First Pacific Company Limited (OTCPK:FPAFY) Q4 2021 Results Conference Call March 31, 2022 5:00 AM ET
Company Participants
Sara Cheung – VP, Corporate Communications
Manuel Pangilinan – Managing Director, CEO
Chris Young – Executive Director, CFO
John Standley – President
Joseph Ng – Associate Director
John Ryan – Associate Director
Conference Call Participants
Jeff Kiang – CLSA
Sara Cheung
Good day, everyone. Thank you for joining this online briefing to discuss the First Pacific’s 2021 Full Year Financial and Operating Results. The results presentation is available on First Pacific’s website www.firstpacific.com under the Investor Relations section’s Presentation page. This result briefing is being recorded and the replay will be available on First Pacific’s website in the Investor Relations section as well. For participants from the media, please note the Q&A session is open for investors and analysts only. If you would like to raise questions, please contact us when the briefing is finished.
Today, we have Mr. Manuel Pangilinan, our Managing Director and Chief Executive Officer; Mr. Chris Young, our Executive Director and CFO; Mr. Joseph Ng and Mr. John Ryan, our Associate Directors, and other Senior Executives from the Head Office of First Pacific.
Over to you John for the presentation.
John Ryan
Thank you very much, Sara. Now those of you who know me know that I’ll run through this fairly rapidly and then we can go through to questions. For refamiliarization page 2 has our major holdings. These percentages are as of the year end. So you’ll please note that the 44.0% in MPIC is as of today’s date I think 44.1%. There are no big changes however.
Now on page 3, we’ve got the major highlights of our earnings report that we published at lunchtime today. We’ve got in many ways the strongest numbers we’ve ever had, contribution is not one of them. It’s the strongest since 2011. Turnover recurring profit are the highest that we’ve ever had. And that’s, as you can see on the column chart on the right-hand side of this page at the top, that’s because of strong increase from Indofood, which had its first full year contribution from Pinehill, that’s the noodle maker based in the other side of the world, and then PLP, Pacific Light Power, which we owned through a joint venture with Meralco had a strong turnaround in its performance. Our head of corporate development, Stanley Yang, can speak to that later in this meeting.
MPIC bounced back from its COVID woes of 2021. Philex benefited from extremely strong copper prices. And then head office improvements were strong too. We’ve got sharply lower interest expense. Thanks to our Head of Treasury, Joseph Ng, right here. He can speak to these details a little bit later. So all in all this wound up to a one third improvement in our recurring profit, as you can see there to a record high $426.5 million.
Most of you will recall that we’ve got a consistent policy towards capital management, which for 11 or 12 years now has included a 25% payout of our recurring profit shareholders in the distribution. So the full year number is $0.19 per share. That’s 31% increase from 2020’s figure. And another second leg of our capital management policy is a share repurchase program, which we introduced 12 months ago. I think to this date, we’ve spent about $28 million, 24 million of which was in calendar 2021. And now that we’ve reported our earnings, our blackout period is done. And we can move forward.
Now I’ll speak very briefly on Page 4 about our borrowings and treatment of them because Joseph who manages it with extraordinary grace will speak to it in more detail in our Q&A. Gross debt really not changed from a year earlier. Our gross debt cover has improved. It’s at 3.8 times, Net debt also not very well — not much changed. We’ve got a little over $100 million in cash. Average maturity as you can see is just over three years. Our blended interest cost is quite low at the moment 3.2%, but of course, we’re moving into an environment of steadily increasing interest rates. So that figure might be going up over the next couple of years.
Now an important figure for us is the interest coverage ratio. That’s the ratio of how much money we’ve got after we pay all to the interest bill. And that has improved to 3.8 times as of the end of 2021. And we’re very confident that the outlook for that going forward is quite strong. As you can see from the column chart at the bottom of the page here, we’ve got no borrowings falling due and until a bond in April next year. And that’s a 4.5% 10-year borrowing, which we were quite proud of when we launched it way back in 2013.
As you can see, we try to keep our maturity profile fairly even as the years go by. And again, Joseph can speak to that going forward.
Page 5 has got several points, which are important way. We look at our investments and our strategies for that. And the buyback program is something I’m fairly proud of at a personal level, we promised it back in 2017, and we’ve begun delivering now for the past 12 months. We expect to spend that $100 million fairly evenly over the course of the 3-year period.
Page 6 shows us a snapshot of our gross asset value. Not a lot of change there from month-to-month. This, as you can see, as of the end of February and probably on Monday or Tuesday, we’ll be updating that to end March figures as well, a little over $5 billion.
