rate itself. At 3.8x, that's comfortably above our comfort level, which is 3x. Now a graphic of the gross asset value is here. As you can see, this is fairly recent. It's as of the end of October. Indofood, as I said, is our biggest holding, followed by the phone company PLDT, MPIC and then the Philex Group there. It's a fairly good, strong balance MPIC, PLDT and Indofood clearly are our core investments. Curiously, you will not see PLP, the Singapore power plant here. And that's because after many years of losses, it was stuck in a bad contract charging at very high prices for the LNG at bond. It lost money year after year and our finance department decided to write it down to zero. Now that it is paying out big dividends and paying down its borrowings quite rapidly, we expect when we report our full year numbers late next March, that we will put a value back on it somewhere between $200 million and $300 million. And it will again reappear in this pie chart. Now essentially, our investment in management approach is we like to find assets in our geography, emerging Asia. We like to buy companies, which have great potential and significant presence in their markets. We'd like to have significant influence over those companies, so that we can have strong input in the cash flows, particularly dividends upstreamed to us. Now since 2010, for about 12 years, we've returned about 25% of our recurring profit to our shareholders in the form of distribution, which is more commonly known as dividends. And more recently, about 1.5 years ago, we began a 3-year share repurchase program with a budget of $100 million, and that was going extremely swimmingly until the current market turmoil hit a few months ago. More on that, I think when we sum things up. Now a quick word of sustainability matters. I'm the Chief Sustainability Officer of First Pacific. We're very keen on working towards goals for us and our operating companies that will align with the nationally determined contributions signed by 192 nations in the Paris Accords. I think it was back in 2015. So with Hong Kong pledging to go to Net Zero in 2050, First Pacific head office is aiming for that goal as well, and similar goals are on the books with our operating companies in Indonesia and the Philippines. It's something we take fairly seriously. And among our group companies, I would say MPIC is probably a leader there. You can look at the websites of those companies for more details about their specific commitments to emissions reductions. Now let's move to our biggest holding, Indofood. As you can see, their net sales rose to a record high in the first half of the year, but core profit grew much more slowly. And that is because the Russian invasion of Ukraine sent the prices of wheat through the roof. Palm oil also went through the roof, and that meant the consumer-branded products arm of Indofood, normally the big profit driver, took a bit of a beating. And earnings were able to grow on Indofood, because the flour business called Bogasari and the plantations business managed to coup well with those big increases in commodity prices. Now briefly about Indofood CBP. As you can see, sales were up strongly, but the core profit was down by almost 1/4 in the first half of the year. They and Indofood will be reporting their 9-month numbers at the end of November, and we expect that they will, performance wise, look pretty similar to the half year numbers. But for 2022 as a whole, we expect Indofood again to record high turnover and record high profits. And going forward, we expect medium-term growth to be very, very strong, and that will be built on a group of companies called Pinehill, which are noodle makers in -- based in Africa, Middle East and Southern Europe, which they bought 2 years ago for almost $3 billion. In those markets, noodles consumption is very low. It's growing very, very fast. And our companies in Pinehill are the biggest producers of noodles in those markets. And the formula is really quite simple. Instant noodles are cheap to manufacture. They have a very high margin. And for consumers, they cost relatively very little. They taste delicious. Think of all that sugar and salt and fat with some nice carbohydrate in noodles. And as times get tough, as they often do in very poor countries where are our main markets, noodle consumption grows a lot. And we expect continuing strong growth as those consumption numbers grow in those markets. Now let's have a brief look at PLDT. The growth from PLDT comes, as you can see in the bottom right-hand chart, almost entirely from data services. COVID hit the Philippines very hard. People had to shut themselves in their homes. They turned first to mobile data to stay connected. And then when they saw the cost and inconvenience of that, they've moved out in droves to go out and install home Wi-Fis. Now the Philippines is 1 of the poorest countries in ASEAN and by global standards, it's fairly poor. So home Wi-Fi penetration rate is only about 20% of households, which means that there's significant room for that to grow and earnings in the past year, 1.5 years, as people moved off mobile data consumption to home Wi-Fi, has been driven by the home business at PLDT, as you can see on that tall green column of fixed-line data. Overall, PLDT expects its core profit to rise by 10% for the full year of 2022. CapEx is very high. Remember, I said they're the best network in the country. But we plan going forward to see CapEx trending down from its currently high level to below 40% of service revenues going forward. Now just some more details on the individual businesses. There are 3 main businesses: the Home business as described; you can see the revenues surging up by almost 1/4. The individual business is what we call the mobile phone business, and that's suffering from stiff competition, revenues barely up. What they're doing now to shift revenue growth into a higher gear is to base their advertising more strongly on the quality of the service that they offer rather than trying to match their main competitive globe, it is a duopoly in the Philippines, with deals offering free data here and free voice minutes there. But as you can see, overall, data and broadband services are a whole four fits of all the revenues coming in. And now PLDT has got a little sort of a kicker there for future share price and earnings growth. They control a company called Voyager, whose investors include KKR and Tencent, very, very high-quality investors. And they are the only telecommunications company to have a banking license for financial banking. So that fintech Voyager, it's valued at a little over $1 billion, $1.4 billion. And we have some hope that this is a potential turbocharge for PLDT earnings. As time is going by, we'll skip over the next 2 slides and move on to MPIC, which is the infrastructure holding company we control in