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

Hello, and welcome to the Deutsche Bank Virtual Investor Conference, dbVIC. This is Zafar Aziz from the Deutsche Bank team. I'm pleased to welcome our next presentation by First Pacific from Hong Kong. Before I introduce our speaker, a few points to note. Please click on the questions box to ask a question. All of today's presentations are recorded and can be accessed by the Deutsche Bank website, adr.db.com. I'm pleased to welcome First Pacific. Over to you.

Thank you very much, Zaf. I'm John Ryan, Associate Director of the company, and it falls to me among other duties to engage with shareholders in the wider investor community, which is to say I'm called upon for today's presentation. I apologize that you're only getting our first half results, but the fact is we report only 2 times a year. And you may see if you look deeper into research that our operating companies, many of them are reporting this week and next week with their 9-month numbers. Now who are these companies? The major ones are listed here. Indofood is the biggest maker of wheat-based instant noodles in the world. And this noodle subsidiary, Indofood Consumer Branded Products is where those are made. That's separately listed as well. In fact, both those companies are listed. Metro Pacific Investments is a privately held almost 50% owned by us, holding company based in Manila. It controls the biggest electricity distributor in that country, the biggest nongovernment-owned toll road operator in Southeast Asia and it's also invested in alongside First Pacific by Meralco in an LNG power plant in Singapore called Pacific Light. Now over in telecommunications, we are the biggest shareholder in PLDT, whose mobile phone brand is Smart. They've got about a 50% market share in mobile and slightly bigger in fixed line communications as well. PLDT is the biggest shareholder in Maya. It is the only fintech in the Philippines that is controlled by a telecommunications firm, and it's very exciting. I'll tell you a bit more about it later. Now over in Natural Resources, IndoAgri is the palm oil plantation arm of Indofood. And Philex Mining Corporation is a copper and gold producer currently operating one rather old mine in the north of Luzon in the Philippines and will next year open a new much richer mine down in the south in a big island called Mindanao. And it's also the biggest shareholder in PXP Energy, that's an oil and gas exploration firm. Now how does this all look in the basket of assets that we own. As you can see, as of the end of September, our just over 50% of Indofood, almost 50% of MPIC, about 1/4 of PLDT, et cetera, all of those stakes added up to just over $5 billion with their individual values there in the pie chart, as you can see, Indofood, $1.9 billion. Geographically, most of our assets are in the Philippines, just over half. And the one Singapore asset is PLP, and that's 7% of them all and then Indonesia is the remaining 38%. Now why are you listening to me today? Well, let's hope it's because you know that we deliver access to emerging market growth in Asia from the security of a mature market listing. We're listed in Hong Kong. As you saw 2 slides back, our investments are spread across a variety of defensive assets and they're located in some of the world's fastest-growing economies. Now by defensive assets, I mean assets that are going to suffer less in an economic downturn than others. For example, if we were a maker of jewelry and we're in a recession, our earnings would fall rather more than if we're operating toll roads and telephones and things, which people continue to use rather more during a downturn. Now our Hong Kong listing, at least for U.S. dollar investors, eliminates foreign exchange share price risk because the Hong Kong dollar has been pegged to the U.S. dollar since October 1984 at a rate of HKD 7.8 to the U.S. dollar. Now of course, while there's some foreign exchange risk in the contribution from our investments and their earnings, there is none if you're a U.S. dollar investor into our share price. Now we've got a discount to net asset value, which is a quite interesting topic we'll discuss later. And we have a quite low price-to-earnings ratio, particularly in comparison with our peers. And these 2 together, I think, make us fairly attractive and a safe value proxy for growth in the emerging markets of Asia. Now how do we do our business? We stick to the one geography. The senior management of First Pacific and the companies we're invested in are very, very familiar with Southeast Asia, and that's where we're sticking where we know the customs, we know the regulatory regimes and we have experience. We invest in industries we know. We're not going to go investing in automobile manufacturing, you can be assured. We will just stick to what we know. And we really prefer great big companies or monopolies such as toll road operators or the water company that we control via MPIC. And we'd like to have a majority investment in our assets or at least very big stakes so that we can be confident about our influence over the businesses, how they operate, the