Now looking at Page 7, a brief word about sustainability matters. We’ll be publishing our 2021 ESG report in late April to mid may, following publication of Indofood, very first sustainability report. We’re looking forward to that very, very much that has enabled us to issue our first consolidated ESG report. And for those of you who are putting increasing importance on ESG matters in your investment decisions, please be aware that from calendar 2022 annual staff bonuses will have a sustainability component in them. So, with this, I will have personally either earned a great love or great disdain from my colleagues. Let’s see how it works out in a year’s time or so.
Now, before we move into the operating companies, let’s recall the — some of these numbers that we’ve got published at lunchtime today. The last time we had similar level of performance was 10 years earlier in 2011. And as you can see, it took another 10 years for recurring profit to exceed that figure.
Now looking at the performance of our main operating companies, and by this, I mean Indofood PLDT MPIC, over the past 3, 4 or 5 quarters. There seems to me to be consistent grounds, to expect continuing improvement of their results going forward. And that’s just looking at their quarterly performances in the recent past. So that instills in us a high degree of confidence particularly given the strength of our cash flows and our balance sheet and our expectations for the future.
Now let’s look at Indo food very briefly on page 8. They had record high net sales, as you can see up by more than a fifth, and that’s driven quite a lot by consumer branded products division, which had reported its first full year of results, including Pinehill. That’s a noodle maker based in Africa, the Middle Eastern, Southern Southeastern Europe. And as you can very, very strong core profit is at a record high 8 trillion rupiah in 2021.
And as you can see, I think it’s very important to consider the margins in the blue box and the bottom right. As you can see there is broad improvement across the board. The noodle margin is at an astonishing 24.3% for 2021. This is a very core product for Indo food. It’s North of 50% of all of their sales, and it’s an extraordinarily profitable business, which we expect will be growing fast in the years ahead thanks to Pinehill.
Now let’s move on to PLDT, which is on page 10. Essentially, we’ve got three main businesses for PLDT, it’s the home business you can consider that’s your wired wifi. There’s a little bit of fixed wireless in there. And then there’s the individual business, which is mostly consumer mobile. And then of course there’s the enterprise business, which is services to businesses and data centers and so on.
Now over the past couple of years of dealing with COVID and its ramifications for mobility in the Philippines, the individual and home businesses switched off on the leadership for earnings growth. PLDT has I think for 5 or 6 straight years shown steadily increasing earnings year-to-year, and they did it again, service revenues at a record high, EBITDA at a record high, Telco core up 8% to over 30 billion pesos hitting their target. And that was driven largely by the home business, which saw their service revenues rise by almost a quarter by contrast the individual business, which led earnings growth in 2020 was mostly flat. And then the enterprise business saw their revenues go up 4%.
We’re expecting probably similar sort of performance in 2022. As you can see that PLDT does have some guidance. Telco core profit up another 2 or 3 billion pesos, very to people who’ve been watching it closely for the first time in many years their CapEx guidance is for a lower number than in the previous year. So 2022 CapEx, seen at 76 billion to 80 billion pesos. And let’s have a quick look at page 12, and you can see why they’re bringing down the CapEx.
As you can see their performance, whether it’s fixed line for home wifi or wireless for everybody’s mobile phones, PLDT and its wireless brand smart are delivering much better customer experience than their competitors. And that’s enabling them to take their foot off the gas pedal a little bit on the CapEx. It’s just enough to keep them maintaining that excellent customer experience.
Now on Page 13, we’ve got a snapshot of the shape of NPIC today. The three main businesses of course are electricity distribution. And in increasingly generation now has bought all of global business power and is merging it into its MGreen subsidiary. Then we’ve got the toll roads which have been busily extending their network over recent years and expecting the second half of this year to see new roads come into operation, not least a very beautiful bridge linking the mainland to the airport in Sabu. And then of course, the water business, which had a very difficult couple of years trying to sort out with its regulator, how the shape of relations are going to go over the next 15 years or so left in the concession now a franchise.
A quick look on Page 14 for the financial highlights, the electricity roads and water businesses also higher volumes. But as you see, implied by the red mark above the word water in the change in contribution, the build volumes in the water business were a little bit lower, largely because of COVID restrictions making non-revenue water a little bit higher. They couldn’t get out there to fix the fights as best they might.
Now, as you can see, as people hopped back in their cars with the easing of travel limitations, the toll roads business sharply increased its contribution to head office MPIC, and then that’s followed the power business. As I say, looking ahead, you’ll expect morale code to begin delivering in a big way on its commitment to build out 1,500 megawatts of renewable energy — electricity generation over the next five to seven years, this will gradually increasing delivered to the bottom-line that comes to its shareholders, the largest of which is MPIC. Likewise, the toll roads business will begin seeing much heavier traffic as it builds out its new roads, and so on and so forth. The water business will now that it’s got a stable environment, it will return to steady contribution to MPIC going forward.
