THURSDAY, 14 JANUARY 2016

Century Pacific Food, Inc:

Things shaping up for a great year
SHARE DATA
We reiterate our BUY rating on CNPF and we are raising our FV estimate to Php21.50/sh from Rating BUY
Php19.80/sh as we factor in the acquisition of coconut product manufacturer CPAVI as well as Ticker CNPF
CNPFs outperformance during 9M15. Our new estimates imply EPS growth of 30.9% in 2016E Fair Value (Php) 19.80
and 13.2% in 2017E. We believe the acquisition provides a new leg for growth, giving CNPF access Current Price 14.96
to the fast-growing, highly profitable global coconut water market. Earnings visibility is good in the Upside (%) 32.35
medium term as sales have already been locked in from supply contracts. We estimate that CPAVI
will be 9.6% and 10.9% EPS-accretive in 2016E and 2017E, respectively. We also expect sustained
momentum from CNPF core branded business driven by organic industry growth as well as new
products offerings in meat and dairy. At its current price, CNPF, is being valued at only 13.0X 2016E
P/E, a significant discount relative to the 20.3X average P/E of the consumer sector. SHARE PRICE MOVEMENT
120
Entry into coconut products provides new growth segment. CNPF signed an agreement
on December 2015 to acquire 100% of Century Pacific Agricultural Ventures, Inc. (CPAVI), a 110

manufacturer and exporter of high-value coconut products. Its primary business is the private
100
label manufacture of coconut water, which is expected to account for 70% of sales in 2015.
The acquisition of CPAVI will provide CNPF a new avenue for growth in the fast-growing global 90
coconut water market. Since its introduction in 2004, sales of coconut water in the US have
increased to over US$300Mil in 2014. Industry growth remains strong driven by the continuing 80
trend toward health and wellness. According to management, the US coconut water market is
currently growing by 20% annually. CNPF is also exploring opportunities with other coconut 70
14-Oct-15 14-Nov-15 14-Dec-15 14-Jan-16
products such as virgin coconut oil (VCO) and coconut flour.
CNPF PSEi

Good earnings visibility from supply contracts. Management expects CPAVI to register net
sales of Php1.5Bil in 2015. This is expected to grow by 63% to Php2.4Bil in 2016 and by 10%
to Php2.7Bil in 2017. Meanwhile, net income is expected to reach Php186Mil in 2015, growing ABSOLUTE PERFORMANCE
by 109% to Php389Mil in 2016 and by 22% to Php476Mil in 2017. CNPF is very confident of
1M 3M YTD
achieving these numbers as they only represent sales already locked in with supply contracts.
CNPF -9.88 -10.42 -9.22
CPAVI has supply contracts for coconut water and plans to have the same structure with
PSEi -5.62 -8.06 -8.42
VCO. Together, the two products will account for 76% and 87% of net sales in 2015 and 2016,
respectively. We estimate that CPAVI will account for 9.5% of total sales and 17.2% of net
income by 2017E.
FORECAST SUMMARY MARKET DATA
Year to December 31 (PhpMil) 2014 2015E 2016E 2017E
Revenue 20,439 22,979 27,899 30,783 Market Cap 33,391.93Mil
% change y/y 7.4 12.4 21.4 10.3 Outstanding Shares 2,232.08Mil
Gross Profit 5,375 6,045 7,759 8,617 52 Wk Range 14.96 - 20.49
% change y/y 61.6 12.5 28.4 11.1
3Mo Ave Daily T/O 10.20Mil
Gross Margin 26.3 26.3 27.8 28.0
Operating Income 2,293 2,815 3,831 4,320
% change y/y 111.0 22.7 36.1 12.8
Operating Margin 11.2 12.2 13.7 14.0
Net Income 1,592 2,027 2,806 3,177
% change y/y 113.9 27.3 38.5 13.2
Net Margin 7.8 8.8 10.1 10.3
EPS 0.76 0.91 1.19 1.35
% change y/y 53.2 19.5 30.9 13.2
Jed Frederick Pilarca
RELATIVE VALUE
P/E (X) 21.1 17.6 13.5 11.9 jed.pilarca@colfinancial.com
P/BV (X) 5.1 3.4 3.0 2.5
ROE (%) 33.8 23.9 24.4 23.1
Dividend Yield (%) 0.0 1.3 1.6 2.2
Source: CNPF, COL est imat es
 PHILIPPINE EQUITY RESEARCH

Entry into coconut products provides new growth segment

CNPF signed an agreement on December 2015 to acquire 100% of Century Pacific Agricultural
Ventures, Inc. (CPAVI), a manufacturer and exporter of high-value coconut products. Its primary
business is the private label manufacture of coconut water, which is expected to account for 70% of
sales in 2015. The acquisition of CPAVI will provide CNPF a new avenue for growth in the fast-growing
global coconut water market. Since its introduction in 2004, sales of coconut water in the US have
increased to over US$300Mil in 2014. Industry growth remains strong driven by the continuing trend
toward health and wellness. According to management, the US coconut water market is currently
growing by 20% annually. CNPF is also exploring opportunities with other coconut products such as
virgin coconut oil (VCO) and coconut flour.