financial strategies and of course, because we're an investment holding, the cash flows. Now over the past few years, this strategy seems to be working. The past 4 full year earnings reports, our recurring profit, hit successive record highs. And in the first half of this year, you can see the profit was more than the profit we earned in the entire year of 2020. So that bodes pretty well for our full year numbers, which we will report in late March 2026. Now one benefit of investing in First Pacific is we have a progressive dividend policy. This means simply that our intention is, over time, to give you more money on a per share basis from year-to-year. Last year, the full year distribution was a record high on a per share basis. And the idea is every year, we will give you a little bit more than we gave you the previous year. Now of course, there are caveats. This policy is dependent on financial performance and funding needs of our company. Now a quick look at the first half numbers. As you see, the FY numbers for 2021 to 2024 were successive record highs, and we showed pretty strong growth in the first half of 2025 with contribution up 8% and recurring profit, up a bit more, 11% because we managed to keep head office costs a little bit down. The last bullet point here is probably quite important. We are confident of continuing earnings growth in the medium term. We are invested in defensive companies in the fastest-growing markets of the world. And that implies over the medium term, our earnings will grow, and we're very excited in our confidence about that. Now the difference between first half 2024 and this year in the contribution and profit are displayed right here. As you can see, the biggest contributor by far is MPIC, Metro Pacific Investments Corp, and we'll be discussing in detail about that just a bit later. Now let's turn to balance sheet and cash flows and so on. The chart here on the left, the column chart shows our dividend income over the past 5 years. And as you can see, 2023 was a record high when our Singapore power company, PLP, began contributing dividends to its 2 shareholders for the first time. Our dividend income remained quite high again in 2024, and we're confident about the level of dividend income going forward. We do have borrowings. Our gross debt is something like $1.4 billion. And as you can see, the bulk of it is in bank loans. We've got one bond of $350 million. But we've got close to a 50-50 split between fixed interest rate borrowings and floating interest rate borrowings. We do like a 50-50 split there, which suggests that when our $350 million bond matures in September 2027, we will by then have been looking for a means of replacing it. We could replace it with 1 bond or with 2 bonds. But if the long-term interest rate outlook doesn't look like what we want, then we might go to pure bank borrowing for a little bit. January next year, we've got $200 million falling due, and that $200 million has already seen its refinancing secured. That happened shortly after we reported our half year numbers. So it's not reported there. As you can see, we've got a fairly long maturity profile with some empty gaps from 2030 to 2033. We have investment-grade credit ratings from Standard & Poor's and Moody's, and that helps with borrowing costs and makes discussions with lenders very straightforward. Now let's go to our single biggest holding, Indofood. As I said, it's the biggest instant noodle maker in the world, at least of wheat-based noodles. And noodles make up, as you can see here, 46% of all the revenues at Indofood. It's followed by Bogasari, that's its flour and pasta division and then by dairy. And the green bit is the plantations division where the palm oil business is, which has oils and fats business as well, producing margins in cooking oils and things like that. Indofood is so important. It's getting 2 slides. Look at the growth of its sales over the past 14 years or so from IDR 40 trillion up to well over IDR 100 million. And if you can hear, like I do, the neighbor's little dog, I apologize, it is a very cute animal. Now let's go over to the EBIT margins in the blue box here. Remember, noodles, almost half of all sales have quite strong margin, around 25% EBIT margin or better. Now it's been a difficult 2025 for the Noodles business and the rest of the Consumer Branded Products businesses, which are in the top part of that blue box, because commodity prices have been a bit high. And you can tell because Bogasari and the Agribusiness saw a nice bump in their EBIT margins. So commodity prices, they give and they take away. They give to the flour and plantation businesses sometimes and they take away at the same time from the ICBP businesses. Nevertheless, let me remind you, since 2011, revenues at Indofood have been on successive record highs, and I don't think that's going to change much in the near future. Okay. Let's go over to Metro Pacific Investments. This company was listed in the Philippines up until October 2023. So that's just over 2 years ago when we and some other investors privatized it. We privatized it because we thought it was super good value. And as a private