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

Hello and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. My name is Zaf Aziz from the Deutsche Bank team. I'm pleased to announce that our next presentation will be conducted by First Pacific from Hong Kong. [Operator Instructions] On a final note, our 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 and Chief Sustainability Officer from First Pacific which trades on the Hong Kong Stock Exchange, that's 142 and in the U.S. on the OTC market as FPAFY. We'll come back, John, over to you.

Thank you very much, Zaf. Apologies our audience, technical difficulties made this a late start, so let's get straight into it. As a reminder, these are the assets held by First Pacific. We're a holding company listed in Hong Kong, China, though the only thing we have in either Hong Kong or China is our headquarters. All our assets are in ASEAN and they are here on the slide. The biggest asset we own is Indofood, biggest food company in Indonesia and the biggest wheat-based noodle maker in the world and followed then is Metro Pacific, a recently privatized company that we control in the Philippines, which controls the biggest electricity distributor in that country, the biggest toll road network, the biggest water company and the biggest private hospital chain as well as some smaller growth investments. Moving along, we are the biggest shareholder in PLDT in the Philippines with the Smart brand for its mobile offerings, it's the biggest and highest quality telco in that country. We've got some smaller investments in the commodity space, biggest among them is a copper and gold mining company called Philex Mining. Now let's move on to the next slide, which is about our results. Our first half numbers strongly imply that the full year is also going to be pretty good. We had record high turnover and record by contribution and record high recurring profit from our shareholders -- sorry, recurring profit as a result of all of that. On the cash flow side, PacificLight Power, a power company we control in Singapore, delivered its first ever dividend, and that doubled our dividend income in the first half of the year to about $143 million. Indofood and PLDT had their highest ever revenues because of continuing growth in demand for the food and telco services that they offer. And as a result, after all of this, recurring profit was just over $300 million for the half year. Recurring earnings per share were up by 15% for you in the United States. It was USD 0.0709 a share versus USD 0.0617. And we left the interim distribution to shareholders, our dividend payment to you, unchanged from a year earlier. But given how strong the cash flow is going, as you can see on the next page, on Page 4, there is a good prospect for the final dividend which we declared in March to be higher than it was last year. Pardon me, I'm having trouble moving from slide to slide. I wonder why that is. Hopefully, we are on Page 4, which shows you our balance sheet and borrowings. As you can see on the bottom left of that page, we've got a profile of our debt maturity. We've got some bank debt maturing in 2024, and we've already lined up refinancing of those borrowings. Now because of interest rates going up, over recent months, our interest bill has gone up as well. But it looks like when we're forecasting out to the interest we're paying for the full year for 2023, that's still below the average of our interest bill for the previous 10 years, and we anticipate there will be a peak in interest rates in 2024, we're shortly thereafter. And we won't see any stress really at all on our borrowings. If you look at the top right column chart there on Page 4, you can see from the base line that our interest coverage ratio was 4.5x at the half year. And that simply means that after we've got our dividend income has come in and we've paid our head office costs, we have 4.5x more money left over than the interest bill itself. And as you can see from the column chart underneath that, we've got significantly higher dividend income in the first half of the year than we did in the first half of 2022. Now let's turn over to Page 5, where we've got a pie chart showing the relative value of the asset down. And as I said, Indofood is a bit under 40% of everything that we own. And that's followed by MPIC, that infrastructure holding company, which we privatized last month. PLP, the Singaporean power plant is also there. It's got the dark blue color for our infrastructure investments. And then there's PLDT and then grouped together are smaller investments in the national resources space. As you can see, it's a fairly even balance between our core holdings, and we quite like that because that offers varying sources of cash flow as we go through the ins and outs of different businesses and economic cycles. You'll see that broadly, we're invested in the sorts of businesses that are pretty steady in a downturn. People need electricity. They need to drive their cars. They need to use their phones, they need to eat. So we're defensive for downturns, but we're also looking at the fast-growing markets of emerging Asia. And so we're benefiting a lot from the growth in those markets. I mean 2022 was, I think, our second successive year of record high profit. Good chance we'll see that in 2023 full year. And again, going further because our core investments have got