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

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, DBVIC. This is Zafar Aziz from the Deutsche Bank team. I'm pleased to announce that our first presentation will be from First Pacific from Hong Kong. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box to the right of the slides. Also, 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, Group Head of Investor Relations and Chief Sustainability Officer of First Pacific Company, which trades on the Hong Kong Stock Exchange under the symbol 142, and on the U.S. the OTC markets as FPAFY. Welcome, John.

Thank you, DBVIC, for having me present to you again. It's a very exciting period for my company. But first let me remind you of who we are. We're listed in Hong Kong. You can buy our ADRs there in the United States. I'm in Dublin right now. And we're a holding company, market cap of about USD 2.5 billion. And we hold big companies in four areas of the economy in just one geography. That geography is Southeast Asia, one of the fastest-growing regions of the world. And if you look here, you can see that our four sectors that we're in are all defensive in economic downturns, but because they're located in fast-growing ASEAN nations, they are all delivering pretty good earnings growth going forward. Now something else they also share is that they are big companies or they are monopolies. For example, Indofood is the biggest maker of wheat-based instant noodles in the world with a production capacity right now of USD 36 million. And you might be pleased to know that about half a year ago, Costco agreed to distribute the Indomie brand of instant noodles through all their shopping centers in the United States. They're the best noodles in the world. Take my word for it. We'll talk a little more later about them. Metro Pacific Investments is a holding company we privatized about a year ago. It used to be listed on the Manila Stock Exchange. But now if you want to get access to the earnings it gets from owning almost 100% of the biggest non-government toll road operator in Southeast Asia, you have to buy shares really in First Pacific. Through that, we are also owning almost half of the biggest electricity distributor in the Philippines, that's Meralco. And its electricity production arm MGen is fast building out towards a goal of 1,500 megawatts of renewable capacity in the Philippines before the end of the decade, and the same number, 1,500 megawatts, of natural gas. And continuing the theme of gigantomania, we control the biggest phone company in the Philippines, that's PLDT. We've got about 26% stake there. And with the #2 shareholder, we have a shareholder agreement there, NTT DoCoMo. And via this agreement, we control the Board of Directors and the entire company. It's got a market share in the mobile space of a little over half with the Smart brand and its fixed line business is under the PLDT brand. And it's also got the only telco-owned fintech in the entire Philippines, and that's a company called Maya. It's got a banking license, and it has seen a fantastic performance over the past couple of years, and you know how fintechs are, but this one has already turned to breakeven and will begin turning a profit very, very soon. The last area where we have investments are in natural resources. IndoAgri is the plantations arm underneath Indofood. They've got about 300,000 hectares of plantations. Most of that is in palm oil, which turns into margarine and cooking oil and is used in the production of their instant noodles. Another one is Philex Mining Corporation, which is a copper and gold mining company. They've got a mine called Padcal up in the north of Luzon in the Philippines. And towards the end of next year or in 2026, they will be opening a new mine down in the South, on the big island called Mindanao. That's also copper and gold. Very rich resources. And for me, via an online stockbroker called boom.com, it's my favorite personal account stock, but you can't buy it in the U.S. If you want to get access to it in the U.S., you can buy your First Pacific shares. Now let's have a broader look at what we're worth. The shares that we own in all of these companies here in the pie chart were, at the end of August, worth about USD 5.5 billion. And as you can see, the bulk of it is Indofood. Again, the biggest wheat-based instant noodle producer in the world. And these other companies make up the rest. Interestingly, about 1/3 of the total is unlisted. PLP is our gas-fired power plant in Singapore. They've got about 9% market share there for electricity generation. And MPIC, as I mentioned a minute ago, was privatized last October. And as you can see the color coding, same as on 2 slides back, is pretty fairly balanced all through the pie chart. We've had a pretty good run in our 47 years or so of existence. As you can see, our GAV has grown for 20 years with a compound annual growth rate of 7%. But let's look now at more recent performance. As you can see, this is a very busy slide, but it's very important. Throughout this very long investor presentation, you'll see that there are many words that are in red and they're bold. And that's because we have become used to now, after 3 years, of delivering successive record highs in contribution from our operating companies and in recurring profit and in turnover. As you can see, the top right-hand