San Miguel switches its growth focus

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San Miguel has grand plans. In one of the biggest shifts in its 117-year history, the Philippine food and drinks group in July gained shareholder approval to spin off its domestic beer business and invest as much as 35bn pesos ($777.4m), or a tenth of its total assets, into new businesses.

“We want to be in industries that have scale and will grow and we are determined to build leadership positions in key areas where important trends are driving future growth, not just for San Miguel but for the Philippines too,” Eduardo Cojuangco, San Miguel chairman, told shareholders during the company’s annual meeting in July.

But efforts by San Miguel to buy state-owned power plants and facilities are drawing a mixed reaction from investors and analysts.

The company, which reported consolidated revenue of 250bn pesos ($5.7bn) and profit of 15.2bn pesos ($344m) in 2006, is looking to bid for a 600MW coal-fired power plant that the government is auctioning on October 16.

Meanwhile, San Miguel has teamed up with Tenaga Nasional, the Malaysian state power operator, and Texas Pacific Group, the US private equity firm, to bid for a 25-year contract to operate the Philippines’ power grid that will be auctioned in December. The company has also expressed interest in acquiring a big stake in PNOC Energy Development Corp, a state-owned geothermal developer.

While shareholders and analysts generally agree that San Miguel cannot expect rapid growth and high returns from the domestic food and beverage business, there are misgivings about the company’s failure to communicate its expansion strategy and plans to the investing public.

“Many analysts are downgrading recommendations for San Miguel,” says Astro del Castillo, a director at First Grade Holdings, an investment management company. “We’re at a loss at what the company’s plans are.”

Moody’s and Standard & Poor’s have placed San Miguel’s credit rating under review for similar reasons. San Miguel, meanwhile, remains silent on the matter, declining requests from the FT to comment.

Investors, including Mr Del Castillo, agree that San Miguel is right to consider moving into the power business, which is seen as providing more opportunities for faster growth and higher returns because of tightening power capacity in the next few years.

The government forecasts that at least 4,000MW more generating capacity is needed until 2014 and has warned that existing supply in the main island of Luzon will fall short of peak demand by 2010.

Luz Lorenzo, chief economist at ATR Kim Eng, the stock brokerage, says: “There’s great opportunity in the power sector. The need is so obvious – it’s like the opening up of the telecommunications sector in the early-1990s.”

She says many of the problems that kept investors away – the government has sold only 11 per cent of the combined capacity of the 30 power plants it has been trying to sell since 2001 – are being addressed.

Most of the plants now come with short-term supply contracts and rate-setting has become less politicised.

Alan Ortiz, a former president of the state-owned company that runs the power grid, says that, with the right strategy and organisation, San Miguel can potentially earn returns of 18-25 per cent from its investments in the power sector.

Buying a power plant also makes it easy to build a new one when power supply tightens in the next few years, he says.

The power sector’s high potential returns and prospects for expansion look tempting to San Miguel, which is struggling to sustain overall growth amid sluggishness in the local food and beverage business.

Last year, beer volumes sold in the domestic market declined from a year ago. The company sold a 65 per cent stake in a Coca-Cola bottling company to the Coke parent for $590m after years of falling sales.

San Miguel has also tried to expand abroad aggressively. It bought Australia’s biggest dairy producer two years ago, boosting the share of exports and foreign operations against total revenue from 17 per cent in 2004 to close to 40 per cent last year.

Irving Ackerman, a stockbroker who has owned San Miguel shares since the 1960s, says: “I have enough faith in the management that they will do what’s best for the company ... I just hope they tell us some more about their plans.”

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