A moment of clarity
In 2007, Ramon S. Ang had a moment of clarity. For giant San Miguel Corp. to grow bigger and faster and help push economic growth, it couldn’t rely on the conglomerate’s three core products—beer, food, packaging.
RSA’s epiphany: SMC must diversify widely, clearly, and nimbly. For guidance, the vice chairman (since 1999) and president (since 2002) assembled a team of experts and analysts, nearly all of them young and experienced.
Then he took a look at the country’s development plan. He found many inadequacies —infrastructure, energy and fuel, agriculture, manufacturing, to name some. And something scandalously glaring—the lack of or bad execution. Then it dawned upon the engineer in RSA. SMC’s business is not just beer, not food, not packaging. It is development. Development of the country. And the prospect offered vast opportunities. Growth. Revenues. Profits.
And along with them, the opportunity for a company of San Miguel’s size and financial heft to backstop, if not lead the country’s progress into the 21st century.
Thus, SMC leap-frogged upon the competition and undertook the largest diversification ever in more than 120 years. (The company was founded in 1890). In so doing, Ang redefined two business clichés—game changer and first mover advantage.
SMC defined its two basic strategies this way: Enhance the value of its established core businesses through operational excellence, brand enhancement and improved product visibility. Diversify into industries that underpin the development and growth of the Philippine economy.
Excellence in its current businesses. Diversify into new businesses.
Its expansion and diversification of the past eight years have been so seamless and almost flawless they made SMC a markedly different company today—bigger, better, more resilient, more competitive, and hugely more profitable.
With its seismic shift to power generation, petroleum refining and marketing (Petron Corp.), and infrastructure, these three businesses by 2014 had contributed 72 percent of total SMC sales revenues (63 percent in 2016). No other company in the Philippines, and perhaps in Asia, has done so massive a transformation in so short a time as has San Miguel.
SMC’s infrastructure business, conducted through San Miguel Holdings Corp. (SMHC), consists of toll roads South Luzon Expressway (SLEX), Skyway Stage 1 and 2, the Southern Tagalog Arterial Road (STAR) and the Tarlac-Pangasinan-La Union Toll Expressway (TPLEX) and the just completed NAIA Expressway (NAIAx) and the ongoing Skyway Stage 3. SMC operates Boracay Airport which has a new 1.8-km runway. It will build the Mass Rail Transit Line 7 (MRT-7), with a highway below it, to Bulacan.
Today, SMC is No. 1 beer, food, packaging, petroleum refining and marketing, power generation, and tollways. It is moving aggressively into mass transport, airports, coal, cement, hotels, resort and island development, even while expanding frenetically its core businesses— beer, food, packaging which are also market leaders.
SMC’s businesses have combined EBITDA value of P1,051 billion (P1 trillion), over five times the company’s stock market value. This is the dictum of the individual parts being more valuable than the parts combined.
Beer and Ginebra are worth P307 billion, Food P116 billion, Packaging P46 billion, Power P124 billion, Fuel and Oil P317 billion, and Infra P141 billion. And since then, the country’s premier conglomerates have followed in RSA’s footsteps. Ayala also went into infra and power, as did the so-called MVP Group of Manuel V. Pangilinan, the PLDT CEO. George Ty of Metrobank also saw potential in power generation and has aggressively built up his portfolio of power plants.
“The best is yet to come,” smiles SMC president Ang.
In 2015, SMC retained its position as the Philippines’ largest company in revenues with sales of P677.773 billion, down 13% from 2014 due to the decline in oil prices. Profits remained steady though at P28.993 billion, almost the same as 2014’s P28.57 billion. On a consolidated basis, SMC reported a net income in 2015 of P38.2 billion, 26% higher than in 2014. EBITDA reached P108.6 billion, 23% higher.
The topline 2015 numbers, say Ang and Chairman Eduardo Cojuangco Jr. “offer a snapshot of how our company did in 2015. They, however, do not reflect the level of achievement we have attained in terms of priming the company for long-term growth.” “Our performance in 2015 illustrates how our company is better built to derive income from multiple revenue streams and make structural adjustments to maximize opportunities offered by the business environment,” said ECJ and RSA in their 2015 annual report to stockholders.
Indeed, in 2016, SMC was on track to chalk up profits of P51 billion, a seven-year high, and revenues of more than P700 billion. Overcoming initial confusion about SMC’s frenetic moves, investors have begun to appreciate the strategic moves of Ramon Ang.
From a 12-month low of P47.50 per share in December 2015, SMC shares have steadily risen, to a peak of P101.6 on Dec. 15, 2016, thus doubling the company’s market capitalization to P241 billion before stabilizing at P220 billion at this writing.
The rise in market cap is a tribute to SMC’s strong performance in the first nine months of 2016. Operating income reached P73.2 billion, up 23%. Business showed double digit operating income growth rates—beer 19%, Ginebra 65%, Food 25%, packaging 12%, Petron 23%, power 18%. Infra showed 7% growth in operating income.
SMC’s P20 billion proposed bond issuance was given PRS Aaa, with a stable outlook.
SMC earned its triple A because of: (1) Ample cash flow generation that is seen to strengthen further as the company’s energy and infrastructure projects are completed; (2) Manageable and improving debt position, especially considering the capital-intensive nature of its recent projects in energy and infrastructure; (3) Adequate liquidity and financial flexibility; (4) Solid market position and substantial track record of its subsidiaries, backed by stable demand and boosted by an improving economy; (5) Seasoned management team with sound strategies.