Universal Robina Corporation WED 29 JAN 2020

More convincing signs of a turnaround;

Upgrading to BUY
Sustainable recovery of coffee business underway. Sales from URC’s domestic coffee
segment grew 15% y/y as of 9M19, arresting the double-digit decline in sales during 2016-
2018. In fact, URC managed to retake 150 bps in terms of market share since the roll-out
BUY
of its new coffee products for Great Taste White at the start of last year. Moving forward,
management expects to sustain the recovery of Great Taste White through continued TICKER: URC
investments in promotions (e.g. media ads, ground activation, product sampling). However,
apart from protecting the core white coffee segment, management also intends to launch FAIR VALUE: 177.00
new varieties of coffee products as a result of its consumer insighting exercise. CURRENT PRICE: 154.00
More aggressive product launches and investments in distribution to drive growth. UPSIDE: 14.94
URC has been launching new products aimed to ensure the sustainable growth of the
company. This trend is expected to continue going forward as product launches become
an integral part of URC’s strategy. In fact, URC has pipelined several new product launches
in 2020 for its other businesses besides coffee. URC also mentioned that they are open to SHARE PRICE MOVEMENT
bringing in the C2 Milk Tea and Black Tea into the Philippines given its strong reception
in Vietnam. Besides this, management’s efforts in improving lean manufacturing and
enhancing distribution are expected to continue generating efficiencies.
110

Vietnam to drive international; Thailand may have bottomed out. On the international
business, management said Vietnam will continue to lead the growth for 2020. Management 100
is expecting Vietnam sales to grow at high-single digit pace this year. This will be supported
by the restarting of production and recovery of numeric distributions in other parts of
Vietnam. Meanwhile, Thailand operations may have bottomed out as URC continued to
adjust its exposure, focusing more on convenience store sales rather than big box stores. 90
Thus, management sees positive low-single digit growth in 2020 for Thailand after two
years of declining sales.
Upgrading to BUY given more convincing signs of a turnaround. We are upgrading 80
or recommendation on URC to a BUY with FV estimate of Php177/sh. We believe URC’s 29-Oct-19 29-Nov-19 29-Dec-19 29-Jan-20

prospects are brighter this 2020 coming from an inflection point in 2019. The recovery of URC PSEi
the coffee business is underway starting with the successful launch of its new products. We
are also more confident that management can revitalize URC’s other businesses under the
leadership of the new management team. The speed of URC in coming up with new quality
products is also promising, and is a key change that will help the company deliver long-term ABSOLUTE PERFORMANCE
sustainable growth. Note that URC is currently trading at 28X 2020E P/E, which is below its
5-year historical average P/E of 29X. We recommend clients to buy URC on pullbacks close 1M 3M YTD
to Php154/sh or better as we raised our buy below level given more convincing signs that URC 6.21 1.65 6.21
the company can sustain its turnaround. PSEi -4.67 -6.77 -4.67
FORECAST SUMMARY
Year to December 31 (Php Mil) 2016 2017 2018 2019E 2020E 2021E
Revenues 112,612 125,008 127,770 137,247 145,277 153,658
% change y/y 0.5 11.0 2.2 7.4 5.9 5.8 MARKET DATA
EBIT 15,760 14,952 13,381 15,454 16,778 18,892 Market Cap 339,440.93Mil
% change y/y -12.9 -5.1 -10.5 15.5 8.6 12.6
Outstanding Shares 2,204.16Mil
Operating Margin (%) 14.0 12.0 10.5 11.3 11.5 12.3
Core Profits 15,069 13,747 11,800 14,066 15,740 17,954 52 Wk Range 134.84 - 180.40
% change y/y -11.8 -8.8 -14.2 19.2 11.9 14.1 3Mo Ave Daily T/O 158.78Mil
Core Profit Margin (%) 13.4 11.0 9.2 10.2 10.8 11.7
Net Income 12,872 10,888 9,204 11,030 12,371 14,146
% change y/y -7.1 -15.4 -15.5 19.8 12.2 14.4
Net Profit Margin (%) 11.4 8.7 7.2 8.0 8.5 9.2
EPS 5.90 4.94 4.18 5.00 5.61 6.42
% change y/y -7.1 -16.3 -15.5 19.8 12.2 14.4