chart there shows you how our recurring profit changed in the first half of the year. For our first half number, that USD 339 million is a record high. And it was delivered in the greatest part by Indofood followed by MPIC. And I'll speak to these contributions in a little more detail going forward. As you can see from the very bottom chart, our cash flow comes almost exclusively from dividend income from those companies that we own. And our outgoings tend to be mostly our interest bill. As you can see, it's probably going to be a little over USD 70 million for the full year. And then we do a little bit of debt repayment and our corporate overheads are generally USD 20 million a year or less. Our dividend policy to shareholders, very, very important as a holding company, is quite simple. It's a progressive dividend policy. And by that, we mean every year, we will pay out more in dividends to our shareholders than we did in the previous year. So when we delivered yet more record high numbers for the first half of the year, we decided to celebrate by awarding our shareholders a 1.5 HK cents increase in the interim dividend. And I imagine that the full year dividend when it will be announced it in March next year will probably be higher than the previous full year number as well. Now if you're going to read anything at all in these 47 pages of this presentation, the very last bullet point on this page is probably the most important. First Pacific management is confident of continuing earnings growth. Now if you've done some research, you'll see that our share price is up about almost 40% year-to-date. We began at HKD 3.11, fell a little bit in today's trading. I think it's HKD 4.32. And that follows an increase of, I think, 33% during the full year of 2023. And if you think you've missed the bandwagon, you might bear in mind that our P/E is only 5.5x even after the strong share price gain. And this confidence in continuing earnings growth means we expect probably full year 2024 earnings will be a successive record high, then in '25, then in '26. We've got P&L forecast and cash flow forecast out to the end of 2027, so there is a numerical foundation to these claims that I'm making. Now for some reassurance, let's have a look at some balance sheet and borrowing data. As you can see in the top left column chart there, we've got no debt whatsoever to repay until 2026. So that's well over a year from now. And as you can see from the pie charts down at the bottom, even though our single remaining bond is less than 1/4 of all of our borrowings, we've still got almost half of all of our debt is at a fixed rate. Now as we saw -- I think it was at last week, the Fed cut their rate. We're now descending from a peak in borrowing costs. So our blended interest cost of about 5.6% in the first half of the year is probably going to go down. And in fact, our cash flow forecasts show our interest bill descending in 2025 and further on into 2026. Very important to our CFO, Joseph Ng, who couldn't be with us today, is our investment-grade credit ratings from Standard & Poor's and Moody's. These are important because they show that even though we're very cheap at 5.5x earnings, and we have a discount to net asset value which is relatively high at 45%, the fixed income investors consider us among the best financial risks to take on with those two investment-grade ratings, and they are reviewed regularly by Moody's and Standard & Poor's. Why do we have investment-grade credit ratings. Well, look at the bottom left column chart there. It shows our dividend income over the past few years, it doubled since 2019 to a record high in 2023. And that's in large part because PLP, the power plant we operate in Singapore, delivered 2 years' worth of dividend income in 2023. You can see it's a little gold section of that column there and is continuing to deliver strongly in 2024. Looking ahead, our dividend income, we expect, will be USD 300 million or more. Now I mentioned a moment ago that we are cheap on a NAV discount basis. Let's have a quick look at Page 27 and we'll see where our NAV discount has been over the past 18 or 20 months or so. As you can see in the first column here, and in the second, and in the third, we're all listing up the value of the shares we own in these various assets that we've got, like Indofood. So the 50.05% we own of Indofood at the end of 2022 was about USD 1.88 billion in value. And it changed a little bit over the next couple of periods. A year later, it was a little less. And then 8 months after that, at the end of August, it was a little higher. And going down so on and so forth. Now the important crucial item here really is MPIC. Remember, I said we privatized it last October. We privatized it at a share price of PHP 5.2 per share. And that was quite a premium over the then market price, because as you can see, a year earlier, our 46% of MPIC is worth only USD 811 million. And we continue to value our investment in MPIC at that privatization price. So looking down, flowing through all these numbers, you've got our debt thrown into the total sum of all those assets. Then you divide it by the number of shares we've got. And then you've got a value per share of everything that we own minus our debt. And that's the important thing here, because that gives you your NAV discount, which is the very bottom item in these three columns. Our NAV discount