San Miguel pushes spin-off as yield play

The Philippine brewer is aiming for an IPO of at least $150 million, but 90% of the proceeds will go to the parent.
San Miguel Brewery yesterday kicked off the international roadshow for its initial public offering, which may raise between $148 million and $410 million. The listing-candidate is a spin-off from San Miguel Corporation, the largest food, beverage and packaging company in the Philippines, and comprises the groupÆs domestic beer operations although the actual brands will continue to be owned by the parent.

If successful, it will become only the second Filipino company to list this year after Pespi-Cola Products Philippines and, if priced towards the upper end of the range, it could become the largest IPO in the country since conglomerate SM Investments raised $528 million in 2005. Market participants are also hopeful that a solid debut will help energise the local stockmarket which is down about 20% so far this year, and as a result everyone is watching this deal. Earlier this year, budget airline operator Cebu Pacific Air was in the market with an IPO of up to $288 million, but it was forced to withdraw the deal before pricing after tumbling equity markets led to lukewarm interest from investors.

San Miguel Brewery too is coming to market at a slightly lower valuation than hoped for in March when it lowered its initial filing price range from Ps9.50 to Ps16.30 per share to between Ps8 and Ps15.40 û the range that appears in the preliminary prospectus published on the Philippine Stock Exchange website. The initial range is only an indication of the eventual deal size which has to be provided when a company seeks regulatory approval and the official price range is typically set somewhere within this quite wide range. The fact that the company had already lowered the guidance once but was still forced to set the price range at the bottom end of the new guidance is a clear sign that investors remain highly focused on valuations.

The current price range is Ps8 to Ps11, which will give a base deal size of Ps6.16 billion to Ps17.04 billion ($148 million to $410 million). The reason for the wide difference in the deal size is that the company has yet to make a final decision on how many shares it will sell. According to a source, the deal is likely to comprise only 5% of the company, which is equal to the minimum amount of shares on offer and a deal size of $150 million to $200 million. However, a 15% greenshoe could increase it further.

According to the preliminary prospectus, the IPO could be as large as 10% of the company pre-shoe.

Of the total offer, 70% will go to international investors while the remaining 30% will be split between domestic institutions and retail investors. The IPO comprises between 770.5 million and 1.55 billion shares pre-shoe, of which 10% are new and 90% secondary shares sold by San Miguel Corp. The greenshoe is made up of secondary shares only.

Citi and ATR Kim Eng are joint global coordinators and bookrunners for the international offering and ATR Kim Eng is also helping to arrange the domestic portion of the deal together with BDO Capital & Investment Corp.

The price range values the company at 13.7 to 18.8 times this yearÆs projected earnings, which looks reasonable compared with some other regional beer makers like SingaporeÆs Asia Pacific Breweries and JapanÆs Asahi Breweries, which, according to a source, trade at 2008 P/E multiples of 22 and 20 times respectively.

However, KoreaÆs Hite Brewery and Singapore-listed Thai Beverage both trade at around 14 times, which means the newcomer doesnÆt look overly cheap. San Miguel Corp. trades at a 2008 P/E of 13 times, but observers agree that the spin-off deserves a higher valuation since it is the ôbest partö of the group.

San Miguel BreweryÆs key selling arguments include the fact that it is the dominant beer producer in the Philippines with a market share of about 95% and a product portfolio of eight beers, including the top four brands in the country. Despite this overwhelming market position, the company believes that it will be able to expand in certain parts of the country where its market share is less than 85% and also argues that its strong brands and economies of scale puts it in a good position to capture ôa very large portionö of the overall industry growth. Based on internal data, the company believes that its market share grew to about 95% in 2007 from an official estimate of 93% in 2006 by research firm Canadean.

The companyÆs upbeat projections are to some extent supported by the fact that imported brands account for only 0.1% of the Philippine beer market and thus provide less competition than in most other countries.

Canadean projects that beer sales in the Philippines grew by 5% in 2007 and San Miguel Brewery argues in its preliminary prospectus that industry volumes will continue to grow this year thanks to an expected GDP growth rate of 6.3%-7% and relatively low inflation. The company reported a 9.4% increase in net profit in 2007 to Ps8.02 billion ($194 million), which was down from a growth rate of 14.4% in 2006.

Compared with many other industries though, this can best be described as limited growth and observers say San Miguel Brewery is probably more interesting for investors because of its defensive nature. Put bluntly, beer is not among the first things that consumers cut back on in times of declining economic growth.

In addition, the listing candidate has also said that it intends to pay 100% of its recurring net income as dividend every year. Based on the IPO price range, this will give a dividend yield of 5.3% to 7.3% in 2008, which looks very attractive compared with other beer producers in the region. According to analyst forecasts compiled by Bloomberg, Thai Beverage trades at a 2008 dividend yield of around 3.8%, while Hite and Asahi return around 1%. San Miguel Corp is expected to provide a dividend yield of 3.2% this year.

The final price will be determined on April 24 when the international bookbuilding closes and the trading debut is scheduled for May 12.

Pepsi-Cola, which is the exclusive licensed bottler of PepsiCo in the Philippines, raised Ps4 billion ($111 million) from its UBS-led IPO in January after fixing the price at the bottom of the offering range at Ps3.50 per share. It fell 18.6% on the first day, touched a low of Ps2.48 in mid-March and has yet to return above the issue price. Yesterday it closed at Ps3.00.

San Miguel Corp has also been on a downward trend this year. The B-share, which is the most traded one, was down 23.5% as of yesterday, meaning it has underperformed the broader market slightly.
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