RELATIVE VALUE
P/E(X) 26.6 31.8 37.6 31.4 28.0 24.5
P/BV(X) 4.3 4.3 4.1 3.9 3.7 3.5
Justin Richmond Cheng
ROE(%) 16.3 13.4 11.0 12.4 13.2 14.1 Research Analyst
Dividend Yield (%) 2.1 2.1 2.0 1.7 2.1 2.3 justin.cheng@colfinancial.com
Source: URC, COL estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the
COL Financial website as these may be subject to tampering or unauthorized alterations.
 FIELD NOTES I URC: MORE CONVINCING SIGNS OF A TURNAROUND; UPGRADING TO BUY

WED 29 JAN 2020

Sustainable recovery of coffee business underway

Sales from URC’s domestic coffee segment grew 15% y/y as of 9M19, arresting the
double-digit decline in sales during 2016-2018. In fact, URC managed to retake 150 bps
in terms of market share since the roll-out of its new coffee products for Great Taste
White at the start of last year.

Moving forward, management expects to sustain the recovery of Great Taste White
through continued investments in promotions (e.g. media ads, ground activation,
product sampling). However, apart from protecting the core white coffee segment,
management also intends to launch new varieties of coffee products as a result of its
consumer insighting exercise.

Although URC is anticipating a stronger fightback from competition, the company

believes it is in a better position to respond. In fact, in 2019, the company said that it was
able to anticipate numerous scenarios which competition took to fight back, which is
another factor that helped it arrest the decline of coffee sales.

More aggressive product launches and investments in

distribution to drive growth

URC has been launching new products aimed to ensure the sustainable growth of the
company. This includes URC’s newly branded packaged foods under Robina farms, new
flavors for C2 in Vietnam, a super-sized pack of chips, among others. Management said
this trend is expected to continue going forward as product launches become an integral
part of URC’s strategy. In fact, URC has pipelined several new product launches in 2020 for
its other businesses besides coffee. URC also mentioned that they are open to bringing in
the C2 Milk Tea and Black Tea into the Philippines given its strong reception in Vietnam.

Besides this, management’s efforts in improving lean manufacturing and enhancing

distribution are expected to continue generating efficiencies. For the snacks business,
order fill rates have recovered back to healthy levels at around 91% after falling to 70%
in 2016. This helped snack sales accelerate to double-digits in the most recent 3Q19
results. The company is also tracking ahead of schedule in increasing direct distribution
to 300,000 stores by 2021. As of end 2019, URC has already achieved its 2020 targets.

COL Financial Group, Inc. 2

 FIELD NOTES I URC: MORE CONVINCING SIGNS OF A TURNAROUND; UPGRADING TO BUY

WED 29 JAN 2020

Vietnam to drive international; Thailand may have

bottomed out

On the international business, management said Vietnam will continue to lead the growth
for 2020. Management is expecting Vietnam sales to grow at high-single digit pace this
year. This will be supported by the restarting of production and recovery of numeric
distributions in other parts of Vietnam. The new C2 Milk Tea and Black Tea lines should
also support the strong growth of Vietnam as it helped C2 sales grow by double-digits
last year.

Meanwhile, Thailand operations may have bottomed out as URC continued to adjust its
exposure, focusing more on convenience store sales rather than big box stores. Thus,
management sees positive low-single digit growth in 2020 for Thailand after two years
of declining sales. There is also more room to recalibrate operations such as adjusting
the price points for its snacks to be in line with competition (URC snacks selling at 5 baht
vs 25 baht of competition). For Oceania, production problems have been addressed in
Australia and should start seeing improvements in 4Q19. In addition, it is focusing on
addressing hybrids between biscuits and snacks or snacking crackers to help revitalize
the market.

Guiding mid-single digit sales growth and some margin

improvement in 2020

Management is guiding for total URC sales to grow between 4 to 6% for 2020. Meanwhile,
it expects EBIT margins to expand by 20 bps driven by cost savings from the international
business. Note that lower oil prices and the strong peso could be an upside risk to URC.
The peso remains relatively strong at the Php51/USD level. Should the peso stay at these
levels, EBIT margins could expand more than expected as management’s budget is at
Php52.30/USD. Nevertheless, URC is keen on reinvesting any savings to advertising and
promotions as well as new product launches to support its topline growth.