was about 60% at the end of 2022. Then after our share price spent the next year rising by 1/3, we knocked about 5 percentage points of that NAV discounts down. We're up very strongly year-to-date in 2024, and you can see the NAV discounts down to about 45%. Now the interesting thing, as I said, was the valuation of MPIC, because we valued it, here we are on a different comparison of how we look at this question, at PHP 5.2 per share. Now at CLSA, there's an analyst who covers First Pacific and they have a buy recommendation. They've looked through the assets that MPIC controls to see how much they're worth and how much all of that adds up. I'm going to ask the producer now to have a quick turn to Page 11 to remind us all of what is MPIC. Now it owns about 48% of the biggest power distributor in the Philippines, which is also building out lots of generation capacity as well. It has almost 100%, 99.6% of the biggest nongovernment toll road operator in all of Southeast Asia. And Southeast Asia, I think, is upwards of 1 billion people and it's growing fast. It owns about 53% of the biggest water company in the Philippines and 20% of the biggest private health care provider in the Philippines and some other assets. Now that we've seen all the things that Metro Pacific has got, let's flip back to Page 28. The CLSA analyst, remember, did a look-through valuation and he says, "John, your 46% of MPIC is worth not USD 1.35 billion, but actually USD 2.23 billion". Now before it was privatized, MPIC, the last analyst who covered it did their own look-through valuations. And I took an average of all of their numbers and multiplied it by 0.46 to see what our 46% is worth. And they said, now these numbers are about a year old, that our stake in MPIC is worth maybe USD 2.9 billion. Now let's trickle down to the bottom of these columns and see what's going on here. Now at the end of August, our share price was HKD 4.17, and we reckoned our discount was 45.1%, as you saw on this previous page, it's the exact same data here. According to the CLSA analyst, now with the only thing changing is that valuation of our stake in MPIC. He says, "Actually, John, your assets aren't worth HKD 7.59 a share. They're worth almost HKD 9.20, to give you a discount of 55%." But the MPIC analyst suggests, "No, actually, you're worth HKD 10.43 a share, which means your discount is 60%. Now let's remind ourselves of those two investment-grade credit ratings and our promise of continuing earnings growth over the medium term. We reckon this is very solid, and that means any kind of revaluation of those MPIC assets makes our NAV discount look oddly large, which I expect, as we've seen in years past, this will tell the market to decide that they're pricing this asset badly, and First Pacific is priced cheaper than it's worth, and we need to go have a look at it and then the share price goes up. So in my personal view, I think after the gains of last year and so far this year, it's going to continue going up. Now let's just go into a little bit of detail on that. On Page 7 begins our exploration of Indofood, the biggest maker of wheat-based instant noodles in the world. They also have a very big plantations division, as noted earlier. And they've got a big flour business called Bogasari. Bogasari contributes about 1/4 of their revenues, plantations business anywhere from 10% to 13% depending on how commodity prices are doing. Palm oil moves a lot according to what the prices of soybeans are. And they've also got a big dairy business where they sell everything from sweetened condensed milk to UHT milk and ice cream and butter and yogurt and all that stuff. But the biggest seller that they've got is instant noodles. And remember, all those bold red words that I said are littered throughout here. I looked back in my spreadsheet, and it goes back about 20 years, Indofood has had ever higher revenue since 2014. Every year, revenues are higher. And they were a record high again in the first half and their EBIT was a record high and their core profit up 22%, not bad for a fast moving consumer goods company, 22% increase in profit. Now why is that? Look at the blue box. The EBIT margin on noodles, that is to say the margin that they've got on their profitability on their earnings before interest and tax, was 27.2% in the first half of the year. That is close to record highs that we saw for their noodles business, I think, in the first quarter of 2023. Why are the margins so high? Essentially, they've got pricing power in all of their markets. They've got domestically a 70% or so market share in Indonesia. Four years ago, they bought Pinehill, a company that operated 9 noodle factories in North Africa and the Middle East. Remember, Indonesia is the biggest Muslim country in the world. Everything Indofood produces is halal, it's okay, kosher for Muslims. And those new markets in the Middle East and North Africa are, again, predominantly Muslim people. They're very poor countries, as you can imagine. They're growing very, very fast in terms of economic growth and in population. And the delightful thing for Indofood is that their market shares in all of those markets range from about 65% to over 90%, and the per capita consumption in those markets is extremely low. What does that mean? That means that there is a lot of revenue growth planted in those markets over the next several years. So Indofood