Earnings Call: H1 2019

Aug 27, 2019

Good day, everyone. Thank you for joining us today to discuss First Pacific's 2019 first half financial and operating results. The results presentation is available on First Pacific's website, www.firstpacific.com. For media on this call, please note the question and answer session is open for investors and analysts only. If you would like to ask questions, please contact us when the call finishes. For today's call, we have with us Mr. Chris Young, Executive Director and Chief Financial Officer, Mr. Joseph Ng, Mr. John Ryan, our Associate Directors, and other senior executives. At this point, I would like to turn to Mr. Ryan for his presentation. Thank you, Sara. Good afternoon, everyone. We'll be using the investor presentation that we uploaded on the website this afternoon. We won't be going through every page. We will just be hitting the highlights of it, as we've tended to do in the past. The focus here is our turnover is up quite powerfully, 6% driven by growth at MPIC and Indofood. Indofood has delivered a truly astonishing performance in the first half of the year. Our three core holdings, which you all know as MPIC, PLDT, and Indofood. Their contribution rose 3%. However, the overall contribution from operations, as you can see on page 7, was down 8% to a bit less than $200 million. Recurring profit was down 12% to $142 million. As far as the net number goes, we announced in March with the disposal of Goodman Fielder to its other owner, Wilmar International, that we'd be taking a non-cash, non-recurring write-down in the value of that investment, and that's been declared in our P&L statement for the first half of 2019. That's why we've got a net loss of $148.3 million in the first half of the year. It's the first loss we've recorded in almost two decades, and with luck, we won't be doing it again anytime soon. There are further details going on through the statement. If you're looking at our free cash flow chart, we've got dividend and fee income of about $68.4 million. Our opening cash and closing free cash are not terribly far apart from each other, going down by $9 million to 80.5. The breakdown on the recurring profit, as you can see in the contribution column chart underneath that. Goodman Fielder is the biggest decliner all the way going down. As mentioned, we've got an impressive increase in contribution from Indofood and a slightly smaller one from MPIC, which has faced higher interest expenses. Page 8 of this presentation is an extremely useful page, packed as it is so full of data. It shows you first half earnings numbers for, I think, just about every company in the First Pacific group, as well as a snapshot of their debt and cash positions. Turning to page 9, we can see that there are no more debt repayments to be made in 2019. You've got in the column chart at the bottom of that page on the left-hand side our most expensive borrowing, a 6 3/8 bond maturing September next year. The proceeds from the Goodman Fielder sale, which we expect to be about $275 million coming to us before year-end, will be devoted towards paying off that bond when it matures. As you can see, the following borrowings going forward are all either unsecured bonds or unsecured bank loans. Our blended interest cost is currently about 4.5%. Once that bond is paid off in about a year's time, our borrowing cost will be rather lower, and I think our maturity might push out more a little bit too. As you can see with these bonds falling away, we've got a higher proportion of floating rate borrowings now. Going forward, it's about 53% to 47% if you're looking at the pie chart on the right-hand side of page 9. A brief mention of sustainability matters on page 10, please. Over the past, what is it? 10 or 11 months, we've managed to push our ISS governance quality score down to 4, which is rather better than the average in Hong Kong, from 8, which was a pretty rough score late last year. Hopefully, going forward, we will be gradually able to continue the improvement in those ESG snapshots that these various ratings agencies give us. Let's move to some operating results. Indofood on page 11. 7% increase in revenues, and as you can see, that is led by noodles and Bogasari, the flour and pasta division. That has trickled down to a bottom line of a 22% increase in the core profit to 2.4 trillion rupiah. A truly wonderful performance. You see there in the change in sales column chart the biggest red line is a decline in distribution. That is simply because we've seen some revenues recorded in the distribution business move over to ICBP business with the buying out of the other partner in a joint venture last year. So that's more of an optical rather than a real decline in the revenues. As you can see, it moved to food seasonings which saw a mostly corresponding increase in their sales. As you can see also, the price of palm oil has hampered sales at the plantations business. As you know, when you're looking at Indofood, you do have that commodity element in their P&L. Broadly speaking, as we look over the past few years and looking ahead in the short to medium term, Indofood has got terrific prospects going forward. There are more details about its operating subsidiaries, ICBP and Indo Agri on the next couple of pages. Let's move over to page 14 to the biggest phone company in the Philippines, PLDT, which really is producing some astonishing growth in take-up of data services, particularly in the first half of this year with the