Stocks in Focus: WED 29 JAN 2020

URC: More convincing signs of a

turnaround; Upgrading to BUY
Sustainable recovery of coffee business underway. Sales from URC’s domestic coffee (AS OF JAN 28, 2020)
segment grew 15% y/y as of 9M19, arresting the double-digit decline in sales during 2016- INDICES
2018. In fact, URC managed to retake 150 bps in terms of market share since the roll-out Close Points % YTD%
of its new coffee products for Great Taste White at the start of last year. Moving forward, PSEi 7,468.70 -118.93 -1.57 -4.43
management expects to sustain the recovery of Great Taste White through continued All Shares 4,435.67 -59.67 -1.33 -4.60
investments in promotions (e.g. media ads, ground activation, product sampling). However, Financials 1,803.12 -11.26 -0.62 -3.25
apart from protecting the core white coffee segment, management also intends to launch Holding Firms 7,180.52 -115.93 -1.59 -5.42
new varieties of coffee products as a result of its consumer insighting exercise. Industrial 9,414.67 -180.31 -1.88 -2.29
Mining & Oil 7,812.78 -163.20 -2.05 -3.45
Guiding mid-single digit sales growth and some margin improvement in 2020. Management Property 3,906.16 -63.59 -1.60 -5.98
is guiding for total URC sales to grow between 4 to 6% for 2020. Meanwhile, it expects Services 1,515.86 -18.48 -1.20 -1.00
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 Dow Jones 28,722.85 187.05 0.66 0.65
remains relatively strong at the Php51/USD level. Should the peso stay at these levels, EBIT S&P 500 3,276.24 32.61 1.01 1.41
margins could expand more than expected as management’s budget is at Php52.30/USD. Nasdaq 9,269.68 130.37 1.43 3.31
Nevertheless, URC is keen on reinvesting any savings to advertising and promotions as well
as new product launches to support its topline growth.
INDEX GAINERS
Upgrading to BUY given more convincing signs of a turnaround. We are upgrading or
Ticker Company Price %
recommendation on URC to a BUY given better visibility in the turnaround of the business.
BPI 83.00 0.36
We believe URC’s prospects are brighter this 2020 coming from an inflection point in 2019 Bank of the Phil Islands
MPI Metro Pacifici Inv Corp 3.25 0.31
with 9M19 core earnings up 10.6% y/y. Recall that core earnings were on a decline for three
RRHI 79.20 0.25
straight years at a -12% CAGR. Robinsons Retail Hldgs
FGEN First Gen Corporation 21.10 0.24
BLOOM Bloomberry Resorts 9.85 -0.20
Top Story:
INDEX LOSERS
UBP: Earnings outperform on strong non-interest income growth
Ticker Company Price %
SCC Semirara Mining 20.65 -4.62

Other News: GTCAP GT Capital Hldgs Inc 752.50 -4.14

MER Manila Electric Co 282.00 -4.08

GTCAP: Toyota sees sales hit from Taal eruption JFC Jollibee Foods Corp 205.00 -3.85
TEL PLDT Inc 1006.00 -3.73

Market Summary:
TOP 5 MOST ACTIVE STOCKS
The local equities market continued to decline on Tuesday as concerns over the coronavirus Ticker Company Turnover
outbreak from China persist. ALI Ayala Land Inc 599,062,300
SMPH SM Prime Hldgs Inc 353,482,800
The PSEi lost 118.93 points or 1.56% to close at 7,468.70. The sell-off was broad-based with BDO BDO Unibank Inc 229,742,700
decliners outnumbering gainers, 26 to 4. The main drags were SMPH (-3.05%), SM (-0.98%), SM SM Investments Corp 218,226,200
JGS (-2.43%), AEV (-3.60%), and BDO (-1.60%). On the other hand, the only gainers were BPI MBT Metrobank 167,505,600
(+0.36%), MPI (+0.31%), RRHI (+0.25%), and FGEN (+0.24%).

Value turnover increased to Php4.4Bil from Php4.3Bil registered in the previous session.
Meanwhile, foreigners turned net sellers, liquidating Php544.5Mil worth of shares.

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.
 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

WED 29 JAN 2020

Stocks in Focus:

Justin Richmond Cheng URC: More convincing signs of a turnaround;

Research Analyst
Upgrading to BUY
Universal Robina Corp.
BUY Sustainable recovery of coffee business underway. Sales from URC’s domestic coffee
Php177.00 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.

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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.

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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.

Top Story:

John Martin Luciano UBP: Earnings outperform on strong non-interest

Senior Research Analyst income growth
Union Bank of the Phils.
BUY Earnings outperform on strong non-interest income growth. UBP’s net income in
Php69.00 4Q19 soared 344% y/y to Php5.5Bil from the Php1.2Bil booked in 4Q18. This brought
the bank’s FY19 earnings higher by 91% y/y to Php14.0Bil, outperforming both COL
and consensus estimates, and representing 136.8% and 163.6% of full-year forecasts,
respectively. The strong earnings growth in the fourth quarter was driven by the surge in
non-interest income (+369% y/y). Similar to previous quarters, we believe this was likely
due to strong trading gains as the bank’s total investment securities dropped by 19%
q/q, implying the sale of its bond portfolio in the fourth quarter. On the other hand, the
bank’s net interest income continued its recovery in the fourth quarter, posting an 18%
y/y growth to Php6.4Bil, driven by a sequential improvement in net interest margin as
well as an acceleration in loan growth. The full-year results translated to a ROE of 17.4%
(adjusted for goodwill).

