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Midas Investments Research Retail Industry
This report is published for educational purposes only
by students competing in the CFA Institute Research
Challenge. Puregold Price Club, Inc.
29 November 2012 Ticker: PGOLD Recommendation: BUY
Price: PHP 32.20 (USD 0.79) Price Target: PHP 40.16 (USD 1.00)
Exchange Rate Pure consumer play outpacing market on defensive
USD/PHP: 40.88
growth
Figure 1: Share Price Performance We recommend a BUY for PGOLD, the Philippines‟ fastest growing grocery retailer and
the only pure, direct and broad-based domestic consumer play in the market, at a price
35 target of Php 40.16, a 24.72% upside from current price of P32.20. Our positive outlook is
30 based on growing and resilient domestic consumption that is captured by an EDLP (Every
25 Day Low Prices) Strategy targeting low to middle-income consumers bringing in traffic of
20 18 million each week. Through the Tindahan ni Aling Puring (TNAP) reseller program, it
15 is the only major retailer to focus on the widely popular traditional sari-sari store. By
10 acquiring membership shopping club S&R, it also captures a growing niche of high-income
5 consumer spending. With aggressive store expansion underway, we forecast sustainable
0
long-term growth for this defensive stock.
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Market Capitalization P 89,078,281,250 Aggressive national roll-out catalyzing revenue growth: By adding 51 stores outside
Metro Manila this year alone, Puregold revenues are slated to grow by 39.69% in
Shares Outstanding 2,766,406,250
2012. Four-year revenue CAGR of 23.6% is expected on the back of aggressive
Free Float 34% expansion raising total store count to 260 by 2016 (See Figure 2). A key catalyst will
52week Price Range P 14.98 - P33.00 be expansion into the unsaturated and attractive market of Visayas and Mindanao
where we calculate a potential of 91 hypermarkets to be added. With a hypermarket
Ave. Monthly Volume 78,233,692
opening in Palawan today, it has already begun operating its first store outside of the
Beta 0.81 island of Luzon.
Scalable asset-light model translating to strong margins and abundance of free
cash: PGOLD has a scalable asset-light model that relies on property leasing and
third-party logistics from suppliers. Fixed Asset Turnover is seen to improve from
6.49 to 10.96 (2011-16E), showing potential for growth. This translates to impressive
ROE and profit margin at 21.95% and 8.85% respectively, both above industry
averages. PGOLD generates an abundance of free cash enough to meet the expected
yearly annual capex of Php 3.46B allocated for expansion from 2013 to 2016. With
issuance of additional debt, special Dividend Payout Ratio (DPR) at 2016E is 43.82%
on top of the actual DPR of 14.91%, giving a total DPR of 58.73%
Valuation confirms BUY rating: FCFE analysis indicates a price of Php 40.16 at a
24.72% upside from current price, supporting our positive long-term outlook. PER
analysis with Asia-Pacific grocery retailers indicates a discount of 20.75%, confirming
the attractiveness of PGOLD. Investment risks include: execution of VisMin
expansion and competitive risks from SM Retail.
In Php mil 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Revenues 24,112 29,108 38,988 59,541 81,273 100,718 122,258 148,707
EBIT 458 985 2,216 4,682 7,985 10,899 14,465 19,097
Net Income 132 510 1,545 3,156 5,384 7,423 9,919 13,160
Ratios
EPS N/A N/A 1.10 1.29 1.95 2.68 3.59 4.76
Profit Margin 0.56% 1.97% 4.83% 5.58% 6.62% 7.37% 8.11% 8.85%
Cur. Ratio 0.93 0.76 1.10 1.11 1.24 1.28 1.37 1.47
ROA 0.96% 5.28% 11.29% 7.47% 9.64% 10.77% 11.80% 12.75%
ROE 11.28% 29.48% 21.74% 12.24% 16.10% 18.50% 20.34% 21.95%
CFA Institute Research Challenge November 29, 2012
Business Description
Figure 3: Expansion Plans Puregold Price Club, Inc. (PGOLD) is the Philippines‟ fastest growing grocery retail chain.
300 Since establishing its first store in 1998, it has reached a total store count of 151 stores as of
260
250 234 Nov. 29, 2012. In a matter of 14 years, it has overtaken established retailers in terms of store
208 count and revenue to be the second-largest grocery retailer in the country. Behind the
200 182
156 company‟s remarkable growth (see Figure 3) is a strategic customer focus on low-income
150 consumers and sari-sari stores.
100
100 62
41 Store Formats and Locations
50
PGOLD‟s operates in four store formats: 74 hypermarkets (Puregold Price Club), 56
0
supermarkets (Puregold Jr. and Parco), 15 discounters (Puregold Extra) and 6 membership
shopping clubs (S&R) (see Figure 4 and Appendix 8). These are strategically located in key
commercial districts and residential areas with access to major transportation hubs. All stores
Puregold Price Club Puregold Jr.
are geographically located in Metro Manila and Luzon except for a single S&R outlet in Cebu.
Puregold Extra S&R Expansion to VisMin is forecasted to begin by 2013 (see Appendix 9). The first hypermarket
Parco outside the Luzon island in Palawan is already in operation.
Source: Company, Team’s Estimates
PGOLD has a highly-scalable asset-light operations model with direct-delivery outsources
logistics to suppliers and third-party agents, and minimizes warehousing and distribution costs.
Figure 4: Store Format Overview Hypermarkets function as warehouses for supermarket and discounter formats. The different
store formats allow PGOLD to quickly enter new locations with minimal upfront costs.
Hyper- Super- Dis- Broad Customer Focus through “Tindahan ni Aling Puring”
Type of Store
market market counter PGOLD is the first and only modern retailer to strategically target sari-sari stores and other re-
No. of Stores sellers as customers through the Tindahan ni Aling Puring (TNAP) program. By selling to
(as of 74 37 15 sari-sari stores, PGOLD penetrates the DE market which comprises 90% of the Philippine
11/29/12) population. TNAP provides rebates, delivery services, training seminars, and even travel
Average Net
1,500- 800- 300- incentives for its members. From its beginnings in 2005, TNAP has grown its member base
Selling Area
7,800 1,500 700 from 30,000 to 220,000 by 2012, representing around 20% of the growing number of sari-sari
(sqm)
No. of SKUs stores in the country (see Appendix 10 and 11). Re-sellers contribute 35% of PGOLD‟s annual
30-50 8-10 1.5-2 revenues (see Figure 5).
(in „000s)
Source: Company Data
Strategic Acquisitions Complete Spectrum of Consumer Segments
By acquiring S&R Membership Shopping and Parco Supermarkets last May 2012, PGOLD
covers the entire spectrum of consumers. S&R membership shopping club which currently
boasts of 215,000 members taps the high spending power of the AB socio-economic class.
Parco, a supermarket chain with 19 stores, will be integrated and rebranded to PGOLD‟s
Figure 5: PGOLD Revenue Breakdown supermarket format Puregold Junior. This will strengthen Puregold‟s reach to households
by Consumer Segments belonging to the CDE socio-economic classes.
The company has set its organic growth rate at 25 stores per year for the next 5 years.
PGOLD‟s 2011 IPO and 2012 notes issuance which raised P2B and P5B respectively will
Source: Company Data accelerate growth through acquisitions on top of organic expansion within the next 5 years.
7.8 The Board of Directors has an average of 9 years of working experience in PGOLD and the
6.2 retail industry, while Executive Officers and Key Managers have an average of 8-9 years of
5.5 working experience with PGOLD (see Appendix 13). As they architecture PGOLD‟s dramatic
growth, they are well positioned to take PGOLD to new heights.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
Figure 7: Microfinance Loan Portfolio and economies. While unhealthy peso appreciation is unfavorable for dollar-earning export
Number of Borrowers (2001-2011) industries, PGOLD is cushioned as revenues are based on growing domestic consumption.
7000 3,500 Value of OFW remittances may be impacted but this has been historically shown to grow even
6000 3,000 during the financial crisis. OFW remittances grew during the 2008 and 2009 financial crisis
5000 2,500 at13.68% and 5.61% respectively, before rising again to 8.16% in 2010. Remittances also
4000 2,000 impact disposable income which will not cause a decline in essential spending on grocery
3000 1,500 items like food (Figure 6)i. 70% of PGOLD‟s items are food products.
2000 1,000
1000 500 Private consumption in the Philippines is expected to grow by an average of 7% with about
0 0 20% dedicated on grocery spending.ii At worst, grocery consumption will grow along with
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
population growth which is stable at 2.0%iii, higher than the Asia Pacific average of 1.0%.iv
Gross Loan Portfolio (in PHP millions) Historic cuts in local interest rates to reduce cost of debt accelerating PGOLD expansion
Active borrowers (in '000 People) Puregold‟s aggressive expansion plan of opening 25 stores per year is expected to accelerate
with all-time lows in the country‟s interest rates. Driven by a credit upgrade of Philippine
Source: MixMarket.Org sovereign debt by S&P and Moody‟s to only one-notch below investment grade, interest rates
are at an all-time low of 3.5% and are expected to decrease by 2013. This reduces the cost of
Figure 8: Revenue CAGR of PGOLD vs. capital to fund expansion and Puregold has responded to this opportunity by issuing a
Industry (2006-2011) corporate note of P5 billion for expansion and acquisition.
Source: Euromonitor We expect them to continue stable growth given strong support from micro-finance industry.
Sari-sari stores are a popular small enterprise that keeps many home-based women employed,
the Philippines‟ burgeoning micro-finance industry, ranked 6th in the world, (see Figure 7) has
Figure 10: Revenue Share of Modern vs.
lent financial muscle to ensure their stability for many years to come.
Traditional Retailers among Regional
Peers
100% Philippine modern retailing transitioning to opening stages of growth cycle
80% Amid the strong presence of traditional retail, modern grocery retailing in the Philippines
60% posted robust growth amidst the global financial crisis. Between 2006 and 2011, value sales of
modern grocery retailing grew by a CAGR of 7.4% with hypermarkets posting double-digit
40%
growth at 17%. With the bulk of PGOLD‟s stores in the hypermarket format, revenue grew by
20% a CAGR of 18% (see Figure 8).
0%
We identified the Philippines to be in the opening stage of global retail development using AT
Kearney‟s Global Retail Development Index (GRDI) (Appendix 16). The country meets the
four indicators of this stage: 1) middle class growing at 9% per yearv; 2) Consumers exploring
organized formats evidenced by growth in modern retailing; 3) government reducing
Modern Traditional restrictions through the liberalization of foreign ownership; and 4) minority investment by
Source: Euromonitor Trade Statistics foreign retailers in local retailers with Hong Kong-based retailer Dairy Farm Holdings
acquiring a stake in Rustan‟s SuperCenter.
Figure 11: Distribution of Households by
Economic Classes In this stage, growth potential for modern retailers will not only come from a growing market
AB
1% but by a shake-out of smaller players. PGOLD has already capitalized by acquiring Parco
chain of supermarkets and has set aside P2 billion for acquisitions for 2013.
