Ginebra San Miguel share: Remaining solid despite the macroeconomic situation (OTCMKTS: GBSMF)


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Investment thesis

I believe Ginebra San Miguel Inc. (OTC:GBSMF) is in a solid financial position. My assessment implies the company has robust free cash flow performance, strong performance over the past year, and is a prominent player in the beverage industry, particularly in the alcoholic beverage market, which is why I rate the stock as a buy.

Over the past year, the company has improved its performance against its KPIs. We will also talk about the growth of the alcoholic beverages market in the Philippines and how it can influence business growth. From my perspective, everyone I have known here in the Philippines has tried, tasted and drank some of Ginebra San Miguel’s (“GSM“) products. While we can’t use my experience with the drink to provide a solid example of how popular the drink is, it’s a great starting point, and it shows just how popular the drink is in the Philippines and why investors would want consider investing in GSM since it is one of the recognized drinks in the Philippines.

Brief overview of the company

Ginebra San Miguel Inc. was founded in 1834, headquartered in Mandaluyong City, Philippines, and is a subsidiary of San Miguel Food and Beverage, Inc. The company and its manufacturers sell alcoholic beverages in the Philippines and around the world. ‘foreign. GBSMF supplies gins, brandies, wines, vodka, rum and distilled spirits. They offer different alcoholic beverages and serve resellers, wholesalers, retailers, supermarkets, grocery stores, sari-sari shops and convenience stores with the alcoholic beverages they produce.

Source - GSMI SEC 17-A Form

Source – GSMI SEC 17-A Form

Here are some of GBSMF’s products:

  • GINEBRA SAN MIGUEL

  • GIN GINEBRA SAN MIGUEL PREMIUM

  • GSM BLUE LIGHT GIN

  • GSM BLUE FLAVORS (Mojito, Margarita and Gin Pomelo)

  • PRIMERA LIGHT (Imported Primera Light)

  • VINO KULAFU (Chinese wine)

  • ANTONOV VODKA

  • DON ENRIQUE MIXKILA DISTILLED SPIRIT

  • RUM AÑEJO GOLD (65 proofs)

  • ETHYL ALCOHOL SAN MIGUEL

For export only:

  • RUM TONDEÑA GOLD

  • RUM FROM MANILA TONDEÑA [GOLD]

  • MIX GIN

  • MIX RUM

  • MIX VODKA

GBSMF primarily operates in the alcoholic beverages market, and the company is a leading player in the market, recognized as the top-selling gin in the Philippines by mybest.ph. The company has been around for almost a hundred years, and that’s part of why I think their gin is one of the most recognized alcoholic beverages in the Philippines and is practically available in even the smallest sari-sari stores (small neighborhood retail stores) opened in the Philippines.

Alcoholic Beverage Market Growth

Source - Philippines Alcoholic Beverages Market from Statista

Source – Philippines Alcoholic Beverages Market from Statista

Considering that GBSMF is one of the most recognized and best-selling spirit drinks in the Philippines, we can use the annual Philippine liquor market to see where their volume of potential customers/consumers will come from. The Philippines Alcoholic Beverage Market recorded revenue of $11.16 billion in 2021 and CAGR revenue growth of 8.63% over the past five years (excluding 2022 as I want to have a figure solid, and the growth of the TTM could change that). GBSMF’s revenues are growing as the alcoholic beverage market grows, as evidenced by its average revenue growth of 18-20% over the past five years. I would like to see GBSMF as a mature company that will be considered one of the “mainstream” alcoholic beverages in the Philippines. I say “traditional” because it is considered almost everyone’s go-to item when shopping for alcoholic beverages due to its affordability and availability even in semi-remote areas of the Philippines (small barangays and barrios in municipalities).

Financial performance and analysis

Source - GSMI stock price chart from Investagrams

Source – GSMI stock price chart from Investagrams

GBSMF is currently trading close to its 5-year price, around PHP90-100. As mentioned earlier, this could be due to an increase in volume and demand for alcoholic beverages over the past three years, primarily when COVID community quarantines began.

In GBSMF’s second quarter results, the company continued to maintain its distribution reach and strengthened its brand equity in the first half of 2022. In Q2’22 results, the company reported volume growth for the first half of 2022, a volume increase of 9% compared to the first half of 2021, which means that consolidated revenues jumped 15% to PHP 23.1 billion, compared to compared to PHP 20.2 billion last year. GBSMF also reported additional expenses for advertising, promotional activities, distribution expenses and personnel costs, which may result in an 11% increase in operating expenses to PHP 2.8 billion compared to Last year. The company’s overall performance for the first half of the year ended with strong returns shown by the 19% increase in net profit to PHP 2.5 billion from PHP 2.1 billion in Last year.

Source - SEC FORM 17-Q

Source – SEC FORM 17-Q

GBSMF reported PHP6.92 billion in cash and cash equivalents from the company’s second quarter 2022 results and has PHP15.6 billion in total current assets while having PHP6.7 billion in liabilities total currents, which gives us a current ratio of 2.33, no liquidity problems in the foreseeable future. They also have a low level of debt, with a debt ratio of 0.57 indicated in the company’s KPIs.

Evaluation

Source - Author's assumptions and Finbox model

Source – Author’s assumptions and Finbox model

Using an EBITDA output to calculate the terminal value of the business 5 years from now, my valuations show that the business is a buy. GBSMF is currently trading at PHP105, which is below the fair value of the company. With an EBITDA multiple of 4.3x, we get a 60% upside if we bought the stock right now. Even with an additional 30% headroom, the company is still relatively cheap. I used a discount rate of 15% and projected CAGR revenue growth of 5.4% (12% for 2022, driven by increased demand and revenue momentum) 5Y EBITDA CAGR of 9 .2%, which leads me to rate the stock as a buy .

Risks

Source - Sugar Regulatory Administration

Source – Sugar Regulatory Administration

I think two risks will affect the company’s inflationary pressures and the sugar shortage in the Philippines. There is still uncertainty in inflationary pressures that the Philippines has yet to experience. Sure, commodity prices have gone up, but I think we’re not at the peak of inflation, and it’s better to be prepared for the worst effects than to be optimistic in an unfavorable market. There may be an increase in volume today, but we will have to see how the business performs later in the year and if any potential macro headwinds affect the business. Although the palace reported “sugar shortages”, the supply and demand statement provided by the Sugar Regulatory Administration shows that there is enough supply for demand in the country. These are the risks that I believe will significantly affect the GBSMF in the long term (it may be difficult to recover from inflation) and in the short term (the sugar shortage).

Key takeaway for investors

I believe GBSMF is performing well despite the company’s performance in an unfavorable market where inflationary pressures can affect its consumers’ wallets, which can translate into lower demand, volume and revenue. The liquor market is constantly growing in the Philippines, and due to the popularity of the business, GBSMF can potentially increase the number of its loyal customers who love its liquor. The company has a low level of debt and no short-term liquidity issues, and as evidenced by my valuation, the company has a fair value of PHP166. It is currently trading at PHP105, which means the stock is cheap, leading me to rate GBSMF as a buy. I would like to monitor the stock and await further announcements from management if there are any significant updates from the company.

Thank you very much for your time and thank you for reading. Have a nice day.

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