individual segment, which you can think of as people using their mobile phones. So we've got a strong growth in service revenues, not too different from what Indofood saw. 15% increase in EBITDA, but telco core was flat at PHP 13.2 billion because of higher non-cash expenses and net financing costs and so on. The CapEx at PLDT is remaining high this year at around PHP 78 billion, and that really is delivering some impressive results. Let's skip a page to page 16, and you can see these bar charts at the bottom of the page showing the source of the improvement of PLDT's earnings in 2019. The cellular speed and the fixed line speed are head and shoulders in front of the competitor. Download speeds are much better, and same with the upload speeds. PLDT is now confidently predicting a 10% increase in their telco core in 2019 for the full year to PHP 26.4 billion. I think it's not unreasonable to expect continuing earnings growth at PLDT moving forward. Now, let's have a look at MPIC. Page 17 gives you the familiar schematic of what is made up inside the Metro Pacific holding company. No big changes there from the last time we spoke back in March. Let's have a look at the financial highlights and the outlook. The big change you've got here from the 2018 full year is there's a bigger interest bill. That's kept their contribution to First Pacific rather flattish. Their core income growth is the same, held at 1%. It's well known that there is investor interest in its hospitals business, and if they are able to sell off part of that business to an outside investor, they're very likely to get the sort of enormous valuations of hospital businesses that we've seen elsewhere in the region. Metro Pacific will use any proceeds from that for, pardon me, for mostly paying down its borrowings as it's had to increase its borrowings to finance CapEx in its various growing infrastructure projects, particularly in the roads business. All in all, volume growth at the main infrastructure businesses at Metro Pacific will continue to be strong for the rest of the year looking ahead. By these, I mean the roads, the electricity, and the water businesses. That's a look at those core holdings that we have, which we're really focused on driving forward. I can't end this narrative without a word or two about Philex, which as we all know, has been operating the Padcal mine for about half a century. In the past few weeks has finished a definitive feasibility study for the first phase of its Silangan project down in Mindanao, the big southern island in the Philippines. There's some details about this on page 21 of this presentation. Essentially now, the project has started with a search for an equity partner and project finance for the $750 million CapEx program for the first phase of this project. That will really transform Philex Mining, from the business it is now, a mine that's been going for a very long time with rather relatively low grades, to a new project with very rich resources as described in that table in the blue box down below. Now, with regards to other companies in the group, we have been working on what to do with PLP, the power plant in Singapore. We announced in March the sale of our half of Goodman Fielder to the other partner, the other owner of that company. We can speak to those details in the Q&A, which is about to follow. I think we're properly ready for that now. Yes. Operator, we are well and ready for questions. Yes. Thank you. Ladies and gentlemen, if you would like to signal to enter in the queue for a question, please press *1 on your telephone keypad. We can now take our first question from Kedar Wagle, Maybank Asset Management. Please go ahead. Thank you. I had a couple of questions. You mentioned about your plans to sell out of or dispose of PacificLight. Can you just give some update on that? If I look at the numbers for PLP, they seem to remain pretty weak. Would we need to inject more equity into the business this year? Second, your investments in the first half were $42.5 million. This is from the cash flow statement. Can you give us a breakup of that between the different businesses? Thank you. The first part of that question, Kedar. Hi, it's John. Nice to hear from you. Will be answered by Stanley Yang, who's in charge of our corporate development, and then on the cash flow, Associate Director Joseph Ng will answer that. Hi, good afternoon. On the PacificLight, for us, this is an asset that does continue to sit in a very difficult market with the power prices, both retail and pool, remaining at very low levels. The source of this is the overcapacity. There is too much generation capacity, which has existed for a number of years now. It is also a result of the oversupply of gas. There were a number of gas contracts, particularly on the LNG side, that were signed up to long-term contracts, 10-year contracts, which brought the market demand and supply balance out of sync. It was because of that that the losses, not just at PacificLight, but across all the generating companies within the Singapore market, continue to struggle. We have looked at options, both whether a sale, an outright sale would be feasible. I think the reality is in this market, though, that is a difficult one in terms of generating the best value for shareholders. The transaction that we are reviewing is the possibility of consolidation in the market. By combining with one or other generating firms in Singapore, then there could be the takeout of old, inefficient