C
E 9%
PGOLD has focused growth, differentiated against competitors
30%
While major players in grocery retailing such as SMvi, Robinsonsvii, and Rustan‟sviii have
witnessed robust growth (Figure 9), PGOLD has outperformed competitors with its broad-
based consumer play. While other retailers have diversified into non-grocery goods (See
D
Appendix 17), PGOLD has focused on essential spending, targeting low-income segments and
60% traditional re-sellers, cushioning it from vulnerability to the global economy.
Source: NSO
CFA Institute Research Challenge November 29, 2012
Focus on domestic consumption driving resilient earnings against volatile global financial
system
As the only pure direct and broad-based domestic consumer play on the local market,
PGOLD‟s stock price has outpaced the Philippine stock market by 77.2% (see Figure 1) driven
by revenue growth of 39.69% (2012E) on the back of 16% growth in domestic consumption.
Source: SWS, Company data, Team’s
Estimates
CFA Institute Research Challenge November 29, 2012
Scalable asset-light model translating to strong margins and abundance of free cash
PGOLD has a scalable asset-light model that relies on property leasing and third-party logistics
from suppliers. Fixed Asset Turnover is seen to improve from 6.49 to 10.96 (2011-16E),
Source: Team’s Estimates showing potential for growth. This translates to impressive ROE and profit margin at 21.95%
Figure 20: Summary of Capex and 8.85% respectively which are both above industry average. PGOLD generates an
Projections and Estimated Returns abundance of free cash enough to meet the expected yearly annual capex of Php 3.46B
CAPEX
Payback allocated for expansion from 2013 to 2016. With issuance of additional debt, special Dividend
Year Period Payout Ratio (DPR) at 2016E is 43.82% on top of the actual DPR of 14.91%, giving a total
(in PHP mn)
(in years) DPR of 58.73%
2012E 3,185.00 0.40
2013E 3,459.74 0.46
Valuation confirms BUY rating
2014E 3,459.74 0.50
FCFE analysis indicates a price of Php 40.16 at a 24.72% upside from current price,
2015E 3,459.74 0.46
2016E 3,459.74 0.43
supporting our positive long-term outlook. PER with Asia-Pacific grocery retailers indicate
discounts of 20.75%, confirming the attractiveness of PGOLD (Figure 21).
Source: Team’s Estimates
PGOLD is the only listed grocery retailer, with other retailers listed under the holdings of their
Figure 21: Regional Peers‟ P/E and PEG conglomerates (SM and Robinsons). Comparables in the local bourse are consumer-themed
P/E (2012E) PEG stocks like URC. PGOLD‟s 2012E P/E is at 28.01, which is 16.57% above the local average of
Big C 23.94 1.26 24.03 (Figure 22). This margin is reasonable given PGOLD‟s huge growth trajectory as
Siam Makro 29.57 1.48
compared to other companies, engaged in the more mature and competitive food and beverage
Sumber Alfaria
Trijaya
35.57 - industry where growth prospects are foreign rather than domestic (See Appendix 18).
Sun Art Retail
34.96 1.94 Strong fundamentals affirm positive outlook: Indicative of profitability and efficiency,
Group
Dairy Farm 26.66 1.62 PGOLD has registered an impressive 27.43% sales revenue CAGR in 2008-11 while key
Peer Average 30.14 1.58 profit-margin ratios (gross, operating, and net) have all been steadily increasing, driven by the
Puregold 27.03 1.18 company‟s aggressive expansion and efficient cost control.
Source: Bloomberg
As for efficiency in asset management important in the retail industry, PGOLD comes second
only after regional conglomerate Dairy Farm in terms of ROA in the region and its upward
trajectory is seen to continue with dramatic increases in ROA as a result of aggressive
expansion resulting to economies of scale (Figure 23). This implies a larger growth potential
for PGOLD than for other groceries in other regional markets (Appendix 22).
CFA Institute Research Challenge November 29, 2012
FCFE’s Assumptions
1. Php 3.0 B will be spent every year from 2013-2016 for Puregold capital expenditures.
(This is based on company historical data.)
CFA Institute Research Challenge November 29, 2012
Figure 26: Bases for Same Store Sales Growth 2. Php 0.459 B will be spent every year from 2013-2016 for S&R capital expenditures. (This
(SSSG) rate per store format is based on company historical data.)
Store Basis for Rate/ 3. All new stores' sales will be fully realized and maximized after six to eight months of full
Format Growth Rate Formula operations. If there is no data available on the finished construction, the store's sales were
assumed to be realized after one year of full operations. (This is backed by company data.)
35% Resellers, (0.35)*3% 4. Sales revenue for each store format (including S&R) is assumed to grow each year by:
Hypermar-
ket
65% CDE + 6.25% for hypermarkets, 8.00% for supermarkets, 3.00% for discounters, and 6.50% for
market (retail) (0.65)*8% S&R. (See Figure 26 for the bases for and derivation of these rates.)
5. Puregold financial statement items grow with store selling area.
Short-term 6. S&R financial statement items grow with the number of stores.
Supermar- Household 7. There will be 25 new Puregold stores--specifically, 14 hypermarkets, 9 supermarkets, and
ket
8.00%
Consumption 2 discounters--every year from 2013-2016. (This is based on company projections and
Growth retaining the proportion of new stores per store format from 2012, as seen below.)
Short-term 8. There will be 1 new S&R store every year from 2013-2016. (This is based on company
Discounter Reseller Value 3.00% projections.)
Growth 9. The terminal growth rate is 3.7550%. (See derivation in subsection below).
Short-term AB
S&R Consumption 6.50% Projected Free Cash Flows (FCF): Drivers of Growth
Growth PGOLD‟s increasing five-year FCF projections is driven by: (1) revenue growth from SSSG
Source: Euromonitor due to rising domestic consumption, (2) additional revenue from aggressive store expansion
particularly in Vis-Min, and (3) improving profitability from increasing scale of operations.
Strong Growth in Domestic Consumption Driving Strong Same Store Sales Growth
Same store sales growth (SSSG) is expected to increase at a rate of 6.41%, driven by the strong
growth in domestic consumption of 4.40% (Euromonitor). This is pushed by the country‟s
above-average population growth of 2%.
Figure 27: Terminal Growth Rate Scalability and Strategic Acquisitions Driving Profitability
Computation The stable growth of operating expenses vis-à-vis rapid sales growth leads to higher margins,
Re-seller Value Growth 3.00% which contributes to PGOLD‟s increasing future value. Opposing movements of naturally
Weight 32% increasing expansion-related costs and lower operating costs in Visayas and Mindanao balance
Household Consumption each other out leading to stability.
4.00%
of Essentials
Weight 59% With its preference for lease arrangements and partnership with suppliers and third-party
AB Private Consumption 4.70% cross-docking providers, PGOLD‟s asset-light scalable model leads to higher profitability
Weight 10% because of the minimum investment required for store expansion. This is reflected in the
shorter payback period (see Appendix 26) and minimal logistical costs such as distribution
Terminal Growth Rate 3.755%
costs as these are mostly shouldered by PGOLD‟s third-party suppliers.
Source: Euromonitor
Economies of scale would result from rapid expansion via organic growth and acquisitions and
Figure 28: WACC Breakdown should lead to higher rebates and discounts from suppliers. (See Figure 18 for an illustration of
Cost of Equity (re) 6.43% the expansion plans.) The increasing number of PGOLD stores would scale the expenses
Risk-free rate 6.5% accordingly, leading to higher operating expenses especially. This, however, is cancelled out
Beta 0.81 by lower operating costs, as it is easier to source manpower and real estate at relative lower
Risk Premium 5.0% costs outside of Metro Manila.
Equity/Asset 60.99%
Cost of Debt (rd) 1.51% Projected margins show strong growth, which is crucial for PGOLD‟s position as the low-price
Weighted average leader in the modern retail sector. Strong margin growth is attainable due to PGOLD‟s
5.53% strategic acquisitions and rapid expansion plans. Strategic acquisitions, such as S&R, boost
cost of debt
Tax rate 30% consolidated margins, with its portfolio of higher margin items sold to the AB market.
Debt/Asset 39.01%
Terminal Value: Assumptions
WACC 7.95%
The weighted average cost of capital (WACC) is calculated to be 7.95%. The terminal growth
Source: Company Data, Team’s rate was estimated to be 3.7550%, factoring in S&R growth driven by consumption of AB
Estimates socio-economic segment and PGOLD‟s broad customer base of resellers and retail consumer.
sellers and 65% for retail consumers) as well as a conservative estimate of S&R contributing to
approximately 10% of sales. (See Figure 27 for the computation).
Same store sales will continue to rise from 2012 to 2016 at a rate of 6.41% on the back of
increasing private consumption, but growth is expected to slow down to 3.755% when new
stores begin to mature and competition enters the same geographical areas. Targeting re-sellers
Figure 31: PGOLD Gross and Operating
will be a strategic driver of growth as shown in the revenue impact of expanding network of
Margins
the TNAP program (see Appendix 27).
30.00%
20.00%
Healthy margins support price leadership strategy
PGOLD will continue improvements in gross margin to 20% in 2016 due to: 1) allocation of
10.00% 20-25% (higher than the current 10-15%) of the selling area in new stores for high margin
items and 2) higher margin products of S&R. On top of the sustained relationships with
0.00%
suppliers which give them a 4% rebate, this stronger performance of the gross margin will
allow the company to competitively price its grocery products.
Gross Margin EBIT Margin
Scale economies back profitable expansion
Source: Company Data, Team’s Estimates The scalable operations of the company gives PGOLD the capability to open new stores with a
minimal investment of P120 million per store (See Appendix 26). Expanding store network
allows the company to maintain an average operating margin of 11% as a result of lower
selling and labor expenses in the Vis-Min area. This is partially offset if warehousing will be
Figure 32: PGOLD EPS Growth and
set-up in Vis-Min (Figure 31).
Profit Margins
10.0% 60% Expansion will lead to a continual increase in the bottom line of 61% for 2012 and 39% CAGR
for the years 2012-2016, equivalent to a healthy profit margin of 8.9% which remains well
50%
8.0% above the industry average of 1.5%-2% (see Appendix 21). This translates to an impressive
40% growth trend in EPS projected at 38.7% CAGR for 2012 through 2016 (Figure 32). Estimated
6.0%
payback for investments averages 5-6 months (see Appendix 26).