Realigning forecasts to factor in management’s guidance

We are realigning our forecast to factor in management’s 2020 guidance. In particular,

we lower our EBIT margin assumption to 11.5% in 2020 from 11.9% (implying 20 bps
EBIT margin expansion for 2020), while maintaining the ~15% EBIT margin target by
2024. This is to take into account that URC will reap bulk of the benefits of its various
initiatives including cost savings from 2021 onwards. Due to this, our 5-year earnings
CAGR (2018-2023) slightly decreased to 14.5% from 14.8%. Nevertheless, prospects for
recovery remain intact, and our FV estimate remains largely unchanged at Php177/sh.

COL Financial Group, Inc. 3

 FIELD NOTES I URC: MORE CONVINCING SIGNS OF A TURNAROUND; UPGRADING TO BUY

WED 29 JAN 2020

Upgrading to BUY given more convincing signs of a

turnaround

We are upgrading or recommendation on URC to a BUY given better visibility in the

turnaround of the business. We believe URC’s prospects are brighter this 2020 coming
from an inflection point in 2019 with 9M19 core earnings up 10.6% y/y. Recall that core
earnings were on a decline for three straight years at a -12% CAGR.

The recovery of the coffee business is underway starting with the successful launch of
its new products. Furthermore, we are more confident that management can revitalize
URC’s other businesses under the leadership of the new management team. The speed of
URC in coming up with new quality products is also promising, and is a key change under
the new management that will help the company deliver long-term sustainable growth.

In terms of valuations, URC is currently trading at 28X 2020E P/E, which is below its 5-year
historical average P/E of 29X. We recommend clients to buy URC on pullbacks close to
Php154/sh or better as we raised our buy below level given more convincing signs that
the company can sustain its turnaround.

COL Financial Group, Inc. 4

 FIELD NOTES I URC: MORE CONVINCING SIGNS OF A TURNAROUND; UPGRADING TO BUY

WED 29 JAN 2020

Universal Robina INCOME STATEMENT (IN PHPMIL)

Corporation (URC) Revenues

2016
112,612
2017
125,008
2018
127,770
2019E
137,247
2020E
145,277
2021E
153,658
% Growth 0.5% 11.0% 2.2% 7.4% 5.9% 5.8%
COMPANY BACKGROUND Gross Profit 36,208 39,314 37,437 42,546 45,036 47,634
Universal Robina Corp. (URC) is a leading % Growth -1.4% 8.6% -4.8% 13.6% 5.9% 5.8%
EBITDA 21,405 21,056 19,750 22,178 24,018 26,646
snacks and beverages company in the
% Growth -7.2% -1.6% -6.2% 12.3% 8.3% 10.9%
Philippines with key brands such as Jack EBIT 15,760 14,952 13,381 15,454 16,778 18,892
& Jill, Great Taste, and C2, among others. % Growth -12.9% -5.1% -10.5% 15.5% 8.6% 12.6%
Aside from this, URC operates its branded Interest Expense (927) (1,427) (1,662) (1,455) (1,158) (1,158)
Other Income/Expense 1,466 426 (174) 67 120 219
food and beverage business in several
Pretax Income 16,299 13,950 11,545 14,066 15,740 17,954
markets across the Asia Pacific region. Tax Expense 3,216 2,797 2,082 2,763 3,079 3,500
Aside from this, URC also has operations Net Income 12,872 10,888 9,204 11,030 12,371 14,146
outside its branded food business through % Growth -7.1% -15.4% -15.5% 19.8% 12.2% 14.4%
EPS (Php) 5.9 4.9 4.2 5.0 5.6 6.4
its Commodity Food Group (flour & sugar)
% Growth -7.1% -16.3% -15.5% 19.8% 12.2% 14.4%
and Agro-Industrial Group (feeds & farms).
BALANCE SHEET (IN PHPMIL)
2016 2017 2018 2019E 2020E 2021E
REVENUE BREAKDOWN
Cash & Equivalents 15,348 14,498 13,023 13,179 16,618 20,901
Trade Receivables 15,776 16,116 14,405 15,041 15,921 16,839
Inventories 18,601 18,465 22,086 19,459 20,598 21,786
9.0% Other Current Assets 2,507 4,623 4,896 4,763 4,763 4,763
PPE 45,007 48,254 51,950 54,285 56,052 57,825
10.5% Domestic Branded Consumer
Other Non-Current Assets
Food
45,697 45,684 45,576 44,871 44,877 44,943
Total Assets
International Branded 142,937 147,641 151,936 151,597 158,828 167,056
1.2%
Accounts
Consumer Food Payable 19,982 21,571 22,767 24,648 26,090 27,595
45.1%
ST Debts
Packaging 1,432 2,009 2,461 2,461 2,461 2,461
Other Current Liabilities 6,691 4,419 6,740 5,799 6,096 6,407
Commodity Food Group
LT Debts 31,367 33,226 31,457 24,857 24,857 24,857
Other Non-Current
Agro-Industrial Group Liabilities 4,616 4,729 4,517 4,517 4,517 4,517
Total Liabilities 64,088 65,955 67,942 62,282 64,022 65,837
34.3%
Total Equity 78,849 81,686 83,993 89,314 94,806 101,219
Total Liabilities & Equity 142,937 147,641 151,936 151,597 158,828 167,056
BVPS 36.1 37.1 38.1 40.5 43.0 45.9