investment, it could focus more on investing for growth and pay less attention to quarterly earnings reports, which it had been obliged to do while a listed company. Now if you go to our website under the Investor Relations section, you'll find our way to investor presentations, which are much bigger and more thorough than this simple slide show that we're looking at there. There's a lot of detail about MPIC. But in any case, as you can see, it's the biggest electricity distributor in the country. MPIC owns 48% of Meralco. And in the Toll Roads business, we've got 93% of the mother company, Metro Pacific Tollways Corporation, and via that, we've got stakes ranging from 23% and higher. The 23% here refers to our investment in Jasamarga, the Trans-Java toll road, which is about 700 kilometers, a bit less, running across Java, the big island in Indonesia, connecting the wealthiest cities there. Maynilad is the biggest water producer -- water company in the Philippines by number of customers, and it is going to be listed later this month on the Manila Stock Exchange. They've had an IPO and reports are it's going pretty well. Now in health care, we privately own with other investors, 29 hospitals. So we're the biggest private health care business in the Philippines through Metro Pacific. We've got 20% of that. The other shareholders are GIS of Singapore and KKR. And MPIC has got some other investments, much smaller than these 4 big ones, such as Light Rail in Metro Manila and a small water business on the side and so on. We can discuss that in the Q&A, if you like. Now as you can see in the column chart here, the earnings at MPIC have been growing very, very strongly over the past few years, again, like First Pacific from record high to successive record high. And the pie chart shows you on the left-hand side there that the big contributor is the power business followed by water and then toll roads. Now the power company, Meralco, when we invested in it about 15 or so years ago, it was really just an electricity distributor. In recent years, it's been building out an awful lot of renewable and natural gas power and electricity production is becoming an increasingly important source of earnings at Meralco with new power plants coming online all the time. Again, turn to our much bigger investor handout on our website or in the Q&A to discuss how that's going. So we see earnings growth there pretty strong over the years ahead. Now let's turn to the biggest phone company in the Philippines, PLDT, formerly known as Philippine Long Distance Telephone. As you can see, it's got 3 main business: enterprises, data centers and so on. Home is going to be home modems and home phone lines and individual is their name for their mobile phone business. Individual, as you can see, is the biggest. Their earnings have been fairly steady over time. They haven't been rockling ahead like Meralco or MPIC or even First Pacific, but they've been steady. And it's important to us because they historically have been paying 60% of their core profit to shareholders year in and year out, and it's an important source of cash for us. And it's the biggest shareholder in Maya, that fintech I mentioned earlier. Now let's go to Pacific Light. That's our power plant operator in Singapore. It built the first LNG-only liquefied natural gas as a sole fuel power plant several years ago, about 12 years ago. And now it's got a second power plant, 100-megawatt fast-start, natural gas-powered plant, which can be turned on when the market needs a big boost of electricity. And it is building out a new 670-megawatt project which they say is hydrogen-ready, and we're hopeful that will go online in early 2029. As you saw earlier on the dividend income page, PLP has become an important source of dividends, and that new power plant will maintain its status as an important source of dividends for First Pacific and its other shareholder, which happens to be Meralco, by the way, just the 2 shareholders. Pardon, I don't know that's that, pardon. Now as you can see, those core holdings, PLP, PLDT, Metro Pacific, Indofood, they're giving us lots of confidence in continuing earnings growth largely based on the economic growth forecast in the markets that we operate in. It won't be uncommon for you to see us reporting record high earnings from time to time. As you can see, we've had 4 successive highs of record high earnings, thanks to the continuing contribution growth from our assets. Now we're small relative to other holding companies listed in Hong Kong. Our market cap is something like $3.5 billion, whereas there are others who have market caps of upwards of USD 10 billion or even USD 20 billion. Now our price-to-earnings ratio is less than 5x, if you look at your Bloomberg screen. So we're confident, notwithstanding enormous share price growth in the past almost 3 years that we've got a lot more runway to go. Now we do have, in addition to these factors, further potential catalysts for share price growth. And that's a continuing strong price for gold as our mine Philex, I'll talk about that in a minute, opens the Silangan mine next year. Unlocking value in the fintech