San Miguel May Struggle to Keep Lofty Profit Promises: Gadfly

By Publications Checkout
San Miguel May Struggle to Keep Lofty Profit Promises: Gadfly

San Miguel President Ramon Ang talks a big game. Investors shouldn't necessarily expect shares in the beer to power-plant conglomerate to match his ambitions.

Ang said San Miguel's profit will increase about five times faster than the Philippine economy this year, in an interview with Bloomberg News published Wednesday. He also rebuffed critics who said his plan wouldn't work to diversify beyond brewing beer, which San Miguel had done since 1890.

If Ang's back-of-the-envelope math works, such growth would take the Philippine conglomerate's profit to 70 billion pesos ($1.4 billion) from 52 billion pesos last year, he told Bloomberg, referring to income after tax and excluding minority interests.

That would be quite a feat, considering one-fifth of San Miguel's profit last year came from the sale of its telecom business for about 70 billion pesos, including debt.

The sale yielded a one-time gain of 11.8 billion pesos, without which income would have been reduced to 40.4 billion pesos. Assuming the beermaker doesn't dispose of another large unit to boost profit, San Miguel would have to achieve a 73 percent increase in profits to meet Ang's lofty target by next year.

Ang was smart to unload the telecom business after realizing he couldn't cut it against stronger competitors. Now he's using his cash stash to build stuff that President Rodrigo Duterte's government cares about, such as much-needed airports and highways.

But with many of the nation's infrastructure projects stalled as Duterte focuses on fighting drugs and terrorism, it's unlikely construction will proceed at the pace San Miguel is counting on. Several of San Miguel's plans for airports, toll roads, and a $2 billion flood spillway project could take years to start providing returns to investors.


San Miguel now gets 51 percent of its revenue from oil refining, where prices are likely to remain depressed by ample inventory. In that context, San Miguel's plan to spend $15 billion to $20 billion to build a refinery and petrochemical plant is a long way from adding to earnings.

While investors might be drawn to this sprawling conglomerate for exposure to the Philippines' fast-growing economy, there are cheaper alternatives: San Miguel shares trade at around 18.5 times forward earnings, compared with a 13.9 forward multiple at GT Capital Holdings and 15.4 times for Metro Pacific Investments Corp. San Miguel is up 11 percent so far this year, compared with a 16 percent gain in the Philippine Stock Exchange's PSEi Index.

Diversifying beyond beer and food production has boosted sales and profits at San Miguel, but heavy industrial sectors like oil, power and infrastructure generally take longer to turn into profitable businesses than consumer-focused ones. Ang may need to tone down his lofty promises.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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