Philippines: Standard & Poor's affirms San Miguel BB- foreign currency rating
Standard & Poor's Ratings Services announced on August 3 it affirmed its 'BB-' foreign currency rating on San Miguel Corp., a food and beverage company based in the Philippines. The outlook is negative.
"The rating affirmation reflects San Miguel's dominant domestic position, increased diversity through overseas operations, and low cost operations," said Standard & Poor's credit analyst Nancy Koh. "Nevertheless, the rating on San Miguel is constrained by an increase in debt-funded acquisitions, high operation risks in overseas markets, and exposure to commodity prices and currency risks."
San Miguel holds a dominant domestic market position in the beer, hard liquor, and non-alcoholic beverage segments, which accounted for more than two-thirds of operating profit in the past three years. It has cultivated effective brand equity across various segments under a multi-brand strategy, and its extensive product range targets a broad group of consumers.
The company will also benefit from increased diversity from its overseas operations, after its recent acquisition of Australia's Berri Ltd. and National Foods Ltd. Upon successful management of integration risks, San Miguel's earnings profile is likely to become more diversified, and international operations are expected to contribute 40% of group revenue, compared with 17%-18% in 2004. Given its economies of scale and strong bargaining power with suppliers, San Miguel has pricing flexibility in its beer and hard liquor segments and the ability to sustain sales volume.
The rating on San Miguel, however, is constrained by its increased debt after its largely debt-financed acquisitions of National Foods and Berri. Its debt is expected to rise substantially to Philippine peso (PHP) 146 billion (US$2.6 billion) by the end of 2005, from PHP61 billion at year-end 2004. As a result, both gearing and cash flow measures are expected to weaken considerably, with total debt to EBITDA projected at 4.2x, and funds from operations (FFO) to total debt at 15% in 2005.
San Miguel also faces high operating risks in its overseas operations due to intense competition, lack of scale economies, and extensive distribution and marketing efforts necessary to develop these markets.
The rating on San Miguel is also limited by its exposure to commodity price fluctuations, as it sources the bulk of its raw materials externally, and commodities account for two-thirds of its food segment revenue. In addition, San Miguel is exposed to foreign exchange risks, as 60%-70% of raw material costs, about 31% of total liabilities, and only about 17% of revenue, were denominated in U.S. dollars as of Dec. 31, 2004.
San Miguel's liquidity is adequate, with cash balance of PHP43.7 billion more than sufficient to cover PHP6.8 billion of debt due in the next 12 months. Nevertheless, its cash balance is likely to be volatile in light of the company's relatively large capital spending.
The negative outlook on the foreign currency rating on San Miguel is constrained by the sovereign ratings on the Philippines (foreign currency BB-/Negative/B; local currency BB+/Negative/B).
"Nevertheless, we expect San Miguel to maintain its dominant domestic position, and that the company's financial profile will remain comparable with relevant peers with similar ratings," said Ms. Koh. "The rating on San Miguel, however, could be lowered if it continues to increase its gearing level materially and weaken its cash flow coverage measures to support an ambitious acquisitive growth strategy."
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