platform, Maya Bank, is growing enormously, and it's already profitable. And then there's a potential revaluation of MPIC. Now the Silangan mine opens next year. The currently operating mine Padcal shows the richness of gold and copper in that top blue box on the left-hand side. As you can see, it's only 1/5 of a gram per metric tonne of ore of gold. So that's not a lot of gold per tonne. Now if you look in the other 3 columns in that box, Sta. Barbara I and II and Sta. Barbara Kalayaan, they've got much richer reserves of gold. Look, over triple 0.7 at Sta. Barbara I, triple at Sta. Barbara II and 2.5x bigger at Sta. Barbara 2 Kalayaan. And there are similar increases for the grade of copper in terms of percent in those new deposits. So we're very excited about that. As you can see in the bottom of the box, production starts low at about 2,000 tonnes a day. By comparison, the currently operating mine at Padcal is about 18,000 tonnes a day of less rich ore. So once that gets online, that could be a nice catalyst for earnings growth at First Pacific. And if you have the ability to invest in Manila listed assets, the stock that is PX.PM (sic) [ PX.PS ]. I quite like this company a lot, and it could be a catalyst for us. Now Maya, it's a fascinating little company. It is the sole fintech in the Philippines, controlled by a telecommunications firm, and it was ranked #1 consumer fintech app. As you can see in the left-hand graphic, it's had enormous growth in the number of bank depositors, about 8 million now, 8.2 million. And deposits at the end of June were just over PHP 50 billion. And as you can see in the right-hand graphic, half of that money was being loaned out, about PHP 25 billion. Now the net interest margin, have a look at how it's changed over 2.5 years there, from 7% in 2023 to just over 20% in the first half of 2025. Now net interest margin is generally the difference between the interest you give your depositors and interest you charge your borrowers. And the reason you've got net interest margin so high is there are multiple factors there. First is these are generally very short-term loans. They're on the order of 30 days most of the time. And it's with borrowers who are not very well understood. The banking industry in the Philippines is not nearly as developed as you might see in the United States and more developed markets. It is estimated that maybe half or up to 70% of Filipinos don't have bank accounts at all. Now who are the customers at Maya? 85% of them are millennials and Gen Z and 60% of the borrowers see Maya as their only bank. So while Maya is very, very small with less than PHP 600 million in net income in the second quarter, there's enormous scope for growth as it expands its customers who -- and you know banking relationships, they're sticky. I have the same bank account I had when I was in university. And now finally, valuation of MPIC, as you can see in this blue box here. We value MPIC at the price it was privatized at 2 years ago in 2023. Our 49.9% of MPIC is worth about $1.3 billion by that measure. Now there are 2 brokerages whose equity analysts cover First Pacific, and that is Citi and CLSA. If you don't know CLSA, it's Hong Kong-based, and it's famous for the quality of its equity research on Asia-based companies, particularly those in China. It was founded, I think, in the 1990s and grew enormously, and they are regarded quite highly. But look at how these 2 brokerages value MPIC, almost triple our valuation of MPIC. So when you get down to a per share basis, at the end of September, we saw our NAV discount was about 7.4%, whereas if they increase the value of MPIC the way they do, they see that, no, your NAV discount is much, much higher. Now in the fullness of time, we will be changing how we value MPIC because if you consider First Pacific's economic interest in just one of MPIC's assets, Meralco, our economic interest in that $10 billion company is about USD 2.5 billion, already much bigger than how we value our entire half of MPIC, along with the water company and the toll road. So I imagine it's just a question of time, though we don't know when that might be. So in summary, our core holdings promised steady earnings growth in the years ahead. I hope I've made that clear. We can discuss in detail in the Q&A, which is about to start. We're committed to a progressive dividend policy, which is in 2024, meant record high per share distribution to our shareholders. And I was -- as a shareholder, I was very pleased by that. And I've just described we've got potential upside catalysts in Maya, revaluing MPIC and Philex. Most importantly, we're quite confident in the future. If you're a regular reader of the International Monetary Fund's World Economic Outlook, you'll see some foundation for our confidence. Now here's the fine print. We really believe and are confident in what we're telling you here. But I might have made a factual error or something like that. Now let me put on my glasses because we've got about 5 minutes left for a few questions. And if I don't get to your question and you want to continue the dialogue, please e-mail me. I'm johnryan@firstpacific.com.