Domestic Branded Consumer CASHFLOW STATEMENT (IN PHPMIL)

Food
2016 2017 2018 2019E 2020E 2021E
International Branded
Income (loss) before income tax 16,299 13,950 11,545 14,066 15,740 17,954
Consumer Food
45.1% Depreciation & Amortization 5,645 6,104 6,370 6,724 7,240 7,754
Packaging
Other Non-Cash Exp (Gains) (725) 920 1,528 1,388 1,038 939
Net interest income (expense) (688) (1,078) (1,168) (1,287) (988) (945)
Commodity Food Group
Increase (decrease) in Working Cap (391) (2,185) (1,059) 3,064 (279) (291)
Income tax expense (3,523) (3,458) (2,559) (2,763) (3,079) (3,500)
Agro-Industrial Group
Operating Cash Flow 16,617 14,253 14,658 21,193 19,672 21,910
Capex (6,334) (8,130) (8,642) (9,058) (9,007) (9,527)
Other Investments (21,511) (278) (38) 604 (56) (59)
Investing Cash Flow (27,844) (8,408) (8,680) (8,455) (9,064) (9,586)
Proceeds (Payment) Debts 7,528 434 (531) (6,600) - -
Payment of Cash Dividends (7,215) (7,171) (6,943) (5,983) (7,169) (8,041)
Others 4,356 41 22 - - -
Financing Cash Flow 4,669 (6,696) (7,452) (12,583) (7,169) (8,041)
Change in Cash (6,558) (851) (1,474) 155 3,439 4,283

COL Financial Group, Inc. 5

 FIELD NOTES I URC: MORE CONVINCING SIGNS OF A TURNAROUND; UPGRADING TO BUY

WED 29 JAN 2020

INVESTMENT THESIS KEY RATIOS

Profits may have already bottomed ou 2016 2017 2018 2019E 2020E 2021E
GPM (%) 32.2% 31.4% 29.3% 31.0% 31.0% 31.0%
We think that URC’s performance in
EBITDA Margin (%) 19.0% 16.8% 15.5% 16.2% 16.5% 17.3%
1Q19 is a telltale sign that profits may OPM (%) 14.0% 12.0% 10.5% 11.3% 11.5% 12.3%
have already bottomed. Note that sales NPM (%) 11.4% 8.7% 7.2% 8.0% 8.5% 9.2%
of its coffee business finally grew by 24% Times Interest Earned (X) 17.0 10.5 8.1 10.6 14.5 16.3
y/y due to favorable market response Current Ratio (X) 1.86 1.92 1.70 1.59 1.67 1.76
to its relaunched Great Taste White Net D/E Ratio (X) 0.22 0.25 0.27 0.16 0.11 0.06
Days Receivable 51.1 47.1 41.2 40.0 40.0 40.0
after several quarters of consistent y/y
Days Inventory 88.9 78.7 89.2 75.0 75.0 75.0
declines. Consolidated EBIT margin
Days Payable 95.5 91.9 92.0 95.0 95.0 95.0
likewise improved by 70 bps y/y to 11.9%. Asset T/O (%) 78.8% 84.7% 84.1% 90.5% 91.5% 92.0%
Management also expressed confidence ROAE (%) 16.3% 13.4% 11.0% 12.4% 13.2% 14.1%
that its coffee sales would grow by mid
to high single digit levels going forward. MAJOR CORPORATE DEVELOPMENTS (5-YEARS)