Good earnings visibility from supply contracts

Management expects CPAVI to register net sales of Php1.5Bil in 2015. This is expected to grow by
63% to Php2.4Bil in 2016 and by 10% to Php2.7Bil in 2017. Meanwhile, net income is expected to
reach Php186Mil in 2015, growing by 109% to Php389Mil in 2016 and by 22% to Php476Mil in 2017.
CNPF is very confident of achieving these numbers as they only represent sales already locked in
with supply contracts. CPAVI has supply contracts for coconut water and plans to have the same
structure with VCO. Together, the two products will account for 76% and 87% of net sales in 2015
and 2016, respectively. We estimate that CPAVI will account for 9.5% of total sales and 17.2% of net
income by 2017E.

Applying knowledge in private label

Although coconut products are new to CNPF, we believe the new business aligns well with CNPFs
competency in private label. The company began as an exporter of canned tuna for private label before
developing its portfolio of brands. As with tuna private label, CNPFs key competitive advantages are
its relationships with global customers and with suppliers. CNPF already has a relationship with All
Market Inc., the owner of the Vita Coco brand, as its distributor in the Philippines. Vita Coco is the
largest coconut water brand globally, with a dominant 60% market share in the US alone. CNPF is
also the preferred buyer for coconut farmers since the company is able to offer consistent long-term
demand.

Superior profitability with high-value products

One key difference with tuna private label is that CPAVI yields higher margins due to health benefits
associated with coconut products. Additionally, suppliers such as CPAVI have high bargaining power
as supply of coconut water has yet to catch up to strong demand. We estimate that CPAVIs gross
margins are even higher than the 25-30% gross margin of CNPFs branded businesses. Although this
may decline in the long run as more players enter the industry, CPAVIs supply contracts will allow it
to sustain its margins for the next two to three years. Eventually, CNPF plans to move downstream
and build its own brand of coconut products.

THURSDAY, 14 JANUARY 2016 CNPF I COMPANY UPDATE page 2

 PHILIPPINE EQUITY RESEARCH

Forecasting 20.7% earnings 5-year CAGR for CPAVI

We forecast CPAVIs sales to grow at a 20.6% CAGR from Php1.5Bil in 2015E to Php3.8Bil in 2020E
with growth driven by coconut water. In our view, our forecast is still conservative considering that we
only factored in sales that have been locked in for 2015 to 2017. Additionally, we assumed no sales
growth for VCO and other products after 2016. We also assumed lower margins beginning 2018E on
increased competition as more players enter the industry. As a result, we forecast net income to grow
by a 20.7% CAGR from Php186Mil in 2015E to Php476Mil in 2020E.

Exhibit 1: COL estimates for CPAVI

4,000 40.0%

3,500 35.0%

3,000 30.0%

2,500 25.0%

2,000 20.0%

1,500 15.0%

1,000 10.0%

500 5.0%

0 0.0%
2015E 2016E 2017E 2018E 2019E 2020E

Coco water VCO Others Gross margin

Source: COL estimates, CNPF

Sustained momentum for core business

We see continued growth in CNPFs branded food business in 2016, largely driven by organic
industry growth as well as new product launches in meat and dairy. We also expect continued margin
expansion as nearly all commodity prices remain on a downtrend. The price of tuna, in particular, was
15% lower y/y as of December and remains at its lowest point in five years. Although this will have a
negative impact on revenues from the tuna OEM business (~20% of revenues), this will be supportive
of better margins in branded tuna (~40% of revenues).

THURSDAY, 14 JANUARY 2016 CNPF I COMPANY UPDATE page 3

 PHILIPPINE EQUITY RESEARCH

Exhibit 2: Skipjack tuna price in US$ per MT

2,500

2,250

2,000

1,750

1,500

1,250

1,000

750
May-09

May-10

May-11

May-12

May-13

May-14

May-15
Jan-09

Sep-09
Jan-10

Sep-10
Jan-11

Sep-11
Jan-12

Sep-12
Jan-13

Sep-13
Jan-14

Sep-14
Jan-15

Sep-15

Source: Thai Union

Extending dairy brand to address emerging demand

CNPF is expanding its dairy business with the launch of Birch Tree Fortified, an extension of its Birch
Tree brand from full cream milk into the milk drink segment. Demand for milk drinks is much larger
compared to full cream milk since it is less expensive having lower milk content. According to CNPF,
the entire milk market is growing by 11% with growth being solely driven by milk drinks.

Prior to Birch Tree Fortified, CNPF had no presence in milk drinks. However, management said
that assuming it successfully captures a 5% market share, revenues from the said business would
increase by a CAGR of 20% over the next three years, doubling the size of its dairy business. We
estimate that dairy currently accounts for 10% of CNPFs sales.