continuing to deliver ever higher earnings going forward is about as safe a bet as you can make in the FMCG industry going forward. Now let's have a quick look at ICBP, which is the separately listed unit. It owns 80% of ICBP, which produces those noodles. As you can see, look at the change in sales on the bottom left chart there, driven by noodles. In the years ahead, we're going to see noodles driving the earnings growth at the Indofood companies, I think as long as I'm employed really. The next page, Page 9, shows you the sales geography for Indofood as a whole, not just the Consumer Branded Products unit. The bulk of it, as you can see, is in Indonesia, Middle East and Africa, that's a proxy for the new businesses they bought 4 years ago. And you can see their contribution is growing very, very fast. Now that's Indofood. For more detail, please get in touch with me later today or next week or later this week. And for now, we'll turn very briefly to MPIC and what's delivering the performance over there. Now after the privatization, there are some details of the privatization here, a new shareholder came in, Mit-Pacific. That's a joint venture of the Japanese government and Mitsui, one of the great big conglomerates in Japan. And they are very keen to invest in the toll roads business of MPIC, and they were very happy to participate in the privatization. An interesting shareholder is MIG. That's the Management Investment Group that's led by our Chief Executive, Manny Pangilinan, who is probably, in my personal view, in the process of transforming himself from a manager into an owner. And under him, MPIC has got a dividend policy of paying 25% of its core profit to its shareholders. And that, as you can imagine, is important to First Pacific, because the only cash we get is our dividend income. So where did the money come from? Let's look at this bottom left change in contribution chart for MPIC as a whole. The big increase is from the power business. Look at that over PHP 1 billion increase alone from the power business, followed by the toll roads, then the water, and then their smaller businesses all grouped together. As you can see, the first half, just as with Indofood, was pretty terrific for MPIC. Core profit was up 27%. Now a reference to the size of our presentation here. We update it quite frequently. In fact, there's a newer version than this already on our website. It's easy to find. And the updates this time around come with lots of data about who the other shareholders are in all the companies that we're invested in, so that you know who we're working with. And another reason that this presentation is so large is that now that MPIC is private, really the only place you're going to find information about MPIC is from First Pacific. And how important is that? I can illustrate that by turning quickly over to Page 34, which shows you the net debt and gearing of all the companies underneath MPIC. This is very, very important, because, as you can see, Metro Pacific Tollways has got net debt of a little over USD 2 billion. Maynilad, that big water company, has got some net debt of a bit over USD 1 billion. These are privately held companies. You will not find this information anywhere, but from First Pacific. We report our results twice a year, and you will see this updated twice a year. Now look very closely at this page. It is a mimic of the previous page, which shows you the same data for the assets owned by First Pacific. So you can see there's our net debt figure there, USD 1.3 billion. And our gearing incidentally is the second highest in the group after PLDT, that great big phone company, which has got lots and lots of CapEx, which has been the foundation of its borrowings of a little over USD 4.2 billion. But not to fear, PLDT has got a better credit rating even than us at it's about BBB. In fact, let's have a quick look at PLDT. They're way back on Page 20. And that shows you their first half numbers. Their service revenues, like the revenues of most of our companies, rise to record highs, it seems, in almost every reporting period. EBITDA at a record high, but they're not as profitable as they were 10 years ago, when the entire country of the Philippines was texting like mad on their 2G phones. SMS revenues were going through the roof and then 3G comes in and it becomes much cheaper to text and profits have not yet reached the highs that they were at about 10 years ago. So where is the money coming from? The bottom right chart will tell you, essentially, it's data services. Like any telco in the world, PLDT is selling ever more data services and getting paid ever less money for it on a per unit basis. So we're confident of the earnings growth at PLDT in the years ahead, maybe about 2%, 3%. In fact, this year, their forecast is to have core profit of about PHP 35 billion. And it will grow 3% or so every year. I think I've just said that, pardon the repetition. Important for us, they pay 60% of their core profit to shareholders in the form of revenues. Now as you can see, we've only gone through the 3 biggest companies that were invested in, in the short time available. The book runs to over 44 pages, I think. For more detail, you can please get in touch with me. There's about 4 minutes or so left here. And I think rather than ramble on, I'm going to turn to the chat window and see what I can do to help you with your questions.