30%
4.0%
20% Cash Flows capable of driving expansion initiatives and high dividend payouts
2.0% 10%
Free cash is expected to grow dramatically due to healthy earnings stream, as EBIT is expected
to grow at an average rate of 44% from 2012 to 2016. Cash flows from operating activities will
0.0% 0% continue to increase at a CAGR of 36% as operations expand. The CapEx trend is seen to be
2012E 2013E 2014E 2015E 2016E
sustained, with a yearly CapEx is forecasted to increase to Php 3.46B due to aggressive store
Profit Margin EPS Growth expansion, and maintenance and renovation costs of existing stores. A double-digit times
interest earned (TIE) ratio gives room for PGOLD to fund expansion with debt. Stronger cash
Source: Company Data, Team’s Estimates flows and increase in leverage allow the company to drive further growth with acquisitions or
increase dividend payouts per share at a 15% CAGR through 2016 (see Figure 19).
light strategy allows PGOLD to capitalize on the scalability of its operations, which translates
to a higher ROE of 21.95% by 2016E. With the recent issuance of P5B worth of notes to fund
store roll-outs, PGOLD‟s D/E ratio average 0.69x for the years 2012E through 2016E.
PGOLD answers the challenge of sustainable development with a business model that
approaches traditional retailers as customers rather than competitors. Through the TNAP
program, it supports sari-sari stores that provides livelihood to hundreds of thousands of
Filipino women and their families. Rather than threaten the livelihood of traditional retailers, it
has made them partners in business growth. With this, we are confident that Puregold‟s
expansion are not only free from regulatory threats but will enjoy strong support from the local
community.
prime locations, drive up leasing costs and limit organic expansion, as well as enter into a
price-cutting war which could hurt margins.
PGOLD addresses the threat of heightened competition by maintaining its Everyday Low Price
(EDLP) strategy through introducing more high-margin products and building on supplier
relationships. The company is planning to allot more space for its high-margin items (15-25%
margin) such as freshly produced goods, general merchandise, and small apparel, from 10-15%
of per-store net selling space to 20-25%. Unlike SM, PGOLD maintains strong relationships
with suppliers by limiting private label products and thus allowing the company to negotiate
low prices. Its asset-light model also improves margins equipping it for possible price wars.
PGOLD‟s strong hold on re-sellers is a distinct advantage that SM does not have. TNAP is the
Figure 35: Related Party Transactions as only existing major move by a modern retailer to capture the dominant traditional retailing
% of Operating Expenses industry seen in the ubiquitous sari-sari store. The discounter format Puregold Extra offers
competitive pricing on top-selling SKUs, thus servicing the needs of sari-sari stores.
16,000 25%
Regulatory Risks: Trade Liberalization Sees Potential for Entry of Foreign Retailers
14,000 Regulatory risks involve potential entry of foreign players in the grocery retail market. The
20%
12,000 Trade Liberalization Act implemented in 2000 lessened restrictions for foreign ownership of
10,000 15% businesses leaving the door open for international players to enter the Philippines. No
8,000 international retailer has yet entered the hypermarket and supermarket formats, but Hong
6,000 10% Kong-based retailer Dairy Farm acquired a 50% stake in Rustan‟s retail group. Dairy Farm is
4,000 the leading retailer in the Asia Pacific region operating in 10 countries.
5%
2,000
0 0% Risk is mitigated because of PGOLD strategic customer focus on low-income segments and re-
sellers that is very well adapted to the local market. It has a first-mover advantage in capturing
sari-sari stores through the 220,000 member-strong TNAP program.
Operation Expenses (PhP Thousands) Operational Risk: Expansion to the Vis-Min region
Rel. Party Transactions / Oper. Expansion to the Vis-Min region is a key catalyst to the company‟s projected growth but
Expenses (%) presents a substantial operations risk. PGOLD‟s asset-light supply chain model which has been
Source: Company Data, Team’s Research successful in Metro Manila and Luzon is yet to be tested in the Vis-Min region. Disruptions in
supply chain could increase cost of operations, deplete margins and limit the expansion
potential of 91 hypermarkets in Vis-Min.
Figure 36: Levels of Investment Risks PGOLD tries to reduce the risk by relying on regional distribution of suppliers who have
and PGOLD‟s Mitigation Efforts regional depots A store in Palawan has opened to simulate operations outside of Luzon before
Slowdown in a full store roll-out in Vis-Min. The option of setting up warehousing in VisMin Is also a
Remittances possibility. To ease the transition of learning a new market environment, senior management
6
from established stores in Metro Manila and Luzon are expected to be assigned to new store
4 locations in VisMin. Mindanao can be prioritized for expansion given it has a strong potential
Related-Party
2
Local to replicate PGOLD‟s existing operational model given similar geography with Luzon and
Transactions Competition
lower retail saturation compared to Visayas.
0
To ensure policies against dubious transactions, the company has put up three new board
Figure 37: Result of Monte Carlo Simulation committees in compliance with the Manual of Corporate Governance of the SEC, namely an
Audit Committee, Nomination Committee, and Compensation Committee. A charter for the
Audit Committee has also been approved and now in effect. These, together with other policy
changes, put the company in full compliance with the Manual of Corporate Governance as of
3Q 2012, compared to a compliance average among the 30 PSE index companies of 95% of
the 75 total compliance guidelines. Furthermore, the company is currently managing its lease
transactions more strictly, thus related party transactions are estimated to decline as a percent
of operating expenses from 19% (2011) to 10% by 2016 (see Figure 35 and Appendix 23).
Valuation Risks
Given 89% of PGOLD‟s intrinsic value is in the long-term, valuation is sensitive to the
terminal growth rate. A Monte Carlo simulation on such resulted in a minimum probability of
Source: Team’s Estimates a SELL at 2% while the level of confidence to recommend BUY is at a high 61% (See Figure
37 and Appendix 28). In case perpetual growth rate falls below target, the possibility of a Hold
at 37% reflects the stability of PGOLD as a defensive stock to invest in.
CFA Institute Research Challenge November 29, 2012
i
Grocery Retailers in the Philippines, Euromonitor International, February 2012
ii
Private Final Consumption Expenditure: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF),
International Financial Statistics (IFS)
iii
Philippine Census 2010, National Statistics Office.
iv
United Nations ESCAP “Statistical Yearbook for Asia and the Pacific” http://www.unescap.org/stat/data/syb2011/I-People/Population.asp
v
CLSA Asia-Pacific Study
vi
SM Retail is a subsidiary of SM Holdings listed in the Philippine Stock Exchange (PSE)
vii
Robinsons Retail Group is a subsidiary of JG Summit Holdings listed in the PSE
viii
Rustans through minority stakeholder Dairy Farms Holdings is listed in the Hong Kong Stock Exchange
ix
“Mindanao to get biggest infra budget in 2013”, Philippine Daily Inquirer. September 2012
Appendix
Appendix 1 Income Statements ............................................................................................................ 1
Appendix 2 Balance Sheets .................................................................................................................. 3
Appendix 3 Statements of Cash Flows ................................................................................................. 6
Appendix 4 Key Financial Ratios (Consolidated) .............................................................................. 10
Appendix 5 Income Statements (Common-Size) ............................................................................... 11
Appendix 6 Balance Sheet (Common-Size) ....................................................................................... 13
Appendix 7 S&R Financial Statements .............................................................................................. 16
Appendix 8 Puregold Store Formats ................................................................................................... 19
Appendix 9 Current Locations of Puregold Stores ............................................................................. 20
Appendix 10 Puregold Customer Base ............................................................................................. 21
Appendix 11 Tindahan Ni Aling Puring (TNAP) Program .............................................................. 22
