Stocks in Focus: FRI 23 OCT 2020

URC: Results in line, but downside risks

remain

3Q20 earnings end in line with estimates. URC’s headline income in 3Q20 rose by 5.5% (AS OF OCT 22, 2020)
y/y to Php1.9Bil, while 9M20 net income reached Php7.5Bil, up 7.2% y/y. Results included INDICES
Php699Mil in forex losses and Php516Mil in restructuring provisions. Excluding these Close Points % YTD%
non-core items, core earnings grew 13.7% y/y in 3Q20. This brought 9M20 core earnings PSEi 6,344.63 66.04 1.05 -18.82
up 10.3% y/y to Php10.8Bil, in line with COL estimates, accounting for 77.8% of full-year All Shares 3,788.75 27.90 0.74 -18.52
forecasts. URC’s sales in 3Q20 declined by 1.2% y/y as domestic branded sales reversed Financials 1,257.65 -10.56 -0.83 -32.52
to a 2% decline in 3Q after growing by 1% in 2Q. Sales fell as demand for consumer Holding Firms 6,510.46 62.90 0.98 -14.25
goods weakened in 3Q20 despite easing lockdown measures. Hence, even with in line Industrial 8,477.59 125.28 1.50 -12.01
9M20 results, URC could still disappoint in 4Q if consumer demand remains weak going Mining & Oil 7,693.93 49.01 0.64 -4.92

into the Christmas season. On a more positive note, URC’s domestic business still managed Property 3,076.69 81.63 2.73 -25.94
Services 1,463.26 -6.21 -0.42 -4.43
to improve EBIT margins in 3Q20, while the decline in sales for its international business
slowed down, thanks largely to improvements in Vietnam.
Dow Jones 28,210.82 -98 -0.35 -1.15
S&P 500 3,435.56 -7.56 -0.22 6.34

Other News: Nasdaq 11,484.69 -31.80 -0.28 28.00

CLI: CLI posts 14% y/y growth in reservation sales in 9M20 INDEX GAINERS
Ticker Company Price %
LTG LT Group Inc 11.96 6.98
COVID-19 Update RLC Robinsons Land Corp 16.16 6.04
SMC San Miguel Corp 105.70 3.63
Total Cases Total Deaths Total Recoveries MER Manila Electric Company 295.00 3.51
SMPH SM Prime Hldgs Inc 33.50 3.24
Philippines 363,888 (+1,664) 6,783 (+38) 312,333 (+843)
INDEX LOSERS
USA 8,658,032 (+76,076) 228,318 (+961) 5,647,280 (+60,692)
Ticker Company Price %
JGS JG Summit Hldgs Inc 63.50 -4.65
Worldwide 41,963,558 (+504,388) 1,142,098 (+6,453) 31,169,310 (+281,892) BPI Bank of the Phil Islands 73.00 -3.69
DMC DMCI Hldgs Inc 4.50 -3.23
RRHI Robinsons Retail Hldgs 66.20 -2.65
SECB Security Bank Corp 97.50 -2.50
Market Summary:
TOP 5 MOST ACTIVE STOCKS
The local equities market sustained its rally on Thursday as the relaxation in quarantine Ticker Company Turnover
measures and the approval of the Php4.5Tril national budget in the lower house continued ALI Ayala Land Inc 534,691,500
to fuel investor optimism. AC Ayala Corporation 518,743,900
BDO BDO Unibank Inc 515,084,100
The PSEi advanced 66.04 points or 1.05% to close at 6,344.63. The top movers were LTG JFC Jollibee Foods Corp 509,214,600
SM SM Investments Corp 475,156,400
(+6.98%), RLC (+6.04%), SMC (+3.63%), MER (+3.51%), and SMPH (+3.24%). On the other
hand, the main drags were JGS (-4.65%), BPI (-3.69%), DMC (-3.23%), RRHI (-2.65%), and
SECB (-2.50%),

Value turnover declined to Php9.8Bil form Php10.5Bil in the previous session. Meanwhile,
foreigners remained net buyers, accumulating Php214.2Mil worth of shares.
 
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FRI 23 OCT 2020
Justin Richmond Cheng
Research Analyst
Universal Robina Corporation
HOLD
Php147.00
COL Financial Group, Inc.
DAILY NOTES I PHILIPPINE EQUITY RESEARCH
Stocks in Focus:
URC: Results in line, but downside risks remain
3Q20 earnings end in line with estimates. URC’s headline income in 3Q20 rose by 5.5%
y/y to Php1.9Bil, while 9M20 net income reached Php7.5Bil, up 7.2% y/y. Results included
Php699Mil in forex losses and Php516Mil in restructuring provisions. Excluding these
non-core items, core earnings grew 13.7% y/y in 3Q20. This brought 9M20 core earnings
up 10.3% y/y to Php10.8Bil, in line with COL estimates, accounting for 77.8% of full-year
forecasts. URC’s sales in 3Q20 declined by 1.2% y/y as domestic branded sales reversed to
a 2% decline in 3Q after growing by 1% in 2Q. Sales fell as demand for consumer goods
weakened in 3Q20 despite easing lockdown measures. Hence, even with in line 9M20
results, URC could still disappoint in 4Q if consumer demand remains weak going into
the Christmas season. On a more positive note, URC’s domestic business still managed
to improve EBIT margins in 3Q20, while the decline in sales for its international business
slowed down, thanks largely to improvements in Vietnam.
Exhibit 1: Results Summary
Source: URC, COL Estimates, Bloomberg
DBCF manages to grow profits, but consumer sentiment weakens. Sales from URC’s
domestic branded consumer foods business (DBCF) declined by 2% y/y to Php15.2Bil
after growing by 1% in 2Q20 and 3% in 1Q20. Sales were also lower on a quarter-on-
quarter basis. During the third quarter, retail trade and market activity slowed down
across several categories in the Philippine. Note that the weaker consumer sentiment
was amidst a tougher economic backdrop and the absence of support from government
relief programs. This resulted in mid-to-high single digit declines in market growth
for key consumer goods. Nevertheless, URC still managed to grow sales in several
categories, albeit at a slower pace compared to 2Q. This was possible thanks to URC’s
robust operations, helping the company ensure product availability unlike smaller
players. This was also driven by URC’s product innovations and strong partnership and
communication with its trade partners. Despite the slight drop in sales, domestic branded
EBIT still grew 8% in 3Q20 amid benign input costs, better product mix, and cost savings
from operational transformations over the last two years.
2
 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 23 OCT 2020