Raising estimates

After factoring in the acquisition of CPAVI and CNPFs outperformance (9M15 net income was already
79.8% of our forecast) due to margin improvement and a lower-than-expected tax rate, we now
forecast EPS to grow by 30.9% in 2016 and by 13.2% in 2017, from our previous forecast of 17.6%%
and 13.4%%, respectively. Based on our estimates, CPAVI will account for 15.9% and 17.2% of net
income in 2016E and 2017E. The new business will also be 9.6% and 10.9% EPS-accretive in 2016E
and 2017E, respectively. In light of these, we are raising our FV estimate on CNPF to Php21.50/sh
from Php19.80/sh. Note that our new FV estimate already includes the 128.2Mil new shares to be
issued to partly fund the acquisition of CPAVI.

THURSDAY, 14 JANUARY 2016 CNPF I COMPANY UPDATE page 4

 PHILIPPINE EQUITY RESEARCH

Exhibit 3: Summary of changes in forecast

2016E 2017E
in PhpMil Old Revised %Change w/ CPAVI %Change Old Revised %Change w/ CPAVI %Change
Revenue 26,348 25,468 (3.3) 27,899 9.5 28,972 28,101 (3.0) 30,783 9.5
Gross Profit 7,064 6,923 (2.0) 7,759 12.1 7,840 7,651 (2.4) 8,617 12.6
Operating Income 3,152 3,364 6.7 3,831 13.9 3,576 3,764 5.2 4,320 14.8
Net Income 2,207 2,422 9.8 2,806 15.9 2,503 2,710 8.3 3,177 17.2
EPS 0.99 1.09 9.8 1.19 9.6 1.12 1.21 8.3 1.35 10.9
Source: COL estimates

Reiterate BUY rating

We reiterate our BUY rating on CNPF. We believe the acquisition of CPAVI is value-accretive to
CNPF given its healthy profitability, good earnings visibility in the medium-term and high growth
potential over the longer term. We continue to like CNPFs core branded food business for its market
leading positions in fish and meat as well as growth opportunities in dairy. Additionally, valuations are
attractive. At Php16/sh, CNPF is trading at only 13.0X 2016E P/E, considerably lower than the 20.3X
average P/E of the consumer sector. This is despite our expectation that EPS would grow by 30.9%.

Exhibit 4: Peer valuation 2016E

P/E Ratio (X) EPS Growth (%)
CIC 17.4 16.4
CNPF 13.0 30.9
DNL 19.4 15.5
EMP 19.1 3.8
JFC 31.8 19.3
URC 27.2 11.1
PGOLD 15.4 10.9
RRHI 19.1 9.5
Average 20.3 14.7
Source: COL estimates

Risks

Competition may hamper expansion plans

Competition is a key risk in CNPFs expansion in coconut products. Even as a private label
manufacturer, CPAVI is able to earn high margins comparable or even higher than that in branded
foods. This may attract new players to the industry, which may eventually erode margins. CPAVIs
supply contracts mitigate this risk in the medium term Management is confident it will be able to
sustain CPAVIs margins for at least the next two to three years. Additionally, CNPF has already
established a division to develop in-house coconut product brands for international markets. This will
give CNPF better control over its margins in the long run.

Competition also threatens CNPFs expansion in milk. Although the opportunity in milk drinks is
attractive, this segment is currently dominated by two players: Nestl and Alaska. These are
international companies with the ability to draw on deep coffers to defend market share. Nestl in
particular has already demonstrated its willingness to defend its market share in the local coffee
market.

THURSDAY, 14 JANUARY 2016 CNPF I COMPANY UPDATE page 5

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Stock liquidity is low

Following the stock issuance in relation to the acquisition of CPAVI, CNPFs free float level of will
decrease to 15.9% from 16.7%, the lowest among the consumer stocks we cover. Value turnover
is also low with the daily turnover averaging Php9.7Mil over the past six months. The stocks low
liquidity may deter investors and impede price appreciation.

Exhibit 5: Consumer stocks free float level

Free Float
CIC 29%
CNPF 16%
DNL 31%
EMP 19%
JFC 42%
URC 33%
PGOLD 38%
RRHI 44%
Source: Company data

THURSDAY, 14 JANUARY 2016 CNPF I COMPANY UPDATE page 6

 PHILIPPINE EQUITY RESEARCH

Investment Rating Definitions

BUY HOLD SELL

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
twelve months.
Stocks that have a HOLD rating have either We dislike both the valuations and
1.) attractive fundamentals but expensive fundamentals of stocks with a SELL rating.
valuations; 2.) attractive valuations but We expect the share price to underperform in
near term earnings outlook might be poor the next six to twelve months.
or vulnerable to numerous risks. Given the
said factors, the share price of the stock may
perform merely inline or underperform the
market in the next six to twelve months.

Important Disclaimers

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 it may
be incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are
subject to change without 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 ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of
securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report.

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THURSDAY, 14 JANUARY 2016 CNPF I COMPANY UPDATE page 7