Appendix 12 Puregold Ownership Structure .................................................................................... 23
Appendix 13 Puregold Board of Directors and Management ........................................................... 24
Appendix 14 Puregold Store Roll-Out Plans .................................................................................... 25
Appendix 15 Porter’s Five Forces Analysis ..................................................................................... 26
Appendix 16 Global Retail Development Index ............................................................................... 27
Appendix 17 Profiles of Major Grocery Retailers ............................................................................ 28
Appendix 18 Revenue Breakdown of Local Company Stocks ......................................................... 29
Appendix 19 Store Growth Potential ................................................................................................ 30
Appendix 20 List of Local and Provincial Competitors ................................................................... 32
Appendix 21 Retail Performance Benchmarks ................................................................................. 33
Appendix 22 Modern Grocery Retail in Southeast Asia................................................................... 34
Appendix 23 Corporate Governance ................................................................................................ 35
Appendix 24 M&A And FCFE Method ........................................................................................... 36
Appendix 25 Regression Analysis .................................................................................................... 37
Appendix 26 Investment Costs and Returns ..................................................................................... 39
Appendix 27 Sensitivity Analysis..................................................................................................... 41
Appendix 28 Monte Carlo Simulation .............................................................................................. 42
Appendix 29 SWOT Matrix of Current and Potential Strategies ..................................................... 43
Appendix 30 Investment Ratings Definition .................................................................................... 43
Appendix 1 INCOME STATEMENTS
Appendix 1.2: Consolidated: Puregold Price Club, Inc.; Puregold Jr.; Puregold Extra
Income Statement
2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
Net Sales 18,842 24,112 29,108 38,988 55,338 70,990 88,438 107,850 132,033
Hypermarkets 18,842 24,112 27,584 33,557 47,310 60,466 75,081 91,288 111,848
Supermarkets - - 1,481 4,695 7,062 9,387 12,039 15,055 18,477
Discounter - - 43 737 966 1,137 1,317 1,508 1,708
Cost of Sales 17,451 21,893 25,577 33,453 46,484 58,922 72,519 87,359 105,626
Gross Profit 1,391 2,219 3,531 5,535 8,854 12,068 15,919 20,492 26,407
Other Operating Income 892 785 781 1,052 1,284 1,938 2,428 2,979 3,667
Selling Expenses 1,711 2,082 2,696 3,568 5,004 6,342 7,805 9,401 11,365
General and Administrative
131 183 261 382 541 695 865 1,055 1,292
Expenses
Other Operating Expenses 144 282 370 421 601 740 883 1,030 1,203
Operating Expenses 1,986 2,546 3,326 4,371 6,146 7,776 9,553 11,485 13,860
Operating Income 297 458 985 2,216 3,992 6,230 8,794 11,985 16,215
Other Expense/Income 119 (21) 12 (57) 10 18 18 18 21
Interest Expense - 290 230 68 46 277 277 277 277
Earnings Before Taxes 178 189 743 2,205 3,936 5,935 8,500 11,690 15,917
Tax Expense 48 58 233 660 1,181 1,781 2,550 3,507 4,775
Net Income 129 132 510 1,545 2,755 4,155 5,950 8,183 11,142
1
Appendix 1.3: S&R
Income Statement
2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
Net Sales 4,204 10,283 12,280 14,408 16,674
Cost of Sales 3,363 8,226 9,824 11,526 13,339
Gross Profit 841 2,057 2,456 2,882 3,335
Other Operating Income 46 92 108 123 138
Selling Expenses 57 114 133 151 170
General and Administrative Expenses 121 242 282 323 363
Other Operating Expenses 19 38 44 51 57
Operating Expenses 197 394 459 525 590
Operating Income 690 1,755 2,105 2,480 2,883
Other Expense (Income) - - - - -
Interest Expense 22 49 51 55 78
Earnings Before Taxes 668 1,707 2,053 2,425 2,804
Tax Expense 268 512 616 727 841
Net Income 401 1,229 1,473 1,736 2,018
2
Appendix 2 BALANCE SHEETS
3
Appendix 2.2: Consolidated: Puregold Price Club, Inc.; Puregold Jr.; Puregold Extra
Balance Sheet
2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
ASSETS
Cash and Cash Equivalents 1,225 1,136 1,838 1,955 4,157 7,324 12,523 19,435 28,615
Receivables 809 645 242 410 491 591 692 793 912
Merchandise Inventory 1,901 1,904 2,934 4,523 5,456 6,577 7,699 8,820 10,139
Other Current Assets 4,034 6,230 402 560 719 877 1,035 1,194 1,352
Current Assets 7,969 9,916 5,416 7,449 10,823 15,370 21,949 30,242 41,017
NET PPE 1,592 2,166 4,146 6,006 7,557 9,071 10,330 11,337 12,045
Deferred Tax Assets 67 101 165 220 295 356 417 477 549
Other Noncurrent Assets 235 285 397 3,005 8,320 8,325 11,054 13,925 17,541
Goodwill - - - - 16,054 16,054 16,054 16,054 16,054
Total Noncurrent Assets 1,894 2,552 4,708 9,231 32,226 33,806 37,855 41,793 46,189
Total Assets 9,863 12,468 10,124 16,680 43,049 49,176 59,804 72,035 87,206
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 4,241 6,114 2,092 - - 100 1,221 1,527 1,552
Accounts Payable 3,252 3,793 5,109 6,421 9,144 11,879 14,938 18,392 22,766
Other Current Liabilities 1,015 960 328 208 588 696 1,927 3,468 5,039
Total Current Liabilities 8,508 10,867 7,529 6,629 9,732 12,674 18,086 23,387 29,357
Noncurrent Accrued Rent 218 318 508 663 663 663 663 663 663
5-year bonds - - - - 4,000 4,000 4,000 4,000 4,000
7-year bonds - - - - 1,000 1,000 1,000 1,000 1,000
Retirement Benefits Liability 3 17 39 76 86 104 122 139 160
Total Noncurrent Liabilities 221 335 547 739 5,749 5,767 5,785 5,802 5,823
Total Liabilities 8,729 11,202 8,076 7,368 15,481 18,441 23,871 29,189 35,180
Capital Stock 796 796 1,450 7,169 23,223 23,223 23,223 23,223 23,223
Retained Earnings 338 470 598 2,143 4,345 7,512 12,710 19,623 28,802
Total Equity 1,134 1,266 2,048 9,312 27,568 30,735 35,933 42,846 52,025
Total Liabilities and Equity 9,863 12,468 10,124 16,680 43,049 49,176 59,804 72,035 87,206
4
Appendix 2.3: S&R
Balance Sheet
2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
ASSETS
Cash and Cash Equivalents 698 2,625 4,098 5,834 7,852
Receivables 122 285 326 367 408
Merchandise Inventory 817 2,153 2,744 3,405 4,137
Other Current Assets 87 228 344 592 1,651
Current Assets 1,724 5,291 7,512 10,198 14,048
NET PPE 558 1,380 1,603 1,792 1,953
Deferred Tax Assets - - - - -
Other Noncurrent Assets 10 23 27 30 33
Goodwill - - - - -
Total Noncurrent Assets 568 1,403 1,630 1,822 1,987
Total Assets 2,291 6,695 9,142 12,020 16,035
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 569 1,281 1,350 1,457 2,063
Accounts Payable 519 1,210 1,383 1,556 1,729
Other Current Liabilities 460 1,486 2,218 3,079 4,296
Total Current Liabilities 1,547 3,977 4,950 6,092 8,087
Noncurrent Accrued Rent - - - - -
5-year bonds (5.4881% p.a.) - - - - -
7-year bonds (5.8673% p.a.) - - - - -
Retirement Benefits Liability 3 6 7 8 9
Total Noncurrent Liabilities 3 6 7 8 9
Total Liabilities 1,550 3,983 4,957 6,100 8,096
Capital Stock 10 20 20 20 20
Retained Earnings 731 2,691 4,165 5,900 7,918
Total Equity 741 2,712 4,185 5,921 7,939
Total Liabilities and Equity 2,291 6,695 9,142 12,020 16,035
5
Appendix 3 STATEMENTS OF CASH FLOWS
6
Statement of Cash Flows
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
trading securities
Proceeds from insurance claim 9 - 57 - - - - -
Proceeds from disposal of property and
4 7 17 - - - - -
equipment
Net cash provided by (used in) investing (2,770
3,617 (4,867) (23,636) (3,180) (5,888) (6,015) (6,710)
activities )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments of ) loans
(4,022) (2,092) 4,978 51 1,070 251 (54)
payable 1,873
Cash Dividend Paid - (383) - (452) (845) (683) (1,164) (1,356)
Proceeds from issuance and subscriptions
- 388 5,719 16,054 - - - -
of capital stock
Net cash provided by (used in) financing
(4,017) 3,626 20,580 (794) 387 (913) (1,410)
activities 1,873
NET INCREASE (DECREASE) IN
(89) 702 117 2,603 4,396 6,672 8,648 11,198
CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
1,136 1,838 2,253 5,554 9,949 16,621 25,269
AT BEGINNING OF YEAR 1,225
CASH AND CASH EQUIVALENTS
1,838 1,955 4,855 9,949 25,269 36,467
AT END OF YEAR 1,136 16,621
Appendix 3.2: Consolidated: Puregold Price Club, Inc.; Puregold Jr.; Puregold Extra
Statement of Cash Flows
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before Income Tax 189 743 2,205 3,936 5,935 8,500 11,690 15,917
Adjustments for:
Depreciation and amortization 297 279 457 1,233 1,487 1,740 1,994 2,292
Interest Expense 290 220 65 46 277 277 277 277