Now, if we look at Page 17, we’ve got the rather pleasant view of Pacific light power, which we bought, I think in 2014 or in late 2013, which had years of difficulties going forward because of an imbalance between supply and demand for electricity and Singapore its market. And as you can see, that began to change rather drastically in 2021, it swung to a decent core profit, as you can see in the chart there and on the bullet points, it’s EBITDA rose 10 times to over a SGD100 million and early electricity demand data for the first two, three months of 2022, suggest that it’s going to continue that strong performance going forward.
So, it’s no longer redheaded stepchild, perhaps even it’s a favored offspring because they’re talking now about investing in the import of solar generated electricity to — from Bulan Island in Indonesia to the south of Singapore. Stanley Yang’s been closely involved in that it’s personally very exciting, and it’s a key part of First Pacific’s thinking about where it will put its money in future. And we’re looking at renewables and FinTech, which of course today fits right underneath PLDT.
A brief word about Philex mining. They saw their core profit double to a 10 year high in 2021. And that’s because of a huge increase in the price they’re able to get for copper, a little bit of an increase for gold. Looking ahead, they are looking around the environments of the Padcal mine for new or deposits to develop. But the big part of their future remains the Silangan project down in the south in mind now which they are keen to begin to develop so that they can get it online in 2025.
Now the Padcal mine, as you can see is scheduled to close operations at the end of 2024. But with what they’re finding round in the environments, I wouldn’t be entirely surprised to see it continue operations a little bit longer than that. But it is not an enormous part of First Pacific’s future. We’ve got our core holdings of PLDT and PIC and Indo food, which are going to be our earnings drivers for the next few years. We can talk about that in the Q&A, but as we saw in this morning’s board meeting to discuss our full year 2021 results.
The atmosphere was really something to be hold. The optimism is great and it’s a delight to be working here. That’s it for the opening monologue, Sara?
Question-and-Answer Session
A – Sara Cheung
Yes. Thanks, John. We are now ready for questions. You can unmute yourself if you have any questions. Please? One question —
John Ryan
What we have got, shall I read it.
Jeff Kiang
Okay. I’m Jeff Kiang, CLSA analyst who covers First Pacific. Is asking a question that everyone can read, and it seems to be directed at Joseph Ng, our Head of Treasury. Eliza, can you scroll, so just Joseph can see it?
UnidentifiedCompanyRepresentative
Yes. Let, just make it bigger too.
Jeff Kiang
Okay. I should do it.
Joseph Ng
I mean, just for the benefit dollars is the question is with continue improvement of [indiscernible] interest coverage ratio, would a change of current capital deployment strategy at office level, such as the variety among acquisition debt reduction and share buyback.
Yes. Maybe I could address that. I think it’s a function of the net cash flow at the headquarter, and he’s talking about the, basically the capital allocation strategy. Main thing is the level of the dividend that we could collect from the units. We are recording quite a decent non-spectacular, but decent growth in dividend in the course of 2021. We grow by roughly 7% from 190 million in 2020 to 204 in 2021 as showing the [casual]. And of course, I mean the interest expenses reduction had a bit mainly because [indiscernible] liability management initiatives we brought back about 300 million bonds I think last quarter of 2020, and that helped us to basically have the full year benefit in 2021.
Now that inches is trending up, so that impact would be kind of mitigate a little bit in the cost of 2022. Now, even after that, I think basically was left after office overhead will be allocated mainly with shareholders, shareholders return, let’s say, right, distribution. And then the account [indiscernible] is increasing quite a bit. And then we are paying 25% dividend payout.
So the payment and shareholders also increased by roughly 30% has demonstrated in the dividend to share increase over 30%. At the same time, we are also allocating some budget for the share buyback also mentioned by John. So, after that, then it’s basically the residual task we could deploy about debt reduction and acquisition. So, it’s going forward, I think it’s a function as to the growth of the dividend streams from the respective major operating units in particular. And there’s some frost that the news about our [PLP] selling some of the towers and that could raise quite a bit of money. And that may be opportunity for distributing a little bit more dividend up to headquarters here. So if that’s the case, then we have more flexibility to explore the acquisition and debt reduction. But for now, I think quite a bit of our — or cash headquarters will be allocating for shareholders return, distributions and share buyback.
