International Conference

The 16th ICMSS

Investment Analysis

Team Pegasus

Ateneo de Manila University - Philippines

Century Pacific Food, Incorporated (CNPF:PS)

TEAM PEGASUS INVESTMENT RESEARCH
CENTURY PACIFIC FOOD, INC. (CNPF)
Consumer Sector

This student report has been published only for the purposes of competing in the 16th Indonesia Capital Market Student Studies Competition
Date: December 14, 2016 Price: 17.00/sh Target Price: Php 21.22/sh
TICKER: CNPF:PS Recommendation: BUY Upside: 24.80%

FIG 1. MARKET SNAPSHOT

CNPF: CATCH OF THE CENTURY
Outstanding Shares 3.54B We issue a BUY recommendation on CNPF with a year-end 2017 target price of Php 21.22/sh,
Free Float Level 20.90%
presenting an upside of 24.80% from the December 14, 2016 closing price of Php 17.00/sh. The
fair value of CNPF was calculated using a Discounted Free Cash Flow to Firm Analysis. We
Market Capitalization Php 60.2B
expect the companys Earnings Per Share (EPS) to grow at a CAGR of 20.37% and reach Php
Par Value Php 1.00
1.39/sh in 2020 from its current value of Php 0.55/sh. This strong buy recommendation is driven
Adj. 52 Week High Php 18.60/sh by CNPFs undisputed market leadership and superior brand equity, favorable macroeconomic
Adj. 52 Week Low Php 9.85/sh and industry trends that CNPF is poised to capitalize on, and the companys solid financials that
Dividend Yield 0.39% will serve as a strong yet flexible foundation for future growth.
Source: Philippine Stock Exchange, Team
Computations UNDISPUTED LEADERSHIP AND SUPERIOR BRAND EQUITY
CNPF is the largest manufacturer of canned food in the Philippines with a market share of 54%
FIG 2. TRAILING RETURNS in canned seafood and 37% in canned meat. The companys success is primarily driven by their
CNPF PSEI long operational history of 38 years, their expansive distribution network, and their award
Today Returns
winning brands such as Century Tuna and Argentina that have become household staples for
1 month 6.50% 0.83%
Filipino consumers. The company recently ventured into the coconut and beverage industries,
3 months 3.16% -8.19% and acquired exclusive rights to distribute Vita Coco, the global market leader in packaged
6 months 18.30% -7.13% coconut water with a 50% global market share. In addition to its already numerous awards,
12 months 53.57% 2.70% CNPF was recognized as Asias Marketing Company of the Year last July 2016 by the Asia
Source: Philippine Stock Exchange Marketing Federation, a testament to the companys superior brand equity. The companys
extensive multi-brand portfolio caters to all income segments, maximizing opportunity to capture
FIG 3. DCF VALUATION SUMMARY growth. We are confident that CNPF will sustain market dominance and leadership with its
Beta 0.95 continued product innovations, financial flexibility, and aggressive growth strategy.
Cost of Equity 9.98%
WACC 8.95% FAVORABLE MACROECONOMIC AND INDUSTRY TRENDS WILL FUEL GROWTH
Terminal Growth Rate 4.50% CNPF is poised to benefit from the Filipinos rising income, changing health preferences, and
Equity Value 75.1 billion Php
advantageous regulations. Dropping unemployment rates and a GDP growing at 7% CAGR
results in household consumption growing at a CAGR of 5.55%. This brings about a wider
Number of Shares 3.54 billion
market base as well as consumers upgrading to