Accrued rent 100 190 155 - - - - -
Retirement benefits cost 15 22 37 10 18 18 18 21
Loss on pretermination of lease contract - - 9 - - - - -
Impairment losses on receivables (5) (11) (0) - - - - -
Unrealized valuation gain in trading securities 0 2 1 - - - - -
Loss (gain) on disposal of property and equipment (13) 3 (0) - - - - -
Dividend Income (1) (1) (1) - - - - -
Interest Income (2) (2) (25) - - - - -
Loss on sale of investments in trading securities 1 - - - - - - -
Gain on insurance claim - - (27) - - - - -
Loss on goodwill written-off - 33 - - - - - -
Operating Income before changes in working capital 870 1,478 2,876 5,225 7,717 10,534 13,978 18,506
(Increase)decrease in:
Investments in trading securities (8) (0) (0) - - - - -
Receivables 164 285 (200) (80) (101) (101) (101) (119)
Merchandise invetory (3) (1,030) (1,589) (933) (1,121) (1,121) (1,121) (1,319)
Due from related parties (2,105) - - - - - - -
Prepaid expenses and other current assets (133) (238) (154) (158) (158) (158) (158) (158)
Increase (decrease) in:
Accounts payable and accrued expenses 537 1,225 1,218 2,723 2,736 3,059 3,454 4,374
Trust receipts payable - - 9 - - - - -
Other current liabilities - 31 (10) 380 107 1,232 1,541 1,571
Due to a related party (284) (258) (119) (776) (253) (253) (253) (298)
Cash generated from operations 1,143 1,493 2,032 6,380 8,926 13,191 17,339 22,558
Interest received 2 2 25 - - - - -
Interest paid (290) (230) (68) (46) (277) (277) (277) (277)
Income taxes paid (46) (163) (631) (1,181) (1,781) (2,550) (3,507) (4,775)
7
Statement of Cash Flows
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
Net cash provided by (used in) operating activities 809 1,102 1,358 5,153 6,868 10,365 13,556 17,506
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (870) (2,266) (2,325) (2,009) (2,747) (2,747) (2,747) (2,702)
Decrease (increase) in other noncurrent assets (45) (130) (2,617) (21,444) (66) (2,789) (2,932) (3,687)
Decrease (increase) in due from related parties (2,105) 6,004 - - - - - -
Decrease (increase) in due to related parties 229 - - - - - - -
Investment in subsidiary - - - - - - - -
Dividends received 1 1 1 - - - - -
Proceeds from sale of investments in trading securities 7 - - - - - - -
Proceeds from insurance claim 9 - 57 - - - - -
Proceeds from disposal of property and equipment 4 7 17 - - - - -
Net cash provided by (used in) investing activities (2,770) 3,617 (4,867) (23,452) (2,813) (5,536) (5,678) (6,389)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments of ) loans payable 1,873 (4,022) (2,092) 5,000 100 1,121 306 25
Cash Dividend Paid - (383) - (553) (988) (751) (1,271) (1,962)
Proceeds from issuance and subscriptions of capital stock - 388 5,719 16,054 - - - -
Net cash provided by (used in) financing activities 1,873 (4,017) 3,626 20,501 (888) 370 (965) (1,937)
NET INCREASE (DECREASE) IN CASH AND
(89) 702 117 2,202 3,167 5,199 6,912 9,180
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT
1,225 1,136 1,838 1,955 4,157 7,324 12,523 19,435
BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF
1,136 1,838 1,955 4,157 7,324 12,523 19,435 28,615
YEAR
8
Appendix 3.3: S&R
Statement of Cash Flows
2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 668 1,707 2,053 2,425 2,804
Adjustments for:
Depreciation 72 195 237 271 299
Finance Cost 22 49 51 55 78
Finance Income (46) (92) (108) (123) (138)
Retirement benefit expense - 1 1 1 1
Operating cash flows before changes in working capital 716 1,859 2,234 2,628 3,044
Decrease (increase) in operating assets:
Trade and other receivables (20) (41) (41) (41) (41)
Inventories (225) (520) (391) (461) (532)
Prepayments and other current assets (65) (54) (116) (248) (1,059)
Security deposits (2) (3) (3) (3) (3)
Increase (decrease) in trade and other payables 187 316 241 280 779
Cash generated from (used in) operations 592 1,556 1,924 2,155 2,187
Income taxes paid (87) (54) (116) (134) (376)
Net cash provided by (used in) operating activities 505 1,502 1,808 2,021 1,812
CASH FLOWS FROM INVESTING ACTIVITIES
Finance income received 46 92 108 123 138
Additions to property and equipment (230) (460) (460) (460) (460)
Net cash provided by (used in) investing activities (184) (367) (352) (337) (321)
CASH FLOWS FROM FINANCING ACTIVITIES
Finance costs paid (22) (49) (51) (55) (78)
Proceeds from borrowings 101 143 68 107 606
Net cash provided by (used in) financing activities 79 94 17 52 528
NET INCREASE (DECREASE) IN CASH AND CASH 401 1,229 1,473 1,736 2,018
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 298 1,397 2,625 4,098 5,834
CASH AND CASH EQUIVALENTS AT END OF YEAR 698 2,625 4,098 5,834 7,852
9
Appendix 4 KEY FINANCIAL RATIOS (CONSOLIDATED)
Key Financial Ratios 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
LIQUIDITY RATIOS
Current Ratio (x) 0.93 0.76 1.10 1.11 1.24 1.28 1.37 1.47
Quick Ratio (x) 0.80 0.50 0.42 0.59 0.79 0.96 1.12 1.23
EFFICIENCY RATIOS
Total Asset Turnover (x) 1.71 2.68 2.34 1.34 1.45 1.46 1.45 1.44
Fixed Asset Turnover (x) 12.01 7.29 6.71 7.35 7.78 8.44 9.31 10.62
Accounts Receivable Turnover (x) 14.50 107.09 74.30 86.70 92.69 98.90 105.40 112.71
Inventory Turnover (x) 10.52 8.89 8.00 8.99 9.31 9.65 10.00 10.42
Payables Turnover (x) 3.66 4.69 5.34 5.23 5.13 5.05 4.96 4.86
Receivable Collection Period (days) 25.17 3.41 4.91 4.21 3.94 3.69 3.46 3.24
Days in Inventory (days) 34.70 41.06 45.65 40.59 39.21 37.84 36.50 35.04
Payables Period (days) 99.73 77.77 68.38 69.84 71.15 72.35 73.63 75.15
Cash Conversion Cycle (days) -39.86 -33.31 -17.83 -25.04 -28.01 -30.81 -33.67 -36.87
PROFITABILITY RATIOS
Gross Margin (%) 8.64% 11.51% 14.79% 16.53% 17.38% 18.24% 19.12% 20.00%
Operating Margin (%) 1.83% 3.59% 6.99% 8.43% 9.83% 10.82% 11.83% 12.84%
Net Profit Margin (%) 0.56% 1.97% 4.83% 5.58% 6.62% 7.37% 8.11% 8.85%
Return on Assets (%) 0.96% 5.28% 11.29% 7.47% 9.64% 10.77% 11.80% 12.75%
Return on Equity (%) 11.28% 29.48% 21.74% 12.24% 16.10% 18.50% 20.34% 21.95%
EPS (x) N/A N/A 1.10 1.29 1.95 2.68 3.59 4.76
EPS growth (%) N/A N/A N/A 16.60% 51.37% 37.89% 33.62% 32.67%
SOLVENCY RATIOS
Debt Ratio (%) 91.49% 82.09% 48.05% 39.01% 40.14% 41.81% 41.98% 41.92%
Debt to Equity Ratio (x) 10.76 4.58 0.93 0.64 0.67 0.72 0.72 0.72
Long Term Debt Ratio (%) 2.206% 4.413% 3.809% 12.081% 10.333% 8.400% 6.912% 5.649%
10
Appendix 5 INCOME STATEMENTS (COMMON-SIZE)
Appendix 5.2: Consolidated: Puregold Price Club, Inc.; Puregold Jr.; Puregold Extra
Income Statement 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Net Sales 100% 100% 100% 100% 100% 100% 100% 100% 100%
Hypermarkets 100% 100% 94.76% 86.07% 85.49% 85.18% 84.90% 84.64% 84.71%
Supermarkets 0.00% 0.00% 5.09% 12.04% 12.76% 13.22% 13.61% 13.96% 13.99%
Discounter 0.00% 0.00% 0.15% 1.89% 1.75% 1.60% 1.49% 1.40% 1.29%
Cost of Sales 92.62% 90.80% 87.87% 85.80% 84.00% 83.00% 82.00% 81.00% 80.00%
Gross Profit 7.38% 9.20% 12.13% 14.20% 16.00% 17.00% 18.00% 19.00% 20.00%
Other Operating Income 4.73% 3.26% 2.68% 2.70% 2.32% 2.73% 2.75% 2.76% 2.78%
Selling Expenses 9.08% 8.64% 9.26% 9.15% 9.04% 8.93% 8.83% 8.72% 8.61%
General and Administrative
0.70% 0.76% 0.90% 0.98% 0.98% 0.98% 0.98% 0.98% 0.98%
Expenses
Other Operating Expenses 0.76% 1.17% 1.27% 1.08% 1.09% 1.04% 1.00% 0.95% 0.91%
Operating Expenses 10.54% 10.56% 11.43% 11.21% 11.11% 10.95% 10.80% 10.65% 10.50%
Operating Income 1.58% 1.90% 3.39% 5.68% 7.21% 8.78% 9.94% 11.11% 12.28%
Other Expense/Income 0.63% -0.09% 0.04% -0.15% 0.02% 0.02% 0.02% 0.02% 0.02%
Interest Expense 0.00% 1.20% 0.79% 0.18% 0.08% 0.39% 0.31% 0.26% 0.21%
Earnings Before Taxes 0.94% 0.78% 2.55% 5.65% 7.11% 8.36% 9.61% 10.84% 12.06%
Tax Expense 0.26% 0.24% 0.80% 1.69% 2.13% 2.51% 2.88% 3.25% 3.62%
Net Income 0.69% 0.55% 1.75% 3.96% 4.98% 5.85% 6.73% 7.59% 8.44%
11
Appendix 5.3: S&R
Income Statement 2012E 2013E 2014E 2015E 2016E
Net Sales 100% 100% 100% 100% 100%
Cost of Sales 80.00% 80.00% 80.00% 80.00% 80.00%
Gross Profit 20.00% 20.00% 20.00% 20.00% 20.00%
Other Operating Income 1.10% 0.90% 0.88% 0.85% 0.83%
Selling Expenses 1.35% 1.10% 1.08% 1.05% 1.02%
General and Administrative
2.88% 2.35% 2.30% 2.24% 2.18%
Expenses
Other Operating Expenses 0.45% 0.37% 0.36% 0.35% 0.34%
Operating Expenses 4.68% 3.83% 3.74% 3.64% 3.54%
Operating Income 16.42% 17.07% 17.14% 17.21% 17.29%
Other Expense (Income) 0.00% 0.00% 0.00% 0.00% 0.00%
Interest Expense 0.51% 0.47% 0.42% 0.38% 0.47%
Earnings Before Taxes 15.90% 16.60% 16.72% 16.83% 16.82%
Tax Expense 6.37% 4.98% 5.02% 5.05% 5.05%
Net Income 9.53% 11.95% 12.00% 12.05% 12.10%
12
Appendix 6 BALANCE SHEET (COMMON-SIZE)
Appendix 6.1: PGOLD (Consolidated)
Balance Sheet 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
ASSETS
Cash and Cash Equivalents 12.42% 9.11% 18.15% 11.72% 10.71% 17.81% 24.11% 30.06% 35.32%
Receivables 8.20% 5.18% 2.39% 2.46% 1.35% 1.57% 1.48% 1.38% 1.28%
Merchandise Inventory 19.28% 15.27% 28.98% 27.12% 13.83% 15.63% 15.15% 14.54% 13.83%
Other Current Assets 40.90% 49.97% 3.97% 3.36% 1.78% 1.98% 2.00% 2.12% 2.91%