capacity, and that could also help in terms of setting off and improving the balance on the supply side, as well as fixing some of the challenges around the gas supply. That is the path that we see. We have been in discussions for a number of months now, which are progressing. I think beyond just exploratory talks, we are advancing it to a point where the due diligence and reviewing the possible structure of the combination would be reviewed. This is something that we are pressing ahead, but at this point, there is no announcement yet. This is an opportunity that is in review and in discussions, but still ongoing. Is there a timeline? I think the objective would be to have, if we can, a transaction announced within this year. There would have to be due diligence. There would have to be consultation in terms of if it is consolidation with the regulatory approval, because EMA, the Singapore power regulator, would be looking at market concentration levels, so there would have to be some work around that. There, of course, would have to be agreement among the lending banks of the participating parties to come up with a refinancing proposal for any merged entity. These are the elements that will take some time to finalize and flesh out. The objective would be if, as a target, we would try to have something signed up within this calendar year, if possible. All right. Referring to your questions, it's Joseph here. Referring your question about the investment of $42 million we put into the units. As explained by Stanley earlier, in the early part of this year, the shareholders in PLP still need to provide a little bit kind of funding support to PLP to ensure that the company could kind of meet all the obligations as well as the relevant kind of governance at the PLP level. All the three shareholders, ourselves, MGen, and Petronas, are putting a little bit more money into the PLP, and that's before the serious kind of exploration of looking for kind of industry consolidation solution at the PLP level. In the first half of 2019, I think of the $42 million, roughly 50%, 50% of that, essentially roughly $21 million we put down into PLP to achieve that purpose. We also put in a little bit money into Goodman Fielder, again, before we sign up the kind of the binding sale and purchase agreement with Fonterra to dispose of the 50% in Goodman Fielder. Before that, in the first quarter of 2019, we also put in roughly 30% of that $42 million, just over $10 million of USD into Goodman Fielder. These two items altogether over 80% of the $42 million is basically the bulk of that $42.5 million kind of investment in the first half of 2019. Looking forward in the second half of 2019, one, we already signed Goodman Fielder, assigned the kind of binding sale and purchase agreement for Goodman Fielder. It's just a matter of cleaning up all the CPs, so as to close the transaction before the end of the year and collect the $275 million that closes from that transaction. For PLP, again, we're getting into final phase of discussion about some sort of industry consolidation solution. We would not see that level of capital injection into PLP in the second half of 2019. Okay. Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We can now take our next question from John Galligan, CLSA. Please go ahead. Hi, guys. Thanks for the call. I had a question about the dividends. I know it's just an interim dividend, but it looks like you have reduced the dividend payment quite substantially, which is not something you've done at the interim for quite some time. Can you talk a little bit about the strategy around the payout ratio and whether anything here has changed? I would also note in the prepared remarks, you talk about potentially trying to reduce your borrowings and incorporate a meaningful share repurchase program. Just in light of the changes on the dividend policy, are you guys now placing a greater priority on share buybacks over dividends? Thank you. The short answer to that, John, is no. We're essentially, with that reduction, bringing a balance between the twice-a-year payouts that we're giving to our shareholders. For historical reasons, many years ago, there was a special dividend paid at the interim, which bumped it up. That never got rebalanced so that the interim and the final more resemble each other. That's all we're doing with this exercise, is we're making them resemble each other more. We're quite clear in our press release that the intention is to keep going with our 10 years of minimum payout of 25%, and I think we also point to a payout of 13.5 cents a share this year as we had last year. As far as capital allocation goes, debt reduction and share repurchases remain paramount to us. I think, however, we do need to push our debt down a little bit from this level before we can announce a repurchase program. Our intent when doing so would be to have the funds and/or cash flow in hand to ensure that it could be sustainable for, say, four years or a bit more. Joseph, anything to add? No, it's more a kind of realignment of the committed 25% with the so-called recurring profit that we have just reported, the $142 million recurring profit. Then we key off the 25% payout for that. As John mentioned, it's more the timing difference, kind of realigning the payout more with the level of recurring profit that we are achieving. If you look back, in the past, we are paying, John, $0.08 for the interim and $0.055 for the final, a total of $0.135. So it's actually 60% for the