capital expenditure going on to deliver continuing growth. Now I'm going to turn you over to Page 6, a brief word about ESG matters. The IFRS, which governs accounting roles globally is introducing new reporting standards for reporting of ESG matters like emissions and how climate change is affecting companies and how -- what companies do affects the climate and so on. And we'll begin to report on that in the first initial steps in 2023. In April when we published our ESG report and then much more broadly in 2024. We like to be leaders among our peers on these matters. Now I'm going to turn you over to Page 7 to Indofood. Again, one of my favorite companies. Net sales in the first half, as you can see, were a record high, EBITDA was a little bit flat because there's a big increase in cost of goods sold. That is largely to do with higher prices for wheat and palm oil and a little bit led to lesser extent on skim milk powder and sugar. But still, core profit rose by over [ 1/6 ] to a record high and that was driven by nearly record high margins on the instant noodle than Indofood sells. As you can see in the blue box, the margins on noodles went up by over 6 percentage points to 26.2%, an absolutely fantastic performance. The other businesses under Indofood include Bogasari, a flour business, which is pretty much a cost-plus model. And their margins deteriorated as their input costs went up, but they've maintained market share and they've grown their sales and volumes as well in the period. They're the biggest sellers, producers of flour in Indonesia with a market share of 50% or 60%. Now I mentioned capital expenditure for growth. A few years ago in the summer of 2020, Indofood bought some noodle producers in North Africa and the Middle East. Remember, Indonesia is the biggest Muslim country in the world. And everything that Indofood produces is allowed. And the markets that it just brought into 3 years ago, also mostly Halal markets. And the capacity for noodle production when we bought those companies in 2020 was 9 billion packs a year. And by the end of March this year, we'd increase that capacity to 13 billion packs a year. And that's because we're seeing very, very strong growth in those new markets we've bought into. And we're very confident that, that strong growth is going to continue in the years ahead. Briefly, the argument is that per capita consumption of noodles is very low. Instant noodles are a very low-cost food, tasty because they've got salt and oil in them. I like them myself. And the penetration in those markets is very, very low and about 12 packs a year. We are going to see very strong growth in that market over the next several years. Now we're going to skip ahead to Page 10 for Metro Pacific. And here's a brief reminder of what exactly this is. The biggest power distributor in the country with a very large and growing power generation business. Mixture of gas, there's a little bit of coal and big growth in renewables. Toll roads, they've got about 300 kilometers of toll roads in Philippines and in other markets in ASEAN and then water, the biggest water company, it's called Maynilad and then hospitals business. It's 23 hospitals now that they own, they've bought another one very recently, we need to update our book. Now when I turn you over now to Page 11, you can see from the contribution chart here, that the Power business really surged the earnings to the record high that they showed in the first half of the year. Very strong growth because of a growing power generation business and the distribution business saw greater profit because of higher electricity prices. Toll Roads business continues to grow very, very strongly. And the water business, as you can see, did very, very well, and that's largely because long-delayed tariff increases have finally begun to feed through, resulting in a straight improvement into the bottom line of that business. Now just a brief word on Page 12 about the Power business, Meralco. It is the most important of the MPIC companies. And it is expanding its power generation very, very rapidly. They plan 1,500 megawatts of new capacity in renewables by 2027. And similar number for natural gas by the end of the decade. All of this means that earnings growth at this power company is going to remain strong in the years ahead. And the particular reason that we like it is it is a very strong payer of dividends to its shareholders. We control it via MPIC's 47.5% stake in it. Now I'm going to turn you over to Page 13, where a brief word about the toll roads business. Revenues were a record high in the first half of the year. Core profit was a record high. We're building out more roads and more people are getting to their cars and driving on the roads. It's a really strong, steady growing business. It demands lots and lots of CapEx and they're managing mostly to finance that with internal cash resources and their own borrowings. And if you look really closely at the announcements that you see on our website, we've been expanding our investment in toll roads in Indonesia, which I think now in terms of traffic volume is the single biggest national toll road network that we own. It's a really, really wonderful business. Now in the interest of time, I'm going to skip over Maynilad to Page 15 to talk to you about PLDT, as said, the biggest telco in the Philippines. Their first half numbers were fantastic. Service