Current Assets 80.80% 79.53% 53.50% 44.66% 27.67% 36.98% 42.73% 48.11% 53.34%
NET PPE 16.14% 17.37% 40.95% 36.01% 17.90% 18.70% 17.31% 15.62% 13.56%
Deferred Tax Assets 0.68% 0.81% 1.63% 1.32% 0.65% 0.64% 0.60% 0.57% 0.53%
Other Noncurrent Assets 2.38% 2.29% 3.92% 18.02% 18.37% 14.94% 16.07% 16.60% 17.02%
Goodwill 0.00% 0.00% 0.00% 0.00% 35.41% 28.73% 23.29% 19.10% 15.55%
Total Noncurrent Assets 19.20% 20.47% 46.50% 55.34% 72.33% 63.02% 57.27% 51.89% 46.66%
Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100%
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 43.00% 49.04% 20.67% 0.00% 1.26% 2.47% 3.73% 3.55% 3.50%
Accounts Payable 32.97% 30.42% 50.47% 38.49% 21.31% 23.43% 23.67% 23.73% 23.73%
Other Current Liabilities 10.29% 7.70% 3.23% 1.25% 2.31% 3.90% 6.01% 7.79% 9.04%
Total Current Liabilities 86.27% 87.16% 74.37% 39.74% 24.88% 29.80% 33.41% 35.07% 36.27%
Noncurrent Accrued Rent 2.21% 2.55% 5.01% 3.97% 1.46% 1.19% 0.96% 0.79% 0.64%
5-year bonds (5.4881% p.a.) 0.00% 0.00% 0.00% 0.00% 8.82% 7.16% 5.80% 4.76% 3.87%
7-year bonds (5.8673% p.a.) 0.00% 0.00% 0.00% 0.00% 2.21% 1.79% 1.45% 1.19% 0.97%
Retirement Benefits
0.03% 0.14% 0.39% 0.46% 0.20% 0.20% 0.19% 0.18% 0.16%
Liability
Total Noncurrent Liabilities 2.24% 2.69% 5.40% 4.43% 12.69% 10.33% 8.40% 6.91% 5.65%
Total Liabilities 88.50% 89.85% 79.77% 44.17% 37.56% 40.14% 41.81% 41.98% 41.92%
Capital Stock 8.07% 6.39% 14.32% 42.98% 51.24% 41.60% 33.71% 27.65% 22.51%
Retained Earnings 3.43% 3.77% 5.90% 12.85% 11.20% 18.26% 24.48% 30.36% 35.57%
Total Equity 11.50% 10.15% 20.23% 55.83% 62.44% 59.86% 58.19% 58.02% 58.08%
Total Liabilities and
100% 100% 100% 100% 100% 100% 100% 100% 100%
Equity
13
Appendix 6.2: Consolidated: Puregold Price Club, Inc.; Puregold Jr.; Puregold Extra
Balance Sheet 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
ASSETS
Cash and Cash
12.42% 9.11% 18.15% 11.72% 9.66% 14.89% 20.94% 26.98% 32.81%
Equivalents
Receivables 8.20% 5.18% 2.39% 2.46% 1.14% 1.20% 1.16% 1.10% 1.05%
Merchandise Inventory 19.28% 15.27% 28.98% 27.12% 12.67% 13.38% 12.87% 12.24% 11.63%
Other Current Assets 40.90% 49.97% 3.97% 3.36% 1.67% 1.78% 1.73% 1.66% 1.55%
Current Assets 80.80% 79.53% 53.50% 44.66% 25.14% 31.26% 36.70% 41.98% 47.03%
NET PPE 16.14% 17.37% 40.95% 36.01% 17.56% 18.45% 17.27% 15.74% 13.81%
Deferred Tax Assets 0.68% 0.81% 1.63% 1.32% 0.69% 0.72% 0.70% 0.66% 0.63%
Other Noncurrent Assets 2.38% 2.29% 3.92% 18.02% 19.33% 16.93% 18.48% 19.33% 20.11%
Goodwill 0.00% 0.00% 0.00% 0.00% 37.29% 32.65% 26.84% 22.29% 18.41%
Total Noncurrent Assets 19.20% 20.47% 46.50% 55.34% 74.86% 68.74% 63.30% 58.02% 52.97%
Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100%
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 43.00% 49.04% 20.67% 0.00% 0.00% 0.20% 2.04% 2.12% 1.78%
Accounts Payable 32.97% 30.42% 50.47% 38.49% 21.24% 24.16% 24.98% 25.53% 26.11%
Other Current Liabilities 10.29% 7.70% 3.23% 1.25% 1.37% 1.41% 3.22% 4.81% 5.78%
Total Current Liabilities 86.27% 87.16% 74.37% 39.74% 22.61% 25.77% 30.24% 32.47% 33.66%
Noncurrent Accrued Rent 2.21% 2.55% 5.01% 3.97% 1.54% 1.35% 1.11% 0.92% 0.76%
5-year bonds 0.00% 0.00% 0.00% 0.00% 9.29% 8.13% 6.69% 5.55% 4.59%
7-year bonds 0.00% 0.00% 0.00% 0.00% 2.32% 2.03% 1.67% 1.39% 1.15%
Retirement Benefits
0.03% 0.14% 0.39% 0.46% 0.20% 0.21% 0.20% 0.19% 0.18%
Liability
Total Noncurrent
2.24% 2.69% 5.40% 4.43% 13.35% 11.73% 9.67% 8.05% 6.68%
Liabilities
Total Liabilities 88.50% 89.85% 79.77% 44.17% 35.96% 37.50% 39.91% 40.52% 40.34%
Capital Stock 8.07% 6.39% 14.32% 42.98% 53.95% 47.22% 38.83% 32.24% 26.63%
Retained Earnings 3.43% 3.77% 5.90% 12.85% 10.09% 15.28% 21.25% 27.24% 33.03%
Total Equity 11.50% 10.15% 20.23% 55.83% 64.04% 62.50% 60.09% 59.48% 59.66%
Total Liabilities and
100% 100% 100% 100% 100% 100% 100% 100% 100%
Equity
14
Appendix 6.3: S&R
Balance Sheet 2012E 2013E 2014E 2015E 2016E
ASSETS
Cash and Cash Equivalents 30.47% 39.21% 44.83% 48.54% 48.97%
Receivables 5.34% 4.26% 3.57% 3.05% 2.54%
Merchandise Inventory 35.63% 32.16% 30.01% 28.33% 25.80%
Other Current Assets 3.79% 3.40% 3.76% 4.92% 10.30%
Current Assets 75.23% 79.04% 82.17% 84.84% 87.61%
NET PPE 24.33% 20.61% 17.53% 14.91% 12.18%
Deferred Tax Assets 0.00% 0.00% 0.00% 0.00% 0.00%
Other Noncurrent Assets 0.44% 0.35% 0.29% 0.25% 0.21%
Goodwill 0.00% 0.00% 0.00% 0.00% 0.00%
Total Noncurrent Assets 24.77% 20.96% 17.83% 15.16% 12.39%
Total Assets 100% 100% 100% 100% 100%
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 24.84% 19.14% 14.76% 12.12% 12.86%
Accounts Payable 22.63% 18.07% 15.13% 12.94% 10.78%
Other Current Liabilities 20.06% 22.19% 24.26% 25.62% 26.79%
Total Current Liabilities 67.53% 59.40% 54.15% 50.68% 50.44%
Noncurrent Accrued Rent 0.00% 0.00% 0.00% 0.00% 0.00%
5-year bonds (5.4881% p.a.) 0.00% 0.00% 0.00% 0.00% 0.00%
7-year bonds (5.8673% p.a.) 0.00% 0.00% 0.00% 0.00% 0.00%
Retirement Benefits Liability 0.11% 0.09% 0.08% 0.07% 0.05%
Total Noncurrent Liabilities 0.11% 0.09% 0.08% 0.07% 0.05%
Total Liabilities 67.64% 59.49% 54.22% 50.74% 50.49%
Capital Stock 0.44% 0.30% 0.22% 0.17% 0.13%
Retained Earnings 31.91% 40.20% 45.55% 49.09% 49.38%
Total Equity 32.36% 40.51% 45.78% 49.26% 49.51%
Total Liabilities and Equity 100% 100% 100% 100% 100%
15
Appendix 7 S&R FINANCIAL STATEMENTS
16
Appendix 7.3: Statement of Cash Flows
Balance Sheet
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 17 201 940 1,337 1,707 2,053 2,425 2,804
Adjustments for:
Depreciation 0 21 72 144 195 237 271 299
Finance Cost - 8 36 43 49 51 55 78
Finance Income (15) (16) (12) (92) (92) (108) (123) (138)
Retirement benefit expense - - 4 1 1 1 1 1
Operating cash flows before
3 214 1,040 1,433 1,859 2,234 2,628 3,044
changes in working capital
Decrease (increase) in operating assets:
Trade and other receivables 188 1,080 (135) (41) (41) (41) (41) (41)
Inventories 44 (235) (378) (449) (520) (391) (461) (532)
Prepayments and other
(778) 328 390 (131) (54) (116) (248) (1,059)
current assets
Security deposits - (1) (15) (3) (3) (3) (3) (3)
Increase (decrease) in trade and
49 (1,548) (293) 375 316 241 280 779
other payables
Cash generated from (used in)
(494) (162) 608 1,184 1,556 1,924 2,155 2,187
operations
Income taxes paid (1) (1) (77) (174) (54) (116) (134) (376)
Net cash from (used in) operating
(495) (162) 531 1,010 1,502 1,808 2,021 1,812
activities
CASH FLOWS FROM INVESTING ACTIVITIES
Finance income received 15 17 13 92 92 108 123 138
Additions to property and
(1) (432) (460) (460) (460) (460) (460) (460)
equipment
Net cash flow (used in) investing
14 (415) (447) (367) (367) (352) (337) (321)
activities
CASH FLOWS FROM FINANCING ACTIVITIES
Finance costs paid - (8) (36) (43) (49) (51) (55) (78)
Proceeds from borrowings - 936 - 202 143 68 107 606
Net cash from financing activities - 929 (36) 159 94 17 52 528
NET INCREASE (DECREASE)
IN CASH AND CASH (481) 351 49 802 1,229 1,473 1,736 2,018
EQUIVALENTS
CASH AND CASH
677 195 546 595 1,397 2,625 4,098 5,834
EQUIVALENTS, BEG.
CASH AND CASH
195 546 595 1,397 2,625 4,098 5,834 7,852
EQUIVALENTS, END
17
Appendix 7.4: Income Statement (Common-size)
Income Statement
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
Net Sales 100% 100% 100% 100% 100% 100% 100% 100%
Cost of Sales 98.40% 92.83% 81.71% 80.00% 80.00% 80.00% 80.00% 80.00%
Gross Profit 1.60% 7.17% 18.29% 20.00% 20.00% 20.00% 20.00% 20.00%
Other Operating Income 2.24% 0.89% 1.10% 1.10% 0.90% 0.88% 0.85% 0.83%
Selling Expenses 2.08% 1.28% 1.19% 1.35% 1.10% 1.08% 1.05% 1.02%
General and Administrative
0.39% 1.59% 3.03% 2.88% 2.35% 2.30% 2.24% 2.18%
Expenses
Other Operating Expenses 0.49% 0.15% 0.48% 0.45% 0.37% 0.36% 0.35% 0.34%
Operating Expenses 2.96% 3.01% 4.71% 4.68% 3.83% 3.74% 3.64% 3.54%
Operating Income 0.89% 5.05% 14.68% 16.42% 17.07% 17.14% 17.21% 17.29%
Finance Cost 0.00% 0.18% 0.54% 0.51% 0.47% 0.42% 0.38% 0.47%
Earnings Before Taxes 0.89% 4.87% 14.14% 15.90% 16.60% 16.72% 16.83% 16.82%
Tax Expense 0.14% 1.39% 4.21% 6.37% 4.98% 5.02% 5.05% 5.05%
Net Income 0.75% 3.48% 9.93% 9.53% 11.95% 12.00% 12.05% 12.10%
18
Appendix 8 PUREGOLD STORE FORMATS
As of 1H 2012
No. of Stores 120 6 19
Net Selling Area (sqm) 243,457 24,803 20,723
No. of Stock-Keeping Units 1,500 - 50,000 5,000 max 8,000 max
Target Market (economic class) C, D, E A, B D, E
Food | Non-food distribution 74% | 26% 50% | 50% 75% | 25%
Gross profit (PhP million) 3,467.20 158.4 50.3
Gross profit margin 15.50% 25.30% 18.30%
Total traffic (million) 41 1.3 5.2
Average net ticket (PhP) 546 3,382 364
Traffic growth 31.90% 27.40% 7.10%
Same Store Sales Growth (SSSG)
Sales 4% 23% -7%
Traffic -1% 12% -5%
Average net ticket 5% 10% -2%
19
Appendix 9 CURRENT LOCATIONS OF PUREGOLD STORES
20
Appendix 10 PUREGOLD CUSTOMER BASE
RETAIL CONSUMERS
RE-SELLERS
Modern
22%
With a unique business model and multiple retail
formats, Puregold is able to serve customers in both the
modern and traditional segments of the Philippine retail
Traditional industry.