Unidentified Company Representative
[indiscernible]
John Ryan
Yes. So PacificLight, as you may recall, in 2020 at the end of — in the fourth quarter, completed a debt restructuring as well as a restructuring of their gas supply agreement. And at that time, PLP was, marked down to zero, and that is still reflected in our NAV calculation.
Having said that, though with the strong EBITDA last year and the continuation of the performance as expected this year, the businesses starting to generate cash flows and positive income. And so, the proceeds are being applied to reduce the debt. It is our plan that even with 23 million of that was repaid in 2021, that amount will increase in terms of the debt repayment this year. And so, we believe that the fundamental value, the value of PLP will grow, but at the moment it’s still carried in the books at zero.
Sara Cheung
The second question is from Patrick, is about raw material costs impact on [indiscernible]? John, can you help?
John Ryan
Sure. Now Indofood doesn’t hedge on the futures markets for soft commodities. For wheat, they purchased ahead for up to 6 months. They have not been enormous buyers from Ukraine and while the black sea made deliver something like a quarter of all global wheat exports, that doesn’t that amount too much. That’s a low single-digit percentage of vault we consumed. Now — sorry, that’s the flower and pasta business at Indofood. Their business model is consistently cost plus, EBIT margins range generally between 5% – 7%. And they’ve raised wheat flower prices so of this year already by about 8%. Now generally speaking in an environment of higher prices for soft commodities that tends to boost the profitability of Indofood as a whole. I hope that helps there.
Sara Cheung
There’s another question from Jeff about PacificLight.
John Ryan
Sure. If I could just scroll up to it. The question is around the solar and this is related to a solar import project of which PacificLight is partnering in a consortium. There’s a consortium of 3 parties that are looking at importing the solar from Indonesian Island to Singapore. Now there has been a pilot, a conditional license granted by EMA for a 100 megawatt project. This is on a continuous basis. So the peak is higher, but on a continuous basis a 100 megawatts.
Having said that though, there is a RFP that the EMA is now tendering and the initial bids non-binding bids will be due next month. And so as part of that there’s an opportunity to scale it beyond the 100 megawatts. And this is something that the consortium is reviewing our opportunities.
If it’s the pilot project, the business would start operations in the beginning of 2025. If it is through the RFP, then there is up to two more years up to until 2027 when the expectation of the project would be commenced the COD date. And so thereafter, and it also depends because this is a solar project but it there’s interest from hyperscalers and retail contracts that looking at a long arrangement for buying the power from this project, it is something that we would know later on. It’s still premature to have a view on the P&L impact.
Sara Cheung
Chris has some questions.
John Ryan
Chris, could you please take the question from Vincent Lam, regarding buybacks at Metro or even Indofood?
Chris Young
This is – I’m sorry, I can’t see the question. This is buyback at their own level at the Metro Pacific level.
John Ryan
Yes. The question is, may I know if management has anything in mind besides share buyback at FBC, EEG, will Metro Pacific, Indofood, a doctor accelerate their share buyback schemes on their own?
Chris Young
Well, I think if you are all Metro Pacific, I think you would’ve seen a few weeks back that they actually announced a new share buyback. I think it’s another 5 billion pesos. So yes, we will consider and support the share buybacks at the operating companies. At the moment, there’s no proposal that that could extend beyond Metro Pacific to the Indofood group meantime, but yes, it’s something we have a watching brief on.
John Ryan
Okay. Stan, LNG pricing for PLP. This’ll take half an hour to answer guys.
Stanley Yang
The LNG contract was a long-term contract signed with Shell when PLP commenced operations in 2014. The contract as it approaches the end. There’s been discussion on renewal and what’s happened in Singapore is that — in the beginning Shell was the only provider and now there are other aggregators which include Exxon. It includes Pavilion. And so there are other opportunities in PLP has been speaking with the other groups.
The formula — there is a formula that is in that to rent in terms of the movement on LNG. It does move up. Having said that though the ability for the plan to pass through and if you look at where the non-fuel margins are in the business, they’re reflecting that improvement. And so whilst the prices of the LNG are higher, the margins are significantly improved as well.
Sara Cheung
There’s two questions about in [indiscernible] John, can you —
John Ryan
I’ll take a step back, Chris, if expansion is needed please carry on after me. Indofood’s revenue and earnings growth not counting Pinehill, are not numbers that Indofood shares. But I am very confident that those numbers are positive. There was revenue and earnings growth in the domestic Indonesian markets.