the Philippines. As you can see, they've got 4 main areas of business and then a collection of smaller, hopefully fast-growing investments on the right-hand side. The biggest earnings contributor is electricity. They're the biggest shareholder by far in Meralco, which also has a generation business under MGEN. And Meralco, as you can see here, has got a 58% stake in PacificLight Power, which is the Singaporean power producer. We're the only other shareholder, we own 42% there. Now the Toll Roads business, as you can see from that collection of logos, has got quite a lot of toll roads in the Philippines. They've also got toll roads in Indonesia and in Vietnam. They are rapidly building out new toll roads going forward in the Philippines. And now the COVID restrictions have eased, we are seeing surging traffic growth. And last year and this year, the Roads business has been the biggest contributor to earnings growth at MPIC. Now in the water business, that is kind of like your humdrum utility. It's just a dividend machine. People consume more or less the same amount of water year in, year out. And that company forks out dividends to its shareholders. It's a nice little earner. It's very mature as you might infer from what its business is. But we like it. It's been 1 of the core parts of MPIC for many years. Now the Hospitals business, we owned 100% of until about 3 or 4 years ago when we sold 80% of it to GIC of Singapore, and I think it was KKR again. And the takeaway from that was about $600 million. It was a remarkable turnaround of an initially very, very low investment. We've retained a 20% stake there. And they are just struggling out of COVID, which turned their business rather upside down. The other smaller companies that we're invested in, they range from the only privately held Light Rail operation in the Philippines to a holiday home real estate development company called Lanco and to a petroleum product storage company called Philippine Coastal Storage and some other ones. Now let's have a quick look at the change in contribution here, as described a moment ago. As you can see, it was Toll Roads, the biggest increase followed by Power and then all the others. Now to get through all of our companies and to the summary, we'll flick through here, look at that nice map of all the toll roads we have in the Philippines. It's a fine, fine business. I love it. And let's move on now to PacificLight in Singapore. We bought this just as it was being -- construction was being finished in 2013. So we've kind of owned it from the beginning. And as mentioned, going to owner's fuel contracts, they lost money year in and year out. But as you can see from the line chart down here at the bottom, things began to turn around in 2021 with the dark blue line with demand surging in Singapore for electricity. And as we can see, from the -- what's the name of that color? Let's call it purple. It's rather higher again in 2022. Now most of their electricity sales are to the retail market, and those are 12-month contracts. So they pretty much locked in what their revenues are going to be from most of 2023, and they are confident that it's going to be even better than this year was. Look at this, EBITDA up fivefold in the first half of the year on an 8% increase in electricity sales. That company has transformed itself from red-headed stepchild to favorite son. God, thank you. I'm very happy to see it. Now the last of our major holdings is Philex Mining. Again, it mines silver and -- sorry, gold and copper with a little bit of silver in the Philippines. It's currently operating mine as there's just 1 is in the north of Luzon. It's been going for over half a century. And it's scheduled to shut down in the next couple of years in 2024. Our engineers are exploring for other ore reserves in the vicinity of that mine, and we expect they'll find something that mine will manage to push out its shutdown, particularly of the refinery operations for another couple of years sometime in the next year or so. So don't expect it to close in 2024, maybe in 2026. And this is quite good news, because they are currently developing a new extremely rich mine down in the south of the country in Mindanao, the details of which are described in the blue box here on the slide presentation. Extraordinarily rich in terms of grams per tonne of gold and percentage of copper as well. We're hoping that we'll get into operation in 2024 or 2025 at the latest. Now to summarize, we hit in 2021 record high earnings. We lifted our distribution to shareholders by quite a bit. And as you saw from our first half numbers, we're continuing to lift ourselves up from those record high numbers of profit and turnover and so on. And our confidence was expressed in the 17% increase we made in our interim distribution to shareholders announced when we reported our earnings back in March. You can imagine that our full year numbers will be equally strong, and we'll see another increase in our distribution to shareholders, and that should make everyone quite happy. In the current market turmoil, we've seen our share price beaten down rather hard, and we're not the only ones. Currently, we are probably at a 9% dividend yield, which is extraordinarily high. So as long as our dividend commitment remains the same going forward and you're buying at today's share price, then you've got a 9% return on your money regardless of what that share price is. Now we've been doing our share repurchase program. Remember, a budget of $100 million for 1.5 years, a bit longer now. And over the course of that, we managed to reduce our NAV discount and that's the discount to our net asset value. Take the value of all those assets we own, take off our borrowings, and that's our net asset value. In the past year or so, it had been in the low 60s and with the advent of the repurchase program, we've got it down to the low 50s, and we're smoothing -- cruising smoothly towards an expected low 40s of NAV discount. And that has generally meant a good increase in our share price. If you look at a 10-year share price history graph against our NAV discount, you'll see that, that has been the case. Now the turmoil has come. We're very cheap, but the operations of our investee companies are going so strongly that I am hopeful, now confident that when the dust settles, our share price is poised for some significant growth moving on from that. I urge you investigate a bit further, drop us an e-mail. The details will be provided by Deutsche Bank. Research us on our website, go to the websites of our operating companies. And if you'd like to see some equity research on us, CLSA has got a history of covering us fairly well. Drop me a note, and I can discuss with you what all that is about. Now there are some more details here in this presentation. Please peruse it at your will. And now I'm ready for questions.