revenues were at a record high. EBITDA was at a record high. And it's notwithstanding that this is a relatively core emerging market, they have very strong EBITDA margins, well over 50% year in, year out and in the first half of the year, they nudged up to 53% versus 52% in the first half of 2022. Now if you're looking for something to be concerned about, net debt versus EBITDA edged up a bit to 2.48x at the end of June and their interest cost was a little bit more than 4%. But they've got very, very strong cash flows. They're habitually paying 60% of their core profit to shareholders in the form of dividends. And we're very confident that will continue in the years ahead. Now I'm going to turn you over to Page 16 for just a quick rundown of their 3 main businesses. The Home Business has been the biggest driver of their earnings growth in the past 1.5 years or so during that dreadful pandemic. People quickly learned that surfing on your phone for half the morning can get very, very expensive. So there is a mad rush of people moving to install home Wi-Fi services, and that's been driving growth in the Home Business. That's slowing down a little bit now with a little bit of saturation. About 1 out of 5 homes in the Philippines has got Wi-Fi. So there's plenty of room for growth, but it's slowing. And as you can see, the revenues were up 3% from a year earlier to just over PHP 30 billion. And that's because the home fiber broadband that we offer has greater geographic scope than anyone else has, and the bandwidth, it's got is much better than the fixed wireless that some other telcos are offering. The Individual Business is what we call our retail mobile phone business. Revenues were kind of flat. The competition in this industry is very tough, notwithstanding this mostly a duopoly. Our PLDT using the Smart brand and then Globe is the second one, very strong competitor. Both these companies, by the way, this week have reported their 3Q numbers, making this presentation very slightly out of date, but the broad trends haven't changed. The 2Q service revenues were up quarter-on-quarter quite a bit, high single-digit rate. And we're hopeful that, that will help towards the full year. Their full year target is for telco core profit to be between PHP 33.5 billion and PHP 34 billion, and that's up from what it was in 2022. Now the last major third business that they've got is the Enterprise Business. I think corporate services, data centers and [indiscernible] and so on. That continues to grow fairly strongly, and they are building out their 11th data center, and that's going to open up in less than a year from now, and that will be coming to hyperscaler clients like Alphabet and Meta and all these other companies that keep changing their names. Now it's worth -- before we leave PLDT to point out on the next page that its leadership stems from many, many years of CapEx spending of about $1 billion a year over the period, which has built the best mobile and fixed-line network in the country. And that has come at -- as a result of lenders finding PLDT to be a very good borrower. As you can see in the bottom half of Page 17 there that it's got investment-grade ratings from Moody's and Standard and Poor's. Now we've got on Page 18, a new addition to our list of core holdings. And that's PacificLight Power which we bought just as it was finished in construction in 2013, a decade ago. Just as it entered into a trap of a long-term, high-cost fuel contract and an unforgiving competitive landscape in the Singapore electric market. So that changed very suddenly about 1 year, 1.5 years ago and this now become enormously profitable, as you can see from this earnings chart in the top right of this page. It's first half 2023 earnings were almost triple their full year earnings for 2021. And that's simply because demand is not just high enough with supply not being able quite to catch up that the Singapore electricity market has become quite profitable. And the fuel contracts that PacificLight has managed to renegotiate make its fuel less costly than fuel of other companies. Now looking to the future, I have not been looking at the clock, I'll quickly wind up. Looking to the future PacificLight got grand solar plans, which we would like to invest alongside in. And then further in this presentation -- this discussion of our mining company, which is developing a new project in the south of the Philippines. But as I've overrun my several seconds, sorry for being late. I'd like to reiterate that we're confident that we'll have a third successive year of record high profit this year. And we'll see a concomitant -- concomitant rewards to shareholders in the final dividend I expect, which will be declared in late March. And looking further ahead, we're very confident about the future. But our market cap has not the trade, the positive numbers there. Our PE is a little over 3x. It's a crazy low number. Our market cap is about $1.5 billion. And the trouble is -- liquidity is quite low. I myself am attempted to dive in and buy a few shares at the current level because if there is a seller, it will really push the share price down quite a bit, and that's going to be a time to buy. In any case, I've been with the company 13 years. I'm long term in it, and I'm very optimistic and positive about the company. That's the end of the narrative, and now you can give me some questions.