URC takes over Hunts-URC joint venture 10/01/2018

More concrete strategies to ensure
sustainable long-term growth URC takes over Calbee-URC joint venture 09/27/2018
URC’s new management team is taking
numerous steps to improve the resiliency URC sells Hunt's License to Century Pacific Foods, Inc. 05/02/2017
and growth outlook of the company’s
profitability. For example, it plans to cut URC partners up with Vitasoy to form joint venture company Vitasoy-URC 02/16/2017
costs through a lean supply chain system
URC announces its acquisition of Snack Brands Australia for AU$600 Mil (80% debt,
and use the savings to increase spending 08/16/2016
20% treasury shares)
on marketing. The said strategy should help
strengthen the branding equity of URC’s URC completes acquisition of Griffin's New Zealand for NZ$742 Mil (100% debt) 09/14/2014
products, increasing its defense against
competition. The new management team
also plans to increase spending on product
innovation, increasing the likelihood that
URC would launch blockbuster products
in the future, helping boost earnings
growth. Finally, the new management
plans to launch more products overseas so
that it won’t be as vulnerable to negative
developments affecting popular products
such as C2 and Rongdo in Vietnam.

COL Financial Group, Inc. 6

 FIELD NOTES I URC: MORE CONVINCING SIGNS OF A TURNAROUND; UPGRADING TO BUY

WED 29 JAN 2020

Valuation RELATIVE VALUATION

Methodology 2019E 2020E 2019E 2020E

Calbee Inc.* 25.2 26.0 7.3% -3.1%
Nestle SA 24.8 23.2 12.9% 6.9%
Nissin Food Holdings Co Ltd* 34.6 30.7 -6.1% 12.5%
PepsiCo Inc 25.8 23.9 -2.6% 8.1%
Kellogg Co 17.7 17.1 -9.8% 3.8%
Mondelez International Inc. 22.2 20.7 1.6% 7.3%
Kraft Heinz Co 10.8 11.9 -22.8% -8.9%
Mayora Indah 23.4 21.0 9.4% 11.3%
Indofood Sukses Makmur 15.2 13.6 17.4% 12.3%
Want Want China Holdings 22.0 19.7 7.5% 11.8%
Average ex-URC 22.2 20.8 1.5% 6.2%
Median ex-URC 22.8 20.9 4.4% 7.7%
URC 31.4 28.0 19.8% 12.2%
* fiscal year

VALUATION ASSUMPTIONS
For DCF
Risk Premium 5.5%
Risk Free Rate 6.0%
Beta 0.85
Cost of Equity 10.7%
Cost of Debt 5.5%
Tax Rate 30.0%
WACC 8.5%
Terminal Growth Rate 4.0%

PV (2019E-2023E) 62,483
PV of Terminal Value 340,171
Enterprise value 402,654
Less: Net Debt 13,720
Equity Value 388,935
O/S 2,204
FV Estimate 177.00

COL Financial Group, Inc. 7

 FIELD NOTES I URC: MORE CONVINCING SIGNS OF A TURNAROUND; UPGRADING TO BUY

WED 29 JAN 2020

I MP OR TA NT R AT ING DEFINITIONS
BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

I MP OR TA NT DISC L AIM ER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

C O L R E S EAR C H T EAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU
RESEARCH ANALYST
adrian.yu@colfinancial.com

C O L F INANC IAL G R O UP, I NC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 8