Decline in international sales abates in 3Q amid Vietnam recovery. From a 9% decline

in 1H20, URC’s international branded sales were flattish in 3Q20 (-1%), driven by the
steady growth of its Oceania business as well as the recovery of Vietnam. Revenues were
also held back by the negative forex impact as the peso strengthened. Excluding this,
sales would have grown by 4% in 3Q. After two quarters of over 30% decline, URC’s sales
in Vietnam finally grew by 11% in 3Q, largely driven by the strong rebound of C2 sales
as schools and the economy reopened. However, international EBIT margin weakened in
3Q20, down 50 bps y/y versus the 290 bps improvement in 2Q20. Margins fell partly due
to one-offs such as plant shutdowns, which took longer than expected to return online,
and drought related costs of its Australia operations.

Acquisition of RHI’s sugar milling assets to improve operational efficiency.

Last September 30, URC acquired Roxas Holdings, Inc’s (RHI) sugar milling assets for
Php4.9Bil, including VAT. This acquisition includes the sugar mill and bio-ethanol plant of
RHI. Management said the acquisition is expected to add Php4Bil in sales and Php600Mil
in EBITDA before unlocking synergies. The acquisition of the sugar mill would also bring
URC’s total market share in the Philippines to 24% from 17% previously. Meanwhile,
the bio-ethanol plant would double URC’s total production capacity for bio-ethanol
and boost its market share to 21%. Apart from enhancing its operations, the acquisition
would also help increase the productivity of the farmers and help the local communities
in La Carlota. As of 9M20, URC’s sugar operations accounted for ~9.5% of total sales and
~18% of EBIT.

Downgrading to HOLD amid limited capital appreciation potential and downside

risks. Since we last upgraded our recommendation on URC to a BUY, its share price has
risen by 15%. As such, capital appreciation potential to our FV estimate of Php147/sh
is limited at 5%. Furthermore, weak consumer sentiment and market spending in 3Q is
a key risk that could persist going into 4Q20. Despite the reopening of the economy,
the trajectory of consumer demand for URC’s products was relatively flat across July
to September. Furthermore, management said there was still no significant pick-up in
demand in October. Finally, both government (social amelioration program) and corporate
assistance (advanced 13th month pay) were mostly given out in 2Q. Hence, there is a risk
that we could see weaker Christmas spending this 4Q20 amid the ongoing pandemic
and the absence of social gatherings. Considering these factors, we are downgrading our
recommendation on URC to a HOLD.

COL Financial Group, Inc. 3

 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 23 OCT 2020

Top Story:

John Martin Luciano, CFA CLI: CLI posts 14% y/y growth in reservation sales
Senior Research Analyst
in 9M20
Cebu Landmasters, Inc.
N/A CLI posted Php10.5Bil reservation sales in the first nine months of the year, up 14% y/y.
N/A Php3.1Bil came from sales in the third quarter. In spite of the challenges brought about by
the 2020 pandemic, the company said it is on track to surpass its 2019 sales performance,
when it ended the year with Php12.7Bil reservation sales. Bulk of the reservation sales
came from CLI’s economic housing brand Casa Mira, which accounted for 62% of the
take-up during the nine months. Meanwhile, 24% of the sales came from the mid-market
brand Garden Series. In the first nine months of the year, CLI launched five projects worth
Research Analysts Php5.5Bil ensuring sustained growth by also expanding to Iloilo and Bohol.

John Martin Luciano, CFA

Frances Rolfa Nicolas Other News:
Justin Richmond Cheng
Adrian Alexander Yu Economy: Loss of domestic refining seen driving up fuel costs;
Kerwin Malcolm Chan risks to forex

Fitch Solutions Country Risk & Industry Research said that with zero or one domestic
refinery, the Philippines will have to spend an additional US$600K to US$$900K each
year on imported fuel. Recall that SHLPH recently decided to shut down its refinery,
while PCOR is mulling the closure of its refinery due to uncompetitive taxes imposed
on refiners. Moreover, Fitch noted that downsized domestic refining output, next to a
rising need for imports is expected to prove a drag on the trade balance over the coming
years, and would create pressures on the country’s external financing position. Fitch also
warned that heightened dependence on energy imports will pose risks such as additional
burden on foreign exchange reserves or the ability to attract foreign investment. This
would also create depreciatory pressures for the currency and elevate import inflation or
disinflation risk. (source: Businessworld)

COL Financial Group, Inc. 4

 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 23 OCT 2020

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. 6