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Exhibit 1: Results Summary

% FY19E
In PhpMil 4Q18 4Q19 % Change FY18 FY19 % Change
COL Consensus
Net interest income 5,469 6,449 17.9 19,999 22,191 11.0 102.3 NA
Non-interest income 1,342 6,297 369.3 5,674 14,398 153.8 153.2 NA
Operating Expenses 4,892 6,469 32.2 16,320 20,362 24.8 109.2 NA
Net income 1,235 5,480 343.7 7,316 14,004 91.4 136.8 163.6

source: UBP, COL estimates

Net interest income continues recovery. The bank’s net interest income continued its
recovery during the fourth quarter, expanding 18% y/y to Php6.5Bil. This is an acceleration
from the 8% growth seen in the first nine months of 2019. Overall, the growth was driven
by a sequential improvement in net interest margin as well as an acceleration in loan
growth. Gross customer loans expanded 21% y/y to Php393.4Bil, faster than the 10% y/y
growth registered in the third quarter. This was led by the solid increase in SME (+40%
y/y), credit cards (+35% y/y), consumer loans (+31% y/y), and commercial lending (+16%
y/y).

Meanwhile, based on our estimates, net interest margin improved by ~24 bps y/y and
~16 bps q/q to 3.81%. Like in the third quarter, we believe the improvement was driven
by lower funding cost following the multiple cuts in the reserve requirement ratio and
normalization in bond rates. In addition, we believe the faster growth in consumer loans
may have also caused higher asset yields due to loan mix. For FY19, net interest income
reached Php22.2Bil, up 11% y/y. This ended largely in line with our forecast, accounting
for 102.3% of our full-year target.

Non-interest income surges, likely on stronger trading gains. Non-interest income in

the third quarter surged to Php6.3Bil from Php1.3Bil in the previous year. This brought the
full-year total to Php14.4Bil, up from the Php5.7Bil booked in FY18. We believe this was
likely due to strong trading gains as the bank’s total investment securities dropped by
19% q/q, implying the sale of its bond portfolio in the fourth quarter. The full-year non-
interest income ended above our forecast, accounting for 153.2% of our full-year target.
Going forward, we don’t expect trading gains onwards to be in the same magnitude as
2019 as the bank has already sold a large portion of its securities portfolio.

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Maintain BUY. We currently have a BUY rating with a FV estimate of Php69/sh based
on 0.95X 2020 P/ BV. Although we believe that the salary loans segment still faces
headwinds as this could still be refinanced by the GSIS with more lenient loan terms, we
believe that downside risks have already been priced in. Going forward, we expect the
strong growth in the bank’s credit cards, mortgage, and commercial loans, coupled with
declining funding cost, to drive the growth in the bank’s lending income.

Other News:

Research Analysts GTCAP: Toyota sees sales hit from Taal eruption
John Martin Luciano, CFA
Frances Rolfa Nicolas
Toyota Motor Philippines Corp. (TMPC) Chairman Alfred Ty said that the Taal eruption
Justin Richmond Cheng
would affect the firm’s sales in the first quarter due to ashfall that affected the operations
Adrian Alexander Yu
of the assembly plant in Sta. Rosa, Laguna. Moreover, eight dealerships in the Calabarzon
Kerwin Malcolm Chan
region suffered from delayed deliveries as cars had to be cleaned and checked after the
ashfall. Nevertheless, the company still expects to post higher sales in the first quarter
compared to the same period last year. (source: Philstar)

Changes in Shareholding:

Acquired or Price per

Stock Volume Person (Designation)
Disposed share
Jorge A. Consunji
DMC 59,400 A 6.26
(Director)
80,000 6.00 Jorge A. Consunji
DMC A
200,000 6.03 (Director)
Source: PSE

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Calendar of events

JANUARY 2020
SUN MON TUE WED THU FRI SAT

1 1 2 3 4
5 6 7 8 9 10 11
12 13 14 15 17 18 19
19 20 21 22 23 24 25
26 27 28 29 30 31

KEY EVENTS HOLIDAY

JAN 1 JAN 21
HOLIDAY: NEW YEAR CAT: ANNUAL SHAREHOLDERS MEETING

JAN 2 JAN 25
EMP: EX-DATE PHP0.05 CASH DIVIDEND HOLIDAY: CHINESE NEW YEAR

JAN 7 JAN 29
APL: ANNUAL SHAREHOLDERS MEETING TFC: ANNUAL SHAREHOLDERS MEETING

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I M P O R TA N T 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 M P O R TA N T 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.

CO 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 KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

C OL F INANC IAL G R O UP, IN C.

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