Here we are, pardon me. I'm looking at -- our first question that I'll look at. Are there plans to build a bigger stake in MPIC to gain overall control of the company? Well, you may have read a recent note about MPIC from JPMorgan, which discussed the possibility of privatization of MPIC. I can only say on that, that is widely regarded to some like fine idea. And the next question is, can you please speak to your ESG strategy and what area needs the most focus? My first blunt answer to that is coal. Meralco still has officially on its books, plans to build a 1.2-gigawatt coal-fired, supercritical power plants, it has been on their books for ages. And to my mind, it has been financially uneconomic for the longest time. But they've poured a lot of concrete and they're reluctant to write off that money spent without something to offset it. So if you will look at Meralco report its full year numbers, if they've got some big nonrecurring gains that may be the time when they would announce that coal-fired power plant isn't going to happen. Now in Meralco's defense, I have to say, over the next 5 to 7 years, they've got even bigger numbers, 1,500 megawatts, 1.5 gigawatts of renewable power plants in the pipeline, and they range from wind to solar to hydro. And they plan to be the biggest renewable power producer in the Philippines. And knowing them and their -- size of their bank account, that's a fairly reasonable ambition. Impact of the rise in the dollar on our business and balance sheet. Profoundly good question, I should have addressed it. Yes, our operating companies are running emerging market currencies, which have been hammered particularly the peso and more recently the Rupiah. PLDT has got most of its dollar interest payments naturally hedged with dollar income from international phone calls, and some swaps that they've conducted as well. They feel very confident. Remember, it's a very high cash flow company. Now Indofood, you remember maybe a year or so ago was the first corporate in Indonesia to do a 30-year bond. They did a 10-year bond at the same time, they borrowed about $1.7 billion, and that was to pay off some bank debt for that Pinehill purchase. Now Pinehill transfers all of its revenues up to Indofood in U.S. dollars. Their biggest individual business is in Saudi Arabia, where we all know, the currency is pegged to the U.S. dollar. So those 2 of our biggest companies, they've got natural hedges for their dollar borrowings. For First Pacific head office, all of our numbers are in U.S. dollars. So the only hurt we might get is the dollar value of the dividend payments that we receive from those companies. Key catalysts for growth in 2023 are, I think, when the commodity markets settle down, wheat prices settle down, palm oil prices settle down, Indofood will come roaring back, and it will be the biggest driver of our earnings growth in 2023. Now PLP is surging ahead. That could well be the #2 driver of earnings growth for us in 2023. As you saw in 1 of the earliest charts I showed you, PLP was the biggest contributor to our contribution growth in the first half of 2022. So it's definitely going to be up there in the mix. And PLDT, of course, with continuing growing profit in its sheer size will also be in the mix. MPIC will continue to grow strongly for them, but they're a bit smaller than PLDT or Indofood, and they'll be growing fairly strongly as well. Now I think that pretty much winds it up. A couple of minutes before the allotted end time, so what I suggest you do is sit back, think for a minute about what all I've been telling you and get yourselves another cup of tea, refresh your cup of coffee and get ready for the next presentation. And I'm very hopeful that they've got a big hill to clients to a better 1 than the 1 from First Pacific, which I honestly believe to be 1 heck of a buy right now. Thank you very much for your attention. Get in touch if you've got more questions.