Now there's some guidance sought on the growth of Indofood into the European, Middle East and Africa region in the future. Excellent question. I was a huge proponent of the purchase of this Pinehill business back in the summer of 2020. It was regarded as expensive at the time at 23x earnings, a price tag of USD 3 billion. And I loved it because the potential for growth in those markets was huge. And since then, what have we seen? When we bought it, Pinehill had a total of 9 instant noodle factories. Now they're up to 13 instant noodle factories. We're building a new one at a rate of more than one every year. The confidence at Indofood of continuing growth in those markets is really, really big. And honestly, among all our group companies, if it weren't for my little personal favorite of that mining company that the market isn't really aware of, Indofood would be my first choice to buy. Okay. Let's move on, our growth targets for the next 3 to 5 years, and which sectors are seen as key growth areas? The toll roads business has seen, in recent years, traffic growth of high single digit and sometimes as high as 12% on its toll roads in Philippines and in Indonesia. It's growing organically, building more roads and it's buying more roads. They've recently bought into the Trans-Java Highway in Indonesia, which is a very big move for growth. So the toll roads business will continue to grow earnings. Now the electricity business over at Meralco, they made core profit last year of about PHP 37 billion, and they've already forecast this year it's PHP 43 billion. I've told you what I think about Indofood going forward. I can't really give you percentage numbers, but senior management bonuses at First Pacific are hooked almost entirely on increase in profitability. And I am, I assure you, a very contented man. Next question is, with gold hitting all-time highs, and copper prices rising, any plans to accelerate progress on the Silangan project? Well, that's a great question. Management of the mining companies say it will open by the end of next year. I'm a little more pessimistic, let's say, somewhere in 2026. But here's some interesting information. Their breakeven cost for gold production at that new mine is going to be, they think, around USD 1,000 an ounce; and for copper, around USD 2 a pound. Fantastic numbers. It's quickly running out of time here. Any plan to narrow the share price and net worth of our company? We are doing our best to speak with investors all over the world. We've made huge inroads into Mainland China. And in fact, no time here. But if you look at Page 42 of this investor handout, you can see that the growth in shares held by Mainland investors, look at that #2 on the list, has grown enormously, and they are, I think, the main driver for our shares currently, because the Chinese stock market is in a horrible mess, but they can buy shares listed in Hong Kong like ours. Our growth is well outside Greater China, and they can't get enough of us. In fact, we have more investor meetings in Shanghai and Beijing than we can manage to find the time for. There are many more questions here. If there's an ability for me to type back the answers, I will do so. But let's continue on until I'm cut off. What initiatives are we implementing to improve operational efficiency across our subsidiaries? CapEx numbers tend to be quite high. Indofood is a leader in finding better ways to increase its margins. And if you look at their margin history, you'll see that they're very good at that. Sorry, man, I didn't hear you before. I didn't read it. Okay. Thank you, everyone. I've gone over. Please send me an e-mail. I'll answer all your questions. Thanks again.