San Miguel’s market power

How do you compete with a behemoth like San Miguel Corporation?

The answer is not easy to come by. Under the tandem of chairman-CEO Eduardo Cojuangco Jr. and president-COO Ramon S. Ang, SMC has grown tremendously, beyond belief. 

For much of that growth Cojuangco credits Ramon, an engineer by training, vice chair since 1999 and president since 2002, for his vision, strategy, and massive diversification the latter uncorked in 2008.

The expansion and diversification made SMC No. 1 in petroleum refining and marketing, food processing, packaging, power generation, and private infrastructure (its tollways  have 82 percent market share.  SMC operates Boracay airport and wants to build a new airport to service Manila).  All the businesses are being expanded some more, to cash in on the tremendous growth of the economy and the severe shortages in infrastructure. 

In the original five Asean countries, according to the World Economic Forum, the Philippines has the worst quality of infra, the worst quality of airports, the worst quality of air transport, the worst railroad, the worst ports, and the lowest quality of electricity supply, the lowest ratio of cellular phone subscriptions, and the lowest fixed line ratio per 100 people.

SMC is the kind of company that can help in those shortages.  It is the No. 1 logistics company in the Philippines.  It has no less than 18 ports.  It has no less than 500,000 retailers.  Despite its market power, San Miguel prices its products reasonably, which makes it difficult for newcomers to compete.

Today, San Miguel has P1.3-trillion assets, P700-billion annual sales, P52 billion in profits in 2016, P436 billion in net worth, and P264 billion in market capitalization or how the stock market values the company.  Ramon Ang estimates the company has an EBITDA (earnings before interest, taxes and depreciation) of $4 billion—basically the cash the company generates from its operations.

This 2017, San Miguel Corp. will record its best year ever, with an unprecedented net income of P60 billion. That will be an increase of 15.4 percent from the previous high of P52 billion posted in 2016, which was a hefty 80 percent jump from P28.99 billion profits in 2015.

The stock market has taken notice of San Miguel’s immense profitability and awesome market power.   SMC’s share price has risen steadily, from a low of P71 per share in May 2016 to a high of P111 in April 2017, valuing the company at P264 billion.  That’s an appreciation of P95 billion or 57 percent in just one year.

Analysts estimate San Miguel has an EBITDA of at least  $4 billion.  “Which company in the Philippines has an EBITDA of $4 billion?” asks Ramon Ang.

Just how much money can you make from SMC? In 1992, the SM Group of Henry Sy Sr. invested $2 million in San Miguel.  In 1998, after six years, Sy cashed in and collected $200 million, 100x his original investment.

San Miguel revenues have been erratic of late.  In 2014, SMC already had revenues of P772.24 billion.  But sales declined to P672.24 billion in 2015, a 12.9 percent drop, only to recover to P685.3 billion in 2016. 

Had crude remained at $100 a barrel (it hit $147 in 2008), SMC would have reached P1-trillion sales long time ago. SMC owns 100 percent of Petron Corp., the country’s largest oil refinery and it contributes P343.84 billion to SMC’s total sales and is potentially a huge moneymaker in the future having just completed a $3 billion modernization.

Ang says Petron is grossly underpriced in the market.  “It is selling at only 8x times EBITDA —[earnings before interest, taxes and depreciation],” he notes.  Petron has an EBITDA margin of 11 percent—almost 40 percent higher than the industry average of 8 percent.

In assessing how good San Miguel is, it is perhaps better to look at its bottomline.  Look at the quality of its management.  Look at its gargantuan projects in the pipeline.  SMC president Ang, 63,  goes to office every day working 15 hours a day.

Ang is extremely bullish about SMC and the economy.   Among his projects in the planning stage or in the pipeline:

1.  A new and larger oil refinery with a capacity of 250,000 barrels per day and manufacturing what he calls aromatics or petrochemicals.  San Miguel will become the biggest producer of plastics products in the Philippines.  Project cost: $15 billion.

2.  A fully integrated steel mill which will produce 20 million tons per year of high grade steel of the series 300 and 400, using chromite and imported high-grade coal and locally sourced iron ore.  Possible location: Quezon.   Possible partner: Foreign.

“We have to produce high-grade stainless steel because that is what the market demands,”  Ang says.  “If you are going to produce just ordinary mine steel, you better stay home.”

3.  A tidal power plant utilizing the movement of ocean tides to produce electricity using underwater turbines.  Initial reports said such a tidal plant will generate 1,200 megawatts of electricity at a cost of $3 million per megawatt or $3.6 billion for San Miguel. 

Of course, SMC continues to pursue its $10-billion new airport project, in Bulacan. Ang says “I can build an airport anywhere in the Philippines.”

Lately, Ramon has been talking of a tidal electricity capacity as high as 20,000 megawatts of electricity at a cost of $60 billion.   At that capacity, San Miguel will put many power generation companies out of business because SMC has the scale and efficiency to drive cost down.  It is already selling electricity to a number of provinces at an unheard cost of P2.85 per kilowatthour.   The usual retail price of electricity: P12/kwh.

The timetable for the oil refinery, steel mill, and tidal power plants—five years.

Even SMC’s old businesses remain exceptional performers.   Its beer business, founded in 1890, enjoys an EBITDA margin that is the envy of its competitors—46 percent. Beer businesses will less than that margin were recently selling for $20 billion.

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Topics: Tony Lopez , San Miguel Corporation , chairman-CEO Eduardo Cojuangco Jr. , president-COO Ramon S. Ang
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