78%
21
Appendix 11 TINDAHAN NI ALING PURING (TNAP) PROGRAM
Since 2004
Member base (as of 1H 2012) 220,000
22
Appendix 12 PUREGOLD OWNERSHIP STRUCTURE
23
Appendix 13 PUREGOLD BOARD OF DIRECTORS AND MANAGEMENT
With PGOLD
Name Position
since
Board of Directors
Lucio L. Co Chairman 1998
Susan P. Co Vice Chair and Treasurer 1998
Leonardo B. Dayao Director and President 1998
Ferdinand Vincent P. Co Director 2003
Pamela Justine Co Director 2003
Marilyn V. Pardo Independent Director 2010
Edgardo G. Lacson Independent Director 2010
Executive Officers
Iraida B. de Guzman Senior Vice-President 1999
Denise Maria Carolino Vice President for Administration 1999
Erlinda Orro Financial Comptroller 2005
Andres S. Santos Legal Counsel 2005
Baby Gerlie I. Sacro Corporate Secretary 2000
Candy H. Dacanay-Datuon Compliance Officer and Investor Relations Officer 2011
Store and Department Managers
Joseph U. Sy Senior Store Manager 2010
James Balingit Senior Store Manager 1995
Sherwin C. Hau Senior Store Manager 1999
Renato T. Bechayda Senior Store Manager 1999
Robert Kelvin Y. Kuan Senior Store Manager 2010
Edison T. Anggala Senior Store Manager 2001
Marissa delos Reyes Senior Manager, Accounting 2011
Elbert I. Balcos Senior Manager, Information Services 2011
Aileen T. Bayona Department Manager, Inventory Control 2005
Emelda T. Bechayda Department Manager, Cash Management 1994
Lilia D.R. Gonzales Department Management, Warehouse 2008
Elvira D. Gutierrez Senior Manager, Human Resources 2003
Anabelle S. Kahiwat Senior Manager, Audit 2001
Grace E. Sy Department Manager, Treasury 1995
Myrna M. Tan Department Manager, Payables 2007
Kenneth Ng Tiu Department Manager, Financial Control 2005
Eugene C. Hidalgo Department Manager, Facilities 2001
Bernardito C. Florido, Jr. Department Manager, Safety & Security 2001
Annaliza B. Barrozo Advertising and Communications Manager 2005
Jenny L. Jacintos Merchandising and Marketing Services Manager 2009
Lalette Alea Site Identification and Acquisition Manager 2009
Marybeth Estrella Real Estate Manager 2011
Maria Guvenneth F. Rodriguez Creative Manager 2009
Marlene A. Varquez Group Merchandising Manager 2004
Nelia C. De Jesus Group Merchandising Manager 2004
Adela B. Cancino Senior Merchandising Manager 2009
24
Appendix 14 PUREGOLD STORE ROLL-OUT PLANS
Leveraging on the success of its business model, Puregold continues to roll out new stores and strategically
acquire retail chains in order to establish itself as a leader in the industry. Beating company targets, PGOLD is
set to open 31 stores for 2012, 24% greater than its original guidance of 25. Recent acquisitions of Parco and
S&R have also boosted the store network by 25, pushing growth further to 56% for the year. The Company
plans 25 new store roll-outs annually until 2015 under the Puregold brand and 1 store opening per year until
2016 under the S&R brand.
25
Appendix 15 PORTER’S FIVE FORCES ANALYSIS
Threat of
Bargaining Power
Substitute
of Suppliers
Services
26
Appendix 16 GLOBAL RETAIL DEVELOPMENT INDEX
The GRDI measures the attractiveness for international retailers to enter new markets. The Philippines is at the
opening stage which means that direct competition from international retailers is estimated to be in around 5-10
years.
27
Appendix 17 PROFILES OF MAJOR GROCERY RETAILERS
Market Share
14% 24% 8% 5%
(as of 2011)
Puregold Priceclub
Puregold Jr SM Hypermarket Rustan’s Supermarket
Grocery Store Robinson
Puregold Extra SM Supermarket Shopwise
Retail Brands Supermarket
S&R SaveMore Hypermarkets
Parco
No. of Grocery
Store Outlets 151 133 66 32
(as of Q3 2012)
Ministop
Robinsons
Department
Rustan’s Department
Store
SM Department Stores
Robinsons
Store Store Specialists
Non-Grocery Appliances
None SM Appliance Marks and Spencer
Retail Brands Robinsons
Our Home Starbucks
Specialty Stores
Ace Hardware
Inc.
Toys R U
Handyman
TruValue
AB socio-economic
CDE socio-economic class
CD socio- ABC socio-
class Families in up-scale
Key Market economic class economic class
AB (through S&R) neighborhoods
Segments Served Mall-goers Health-conscious
SMEs and Sari-sari CD socio-economic
consumers
Stores (35%) class (through
Shopwise)
28
Appendix 18 REVENUE BREAKDOWN OF LOCAL COMPANY STOCKS
SM Investments Corporation
Breakdown of Revenue Breakdown of Net Income
Breakdown of Retail Sales
by Business by Business
Bank
3% Malls
11% Malls Retail
Real 24% 30% Non-
Estate food
10% 43%
Bank Real Food
Retail Estate
31% 57%
76% 15%
20.80%
40%
34% 19.50%
29.60%
18.30%
29
Appendix 19 STORE GROWTH POTENTIAL
This section details the computation for the total number of potential stores based on PGOLD’s store selection
criteria of a minimum concentration of 150,000 people, 2,000 sari-sari stores, existing banking activity and
introduction of modern retailing (existence of Mercury Drug). We expect supermarkets and discounters to be
introduced after three to five years of the introduction of hypermarkets. The table below lists the areas in the
Visayas-Mindanao region which qualified the aforementioned selection criteria.
he following table shows the maximum number of potential hypermarkets that Puregold can open, taking into
consideration only the population and number of sari-sari stores it can serve.
Number of Potential
Total Number of Hypermarkets
Area (Region) Population Sari-Sari Potential
(2016E) Stores (2016E) Sari-Sari
Population
Stores
VISAYAS 21,017,783 191,105 140 96 96
Region 6 8,681,595 76,571 58 38 38
Region 7 7,607,574 83,520 51 42 42
Region 8 4,728,614 31,014 32 16 16
MINDANAO 23,430,497 230,284 156 115 115
Northern Mindanao 13,710,280 125,320 91 63 63
Southern Mindanao 9,720,218 104,965 65 52 52
Total Potential Stores for Vis-Min (Absolute) 211
Number of potential hypermarkets given the population criteria is obtained by dividing total population by
150,000, assuming that all hypermarkets to be opened will serve the entire population. Meanwhile, the number
of stores that need to be open in order to capture all traditional retailers in the area is computed by dividing the
total number of sari-sari stores by 2,000. Thus, the maximum number of potential hypermarkets for Vis-Min is
211.
However, the saturation of the market in the area needs to be taken into consideration. Thus, the Index of Retail
Saturation was used in order to project the adjusted number of potential hypermarkets.
The Index of Retail Saturation (IRS) can be computed by dividing the demand for a particular product by
available supply:
where H is the number of households in the area, RE is the annual expenditures for a particular line of trade per
household in the area, and RF is the square footage of retail facilities for a particular line of trade in the area.
In this case, food expenditure inside home was used to calculate total demand while number of hypermarkets
represented supply, assuming all hypermarkets have similar net selling areas. This will serve as a good estimate
of potential hypermarket stores given that food items account for 74% of stock-keeping units (SKUs) of
Puregold. The weighted number of hypermarkets was used in order to account for supermarkets and smaller
grocery retailers in the area. The IRS score for each area was then compared against Metro Manila, which was
used as the benchmark and assumed to have 100% saturation. This can provide a conservative estimate of the
number of potential hypermarkets for Puregold in the Vis-Min area.
30
Average
Weighted
Number of Household Retail
Area (Region) Number of Potential2
Households Consumption Saturation1
Hypermarkets
for Food
VISAYAS 1,585,975 66,275 35.86 49% 37
Region 6 671,584 63,471 12.88 44% 17
Region 7 672,368 69,372 19.11 59% 13
Region 8 242,022 65,450 3.87 35% 7
MINDANAO 2,190,143 57,820 33.78 38% 54
Northern Mindanao 985,100 53,773 15.94 43% 21
Southern Mindanao 1,205,043 61,129 17.84 35% 33
NCR 2,310,420 92,802 148.76 100% -
Total Potential Stores for Vis-Min (Relative to Competition) 91
1
(IRS of NCR)/(IRS of Area)
2
(Weighted Number of Hypermarkets)/(Retail Saturation)
Using the IRS, the estimate for the number of potential stores was reduced to a total of 91 in the Vis-Min region.
To support the feasibility of this number, the succeeding table lists possible locations for Puregold’s expansion
to Visayas and Mindanao. Market potential for hypermarkets was computed based on the original selection
criteria. The group identified 8 locations in Visayas while 9 in Mindanao.
31
Appendix 20 LIST OF LOCAL AND PROVINCIAL COMPETITORS
32
Appendix 21 RETAIL PERFORMANCE BENCHMARKS
PGOLD’s key financial ratios for FY 2011 were compared against regional peers, national players, and Vis-Min
groceries. Companies used for the analysis are:
1) Regional modern retailers – Big C (Thailand), Siam Makro (Thailand), Sumber Alfaria Trijaya
(Indonesia), Sun Art Retail Group (China), Dairy Farm International Holdings
2) National modern players – SM Retail, Robinsons Supermarket, Rustan Supercenters, Waltermart
Supermarket
3) Vis-Min operators – Iloilo Supermart, Davao Central Warehouse Club, LTS Supermarkets (operator of
NCCC Supermarkets), Gaisano Capital
These were chosen according to comparability with Puregold and availability of data.
Retailers
Financial Ratio Puregold Price Vis-Min National Modern Regional (SEA)
Club, Inc. Operators Retailers Modern Retailers
Income Statement Ratios
3.12% - 13.07% 13.18% - 21.10% 10% - 29%
Gross Profit Ratio 14.79%
Average: 7.44% Average: 17.51% Average: 19.69%
0.41% - 1.06% 0.78% - 5.20% 1.98% - 5.30%
Profit Margin 4.83%
Average: 0.59% Average: 2.34% Average: 3.37%
2.92x – 23.60x 9.12x – 12.44x 6x - 14x
Inventory Turnover 8.00x
Average: 8.59x Average: 10.89x Average: 10.15x
Balance Sheet Ratios
0.70% - 6.24% 1.65% - 32.03% 4-14%
Return on Assets 11.29%
Average: 2.41% Average: 11.10% Average: 8.28%
4.02% - 39.07% 6.88% - 40.67% 18-57%
Return on Equity 21.74%
Average: 13.81% Average: 18.73% Average: 37.31%
0.64 – 1.20 0.93 – 1.49 0.33-0.84
Current Ratio 1.10
Average: 0.98 Average: 1.21 Average: 0.71
0.10 – 0.48 0.44 – 0.93 0.19-0.44
Quick Ratio 0.44
Average: 0.24 Average: 0.69 Average: 0.36
2.34 – 5.26 1.24 – 1.97 1.66 – 2.86
Debt-to-Equity Ratio 0.93
Average: 4.20 Average: 1.66 Average: 2.38
33
Appendix 22 MODERN GROCERY RETAIL IN SOUTHEAST ASIA
70%
51%
43% 41%
22%
15%
The Philippines has one of the lowest penetration rates of modern grocery in Southeast Asia, next to Indonesia.
With a penetration rate of 22%, the country poses huge growth opportunities for the industry.
Limits expansion of
Retail and Wholesale Business Act 2005
Thailand space of 300-4000 square metres to be located at
(Revised 2012)
least 15 kilometres away from central city zones
Law on Enterprises – Decree 102, Chapter Subjects establishment of retail unit according to
Vietnam
IV (2010) retail master plan of local authority
Small Retailer Transformation Program Provides loans for traditional stores to upgrade
Malaysia
(Tukar) 2010 and renovate shops
34
Appendix 23 CORPORATE GOVERNANCE
Corporate Governance across Local Company Stocks
PSE requires publicly-listed companies to accomplish its Corporate Governance Disclosure Survey annually.
The survey encompasses 10 good corporate governance guidelines and comprises a total of 75 statements where
companies are to indicate compliance or non-compliance, providing an explanation in cases of non-compliance.