Now here's the very -- oh, no, no a lots of questions. One question is about how we're deploying AI to enhance our water solutions. Quite honestly, I don't know. Drop me an e-mail. I'll go to Maynilad, I'll ask them and come back to you on that. Which portfolio holdings are expected to be the most significant contributors to future earnings growth? And are there any business we expect to divest or restructure? These indeed are excellent questions. And I would think that MPIC's contribution growth is going to continue to be important, so will Indofood, so will PLDT -- I'm sorry, PLP, the power plant in Singapore. And PLDT is really just flattish, we expect in the years ahead. Except, of course, for the wildcard, the contribution it will be getting from Maya as Maya continues to grow. What might we divest or restructure? Well, Maya eventually will want to go towards IPO. There has been talk in the media about our Toll Roads business also wanting to go to IPO. We don't have any timetables for those, however. The big difference between the realized and market prices of gold and copper that we're getting over at Philex. These prices when they're reported on a quarterly basis, are averaged over time, and they include a little bit of hedging. That's the short answer to that. How are we prioritizing capital allocation between mature and new growth ventures? Thank you very much for answering -- for asking this question because it reminds me to inform you of something I have not. And that is most of the capital allocation occurs down below First Pacific at a subsidiary or associate level. So for example, Indofood makes lots of CapEx on expanding its noodle production capacity, which I think is about 37 billion packets a year. That's a lot of noodles. Likewise, with the Toll Roads business and Meralco, they're using their own sources of cash and bank funding or bonds or whatever. And please be clear, when these companies are raising money, none of their borrowings are guaranteed by First Pacific and there is no recourse to First Pacific. In the next few years, the only big capital allocation that we've got apart from distribution of dividends to our shareholders is our participation in that new power plant project by PLP in Singapore. And that's it. It's a little bit dull, but First Pacific really is the safe, secure value access to the growth in emerging Asia. So that's where the CapEx spending is mostly going to be. Now someone is talking about us on the OTC Pink Limited market and are we considering to remain on this? Are there future plans for the OTCQX? Yes, I'm sorry about that. You can only get us on pink sheets if you don't have access to the Hong Kong Stock Exchange. And I'm afraid we don't have any plans to change that because if you look at our investor handout over on our website, you will see that almost half of our shareholders are in the United States, and we don't see enough upside for the greater reporting requirements that we would have to have by getting, say, a full-fledged ADR in the U.S. Growth in our water purification business and time line for spin-off IPO. Water purification, well, the water provider, Maynilad has its IPO later this month. I hope that answers this question. Progressive distribution policy. Could I elaborate on that continuing the -- continued decline in payout ratios? Yes, you've been looking at our investor handout, which shows indeed the ratio of our distribution as a proportion of our profit has been declining in recent years. And if you've known us really well, you will remember that once upon a time, we had a policy of paying out 1/4 of our profit -- recurring profit to shareholders. I've got less than a minute, so I'm going to talk quickly. Simply, our profit growth is faster than our cash income growth. So we've had to abandon that. You probably can expect to see a continuing decline in the payout ratio. But in strict dollar terms, you'll see that over time, the dividend will be increasing. All right. Let me try very quickly one last question. Sustaining margins and profit growth amid rising input costs and competition. Well, most of our businesses are monopolies or the biggest in their industries, at least locally, so this gives them some kind of power. Now thank you very much for listening to me, johnryan@firstpacific.com. Thank you very much.