Key synergies between Indofood and our ICBP rather and Pinehill, well, as you know, before ICBP bought Pinehill there was a business relationship of many years between those companies. So the Pinehill noodle factories were exactly like the noodle factories in Indonesia using the same spice packets and ingredients and so on sourced from ICBP. So that’s all internal now, that’s can’t really get much closer, but one thing they have started to do already, and that is import non-noodle products from ICBP into the Pinehill markets. And that will help growth going forward.
All in all, it’s been a quite positive acquisition for Indofood. I’m very, very pleased with it. I’m proud of the effort we made in persuading shareholders to take it on. And I think they’ll eventually all of them agree that it was a great acquisition. And I would imagine that the margin improvements overall at Indofood that we saw a few pages away from here were helped by the Pinehill acquisition.
Chris, do you want to add on that?
ChrisYoung
No, I think that’s quite comprehensive.
John Ryan
Now we have free cash flow. Chris, I believe this question here. Can you rule out any risk of making large acquisitions again EG Goodman Fielder. I think this is right up here, Chris.
ChrisYoung
Yes, I think we can rule that out. I think, John in the presentation and Joseph in his earlier description, but I think the presentation page 23, you can effectively see that the approach at least for the next couple of years is to take the net operating cash and return the bulk of that to shareholders. The biggest chunk is the 25% distribution of dividend. And then we have committed to the USD 100 million share buyback. So you can see on page 23 to the end of 2021, we spent USD 24 million on purchasing shares. So if you factor that into 2023, 2024, together with a modest increase in dividends from the underlying businesses, you’ll see that the bulk of our operating cash flow is going to be used to redundant the shareholders. And that’s, I think what we have indicated we would do.
We may make 1 or 2 smaller investments. These investments we will probably invest alongside the operating companies. I think Stan mentioned FinTech layer has an area and possibly something on the renewable site, but smaller scale, and together with the operating companies. But in summary, the bulk of operating cash will be return to shareholders in 2022 and 2023 through dividends and share buyback.
John Ryan
Thank you very much, Chris. We have a question now about the updated adjusted NAV for First Pacific per share based on yesterday’s closing prices of all the quoted subsidiaries. What I’ll do there is since today is the last of the month tonight or tomorrow, I’ll put together that spreadsheet, which we do on a regular basis. So you’ll have the end month data there rather than the 29 March. If that’s not okay, then just drop me an email and I’ll see what else we might be able to do. And while it’s on my mind in late April early may, Stanley Yang, and I will be visiting Equity Investors in U.K., Europe and North America. If you want us to see you, please drop me a note and we’ll see how we can assemble the entire trip. We haven’t seen investors on a formal earnings road show in what a good couple of years, 2.5, I think. And we’re quite looking forward to it and we’re feeling really good about the story we can tell.
Sara Cheung
Any questions? As there’s no more questions, may I invite Manny to give his closing remarks.
Unidentified Analyst
Sorry. There’s one more question. What is the pace of share buybacks going forward?
John Ryan
Joseph, can you help with that?
Joseph Ng
Yes. I mean, as mentioned by John, the program is 100 million over three years. And so far, we spent about 28 million before we got into the buyback period. So we still have somewhere around 72 million to be spent. So for 3 year program, and clearly its market driven and writing on up and down on the share price. But on average, you are talking about 3 years over 400 million. So on average you talk about 30 million. Yes, I think that’s probably a good estimate. But at the end, it’s subject to a number of things as to say [indiscernible] and other things. So in very broad terms I think we say 30 million year kind fair estimate.
Sara Cheung
Thank you, Joseph. There’s no more questions. Manny, can you please give us your closing remark?
Manuel Pangilinan
Well. Simply want to thank everyone for joining us this afternoon in this investors’ briefing in respect to the full year results for 2021. Actually in the board meeting today, we briefed the board about the — at least in amongst the Philippians companies. The first 2 months appeared to have been a good start for the year 2022. And I think our own budgets at First Pacific assume a better year for First Pacific this year than compared to 2021. And I’m glad John and Stanley are going out to see most of you, all of you to explain not only our ‘22 and ‘21 numbers, but to update you on the latest developments amongst our operating companies.
So again, thank you. And we look forward to talking to you again when we announce our mid-year results sometime in August, I guess. John?
John Ryan
Yes. Towards the end of August, I believe Manny.
Manuel Pangilinan
Okay. Thank you so much.
Sara Cheung
Thanks again for joining today’s online briefing.
John Ryan
Thank you. Goodbye, everybody. Drop me a note, please.
Manuel Pangilinan
Thank you, John. When are you actually traveling to Europe?
John Ryan
London first meetings on April 26th, then Europe.
Manuel Pangilinan
Okay. Thank you.
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