Okay. Here's the first question. Can I talk about the rationale to acquire Metro Pacific and what's the sentiment with minority shareholders? This, I believe, is a reference to the privatization of Metro Pacific, which took place almost exactly a month ago. I think it was on the ninth of October when it was finalized. It was listed in the Philippines. And much like First Pacific, its share price didn't seem to be going anywhere. And we had Mitsui and the Japanese government form a joint venture, they came along to us and they said, "Hey, we'd like to be shareholders. We think this is a fantastic company." So along with them and our #2 shareholder GT Capital and government pension fund called GSIS and some others. We offered shareholders a share price of PHP 5.2. It was trading at the current time around PHP 4 and something like 97%, 98% of shares outstanding agreed to the privatization. We took it private. And now without the need for all that quarterly reporting, I'm getting to the crux of the question now. We can do a longer-term focus on MPIC's development. It was just this morning that MPIC had its first post privatization Board meeting where we discussed the 9-month numbers. If it were listed, they would have published those numbers and you would have been as pleased as I was this morning. They've got some activities going on, which we feel have been made easier and more possible by privatization and in the fullness of time, you'll be hearing about that. The assets that we control into that now private MPIC are absolutely fantastic, and we're very happy. We're very happy with what we've managed to do. Now here's an interesting question goes right to my heart. How will we look at the value of MPIC now that it's private times? Now if you -- if we scroll back to Page 5 of this presentation, you'll see that MPIC is valued at just under $1,300 -- $1.3 billion, here we go. That valuation is at a price of PHP 5.2, it was privatized at. Now MPIC is up 48% or so of the power company Meralco is itself worth more than that $1.3 billion. And I've been talking to our finance department guys to have a word with our auditors to see what kind of time frame can we begin to look at the valuation of the Metro Pacific assets on a look-through basis rather than a final privatization price. I'm not sure when that will happen. When it does, then you'll see that $1.3 billion would become a much bigger number, maybe $1.8 billion or even $2 billion which would make our discount to our net asset value, not something like 52% as it is today, but a much bigger number and make it appear to be ridiculously underpriced and even more attractive to non-shareholders. That is my thinking. We have seen in past experience that a decline in the NAV discount has almost always coincided with an increase in the share price. You go on our website and dig out the 2013 annual report where you will see that at a very high share price, our NAV discount was 29.5% at the end of 2013. And I don't think there's any reason why we shouldn't get to those sorts of numbers again as long as [indiscernible] stops being unfashionable and as long as value investing stops being unfashionable. It's like trouser skirt length. These investment style go in and out of fashion. And when we're doing well and our region is in fashion than our share price shoots right up. Okay. Let's look to more questions. Now just to round up on how we're valuing everything. The listed assets, we price the value of those things every day at that day's closing market price. PLP is the other significant unlisted asset, that's PacificLight Power, the power plant in Singapore. And we are valuing that stake, as you can see at the purchase price, $370 million. Metro Pacific has been delisted, but it's not yet quite a privatized company and they will continue, I think, for a little while to report quarterly numbers. And while the Board discussed the numbers that have proved them today, I think you'll be seeing them in about a week or so. I'm ambivalent about quarterly reporting because it be distracting from the longer-term outlook. But then again, when I see the 9 months numbers coming from all these companies, and what they're doing for First Pacific on 9-month performance, I really do wish that we could report the numbers because give me a chance to boast. Turning over to my daily [indiscernible] on my business card, whether our current ESG reporting practices? Do we plan to follow TCFD? Well, the IFRS Foundation, which establishes accounting standards, as now as I'm sure you questioners know, amalgamated under it ISSP, which is setting standards for reporting of the sustainability matters. And in June, IFRS Foundation announced -- I believe, 2 new standards, what is called IFRS S1 for reporting on sustainability matters and IFRS S2 reporting specifically on climate-related matters. And the Hong Kong Stock Exchange issued a consultation paper saying that they're going to be pretty much following what the IFRS Foundations is telling everyone to do. But the Hong Kong Stock Exchange has just told us that changes are coming quite fast and they won't be able to tell us until this coming January, what the new reporting standards will be in Hong Kong for Hong Kong listed companies. And those will apply for 2 financial years beginning on the first of January. So I think that implies there's going to be a little bit of a staggered rollout because you're going to tell us what we're going to have to report but only after we've started being obliged to report that data. In any case, we are very keen of First Pacific to meet new reporting requirements ahead of time. So in our 2023 ESG report, which we're working hard on now, we plan to meet as much as the S1 and S2 reporting requirements as we can so that we can basically have a good ESG reputation. I mean, I personally, I'm quite concerned about climate change and I'm very, very glad that our power company is expanding so hard into renewables. Now moving on to Philex, where -- I have overrun. I'm so sorry. Thank you, everyone.