interim and 40% for the final. It doesn't really tie to the pattern of the first half versus the second half profit. This year, I think we just need to kind of realign that a little bit and stick with the 25% for the first half. The full year, well, we just heard from John saying that basically it's the same payout rate for the full year. So it's a little bit kind of timing difference here. So it's not that we are not committing to the minimum 25% payout, so we're still sticking with it. Okay, great. Thank you, guys. Ladies and gentlemen, please signal by pressing star one on your telephone keypad if you would like to ask a question. We can now take our next question from Vivek Dhawan from ValueSquare. Please go ahead. Hi, good afternoon. Thanks for taking my question. Just to follow up on the comments for PLP consolidation or proceed. Could you comment a bit on what are your expectations on the sale price? Because at the books, it's still carried at around $230 million. So just your expectation on the sales receipt, if something is materialized. Thank you. Sure. In terms of the consolidation and the expectation on what value can be created, I think one thing is clear, is that at the current market, before any consolidation, the profits of all the industry players are down, and they've been down for some time, certainly since 2014, when additional capacity came into the market. With the planned reduction of capacity, which would take place through industry consolidation, we think that's the basis for the margins, what we call the non-fuel margin or the spark spread to improve. By that, this would allow the return of improvement in the cash flows and underpin the value. Now, in terms of what our share in the merged company would be and what the equity value of that would be, is a function of what the recovery of the merger and the business would entail, and we would have to value it off of the future improvements resulting from any consolidation. At this point, we can't comment on what the level would be. What we can say is that it is our view that through the consolidation, that it would be the best option for returning value to the industry, to the profits, and ultimately to the shareholders, and further details would be provided at the appropriate juncture. Thank you. Another reminder, ladies and gentlemen, you can signal by pressing star one on your telephone keypad. Hello, speakers. We have no further questions at this time. Thank you. As there are no more questions, may I invite Mr. Yang to give his closing remarks, please? Thanks. Yes, Sara. I think in terms of closing remarks, I would just refer you back to page six of the presentation, because I think that is directing us during the second half of this year. So in terms of the core assets, we remain quite positive. As John indicated, we had a strong start to the year, and I think we anticipate that continuing into the second half. PLDT, again, John talked through the numbers. We anticipate continued strong growth on our data business and enterprise home to continue to do well. So we're actually anticipating quite strong growth in the telco core in the second half of the year. In terms of Metro Pacific, the underlying businesses are all doing well. The issue again, as John highlighted, is that growth is being mitigated to quite a large extent by an increase in the interest bill. That's why the hospital transaction is important. They are pursuing it, and we would expect, in terms of timeframe, by the end of the year to have a positive announcement there. On the businesses identified as non-core, GF, I think you know the position. In terms of outstanding CPs, it's really the approvals at various country levels. We have the three that we're concerned about, Australia, Ukraine, and New Zealand. We have two in hand already. So there is only one outstanding, and we expect that to be at least by year-end and the transaction to be consummated. Stan has described in some considerable detail what's happening with PLP. With a fair wind, we would expect that transaction, an announcement, a positive announcement there by the end of the year. The Silangan search for a strategic partner is underway. Again, we would expect to make, by the end of the year in the second half, some positive announcements there. So overall, I think it's going to be a busy second half, with core businesses looking very positive, but a lot of work to be done on the non-core side. There were some discussions at our last board meeting about some changes at the board level and the appointment of additional independent directors. I think just to reconfirm for some of those on the line that process is underway. A search company has been appointed, and we would expect again, there to be some announcements there towards the end of the year. So I think that's it. That's what we will be working on during the second half. We look forward. Well, thank you, first of all, for attending this call, and we look forward for you joining us again early in the next year, when we will report on the full year results. Thank you. Thank you, Mr. Yang. Operator, please can you provide the replay details? Yes, ma'am. Ladies and gentlemen, this concludes First Pacific's 2019 First Half Results Conference Call. If you would like to listen to a replay of today's call, for Hong Kong, please dial +852 3008 0334. For Singapore, 800 101 2009. For U.K., 0808 10 11153. And for the U.S., 888 203 1112. The replay passcode for the recording is 3015876. Thank you.