Although PGOLD has been fully compliant with SEC requirements since its IPO in October 2011, it scored only
82.7% compliance with PSE guidelines in 2011, reporting noncompliance in 13 out of 75 statements.
Corporate governance disclosure reports were compared across local consumer-themed companies: Jollibee
Foods Corporation (JFC), Pepsi-Cola Products Philippines (PIP), Universal Robina Corporation (URC), and San
Miguel Brewery (SMB). The table below summarizes the each company’s compliance with PSE good corporate
governance guidelines by tallying its cases of non-compliance. 100% compliance would then mean obtaining a
total score of 0.
PGOLD tied for the lowest score with JFC but prospects for the company remain positive as the survey was
conducted three months after listing. As explained in its disclosure report, PGOLD is already in the process of
addressing most of its cases of non-compliance (10 out of the 13). The team is optimistic that after these are
resolved, the company would achieve 96% compliance, higher than most of its more mature peer companies.
Guidelines
PGOLD JFC PIP URC SMB PSEi Average
(Non-Compliance - 2011)
Sound business strategy 0 1 0 0 0 1.00
Well-structured board 3 2 4 2 2 1.67
Robust internal audit 2 0 0 1 0 2.20
Manages enterprise risk 4 1 0 0 0 1.38
Integrity of financial reports 1 0 2 0 0 1.17
Rights of shareholders esp minority 1 2 2 0 2 1.31
Disclosure and transparency 0 1 0 0 0 1.00
Rights of other stakeholders 0 2 0 0 0 1.40
Related party transactions and insider trading 0 3 1 0 1 1.56
Ethics, compliance and enforcement 2 1 1 0 0 1.00
Total 13 13 10 3 5
Highlighted in Yellow – PGOLD has a higher number of non-compliance in the category than the index
average.
As of 3Q 2012, PGOLD is in full compliance of guidelines prescribed in the SEC Manual of Corporate
Governance.
35
Appendix 24 M&A AND FCFE METHOD
PGOLD’s recent acquisition of Parco and S&R necessitates a valuation that goes beyond the classical or regular
FCFE method. Although an analysis of post-acquisition data would have yielded more reliable results,
availability of such data is very limited as of yet. For this reason, estimating the post-acquisition yearly growth
rates of PGOLD for the expansionary, declining, and sustainable years becomes a major difficulty. Thus, the
team employs another tool in projection, namely regression, rather than working with poorly supported growth
rates. As will be seen throughout the rest of the section, using regression with the necessary adjustments
provided meaningful results.
According to Corporate Finance (Ross, Westerfield, & Jaffe 2002), acquisitions can be valued through pooling
of interests, wherein assets of the acquired firms are added to the financial books of the acquiring firms at their
book values.
This valuation approach is used by the team to conduct pre-acquisition projections of PGOLD, S&R, and Parco
individually, and combine the financial books of the three firms. For the most part, pre-acquisition projections
are made primarily through ratios and regression on pre-acquisition data from 2009-2011. By adding them up,
the treatment seems to be as if S&R and Parco have been acquired even before.
The team believes that the approach taken sufficiently captures the value of PGOLD, considering its recent
aggressive investment ventures.
36
Appendix 25 REGRESSION ANALYSIS
r² 0.006 n 12
r 0.079 k 1
Std. Error 2.481
ANOVA table
Source SS df MS F p-value
Regression 0.3875 1 0.3875 0.06 .8070
Residual 61.5392 10 6.1539
Total 61.9267 11
The team conducted a regression analysis on the data on grocery consumption growth and GDP growth for the
years 2001 through 2011 to measure the correlation between the two variables. The ANOVA table generated, as
seen above, shows a p-value of 0.8070, which means that there is no significant relationship between the two
data sets. This is also evident in the value of R which is 0.079 and R2 of 0.006. Among the economic variables,
GDP is the closest representation of income within the country. Given the findings of the regression model, it
can be said that consumption of grocery items (which are the products of Puregold) is not affected by
fluctuations in disposable income.
Projection Model
The two major tools used in projecting our values are growth rates and regression analysis.
For projecting revenues per store format, we used growth rates to forecast future sales per store per store format.
Our bases for the same-store sales growth (SSSG) rates per store format can be seen below:
SSSG per
Store Format Market Basis for Growth Rate Rate/Derivation
Store Format
35% Short-term Reseller Value
35% Resellers & 65% (0.35)*3.00% +
Hypermarket 6.25% Growth, 65% CDE market
CDE market1 (0.65)*4.40%
(retail)
Short-term Household
Supermarket 8.00% CDE market 8.00%
Consumption Growth
Short-term Reseller Value
Discounter 3.00% Resellers 3.00%
Growth
Short-term AB Consumption
S&R 6.50% AB market 6.50%
Growth
For most of the items, we use regression—either on financial items per store selling space (for Puregold
formats) or on financial items per number of stores (for S&R) to forecast the same-store financial item growth—
because (1) it is more reliable in dealing with projection based on historical data and (2) it adds room for
growth.
1
This follows the revenue contribution for PGOLD of 35% from resellers and 65% from retail consumers (CDE
market). Since hypermarket is the largest component of revenue for the consolidated PGOLD sales, we can
approximate its growth rate on the same proportionate basis for the growth rates for the reseller and retail CDE
market, respectively.
37
The chosen revenue driver for the projection of Puregold’s financial items is net selling space, which is assumed
to be invariant across same retail formats. Thus, the correlation between the number of stores per retail format
and total sales generated by the respective retail format was verified, and the results are given below.
It is evident that there is high correlation between the number of stores per retail format (which reflects net
selling space, since selling space varies among retail format) and the total sales per retail format. Thus, net
selling space would be an accurate driver in the projection of Puregold financial items for the succeeding years.
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Appendix 26 INVESTMENT COSTS AND RETURNS
Assumptions
1. PGOLD's CAPEX for 2013 to 2016 is Php3.0 billion.
2. S&R's CAPEX from 2012 to 2016 is stable at Php 0.459 billion each year.
3. S&R will roll out one new store each year from 2013 to 2016.
4. According to PGOLD, its new stores take 6-8 months before reaching maximum revenue. This is reflected
in the payback period calculations by removing the first 6 months' worth of revenue from each new store.
5. The annual investment costs and the net cash flows for the Puregold Price Club, Inc., Puregold Jr., and
Puregold Extra, are proportional to the number of estimated additional stores to be put up for each year.
Notes
1. The Net Revenue from Investments row in each table refers to the net revenue from the initial year’s
investments only for the initial year, i.e., accounting for 6 months' worth of the investment's revenue only.
2. Each table contains the summary of six separate payback period computations (per year).
3. The estimated additional stores to be put up for each year are in proportion to the new stores put up in
2012, as seen below:
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Appendix 26.4: Puregold Extra
2012E 2013E 2014E 2015E 2016E
Investment Costs (CAPEX) per year 269.52 290.32 290.32 290.32 290.32
Net Revenue from Investments 103.47 85.95 88.53 91.18 93.92
Cumulative Net Cash Flow (166.04) (204.37) (201.79) (199.14) (196.40)
Payback Period (in years) 1.97 2.15 2.10 2.09 2.05
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Appendix 27 SENSITIVITY ANALYSIS
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Appendix 28 MONTE CARLO SIMULATION
2% 37% 61%
10000
8000
6000
4000
2000
0
26 30 34 38 42 46 50 54 58 62 66 70 74 78 82 86 90 94
Price (PHP)
The terminal value constitutes about 89% of our target price and is significantly affected by the perpetual
growth rate, g. To evaluate the sensitivity of the stock, we performed a Monte Carlo simulation, modeling g
using a triangular distribution with the following parameters:
We believe that PGOLD’s strategy effectively mitigates these investment risks. Thus, these have no significant
impact on our target price. The company’s focus on food and essential items keeps us cushioned from
fluctuations in long-term economic prospects.
The results of our simulation show minimal probability of a SELL on the stock at 2%, while the level of
confidence to recommend a BUY remains at a high 61%. In case of terminal growth rates falling below target,
the possibility of a hold at 37% reflects the stability of the stock making GOLD a safe investment.
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Appendix 29 SWOT MATRIX OF CURRENT AND POTENTIAL STRATEGIES
PGOLD has successfully responded to external opportunities and threats by exploiting strengths and managing
weaknesses. The SWOT Matrix matches strengths and weaknesses with opportunities and threats. The
numerical pairings in parenthesis indicate which strengths and weaknesses can address which opportunities and
threats. For example, a (5-1) ST strategy – fifth listed strength with the first listed opportunity.
Strengths Weaknesses
1. Price and cost leadership 1. Limited portfolio of high-
2. Knowledge of local market margin items
3. Scalable operations 2. Limited geographic presence
4. Strong relationships with 3. Scrutiny on corporate
suppliers governance issues due to
5. Free cash related-party transactions
Opportunities S-O Strategies W-O Strategies
1. Development of Current Current
infrastructure in Visayas (5-1) Development of organic (2-2) Planned expansion in Visayas
and Mindanao expansion plans into Visayas and and Mindanao
2. Limited presence of Mindanao (2-3) Acquisition of Parco using IPO
national retail chains in Potential earnings to complement organic
Visayas and Mindanao (3-1) Replication of Luzon model of expansion
3. Decrease in cost of capital store network warehousing to (1-3) Merger with S&R using shares
through attractive equity Visayas and Mindanao swap to increase portfolio of goods
market and lowering (4-2) Use of supplier distribution (2-3) Issuance of corporate notes to
interest rates for debt networks to expand aggressively fund expansion plans
4. Market growth of private (5-3) Use free-cash for dividend pay- (3-3) Compliance with governance
label products outs to attract equity investments requirements
5. Strong micro-finance (2-5) Use TNAP program to partner Potential
support for sari-sari stores with micro-finance programs to (1-3) Selective expansion of private
capture more sari-sari stores label products which has higher
(1-4) Offer private label products at margins while maintaining supplier
the lowest prices relationships
(3-5) Tie-ups with micro-finance and
other sustainable development
programs to help corporate image
with investors
Threats S-T Strategies W-T Strategies
1. High penetration of Current Current
Traditional Retail (Sari- (1-1) Development of TNAP program (1-4) Focused expansion into grocery
Sari stores) to turn sari-sari stores to customers retail store formats ―Puregold
2. Expansion of competitors (3-2) Addition of PGOLD Jr. Extra‖ and ―Puregold Jr.‖
into multiple formats supermarket to prevent expansion Potential
(hypermarket, of competitors (1-3) Acquisition of local operators
supermarkets and (3-2) Addition of PGOLD Extra, the in Vis-Min
convenience stores) first discounter format in the (3-3) Report on sustainability of
3. Presence of local country environmental and social issues to
operators in Vis-Min Potential attract investors while at the same
4. Possible entry of foreign (5-3) Acquisition of local operators in time managing corporate
chains Vis-Min governance issues
(4-2) Add convenience store format to
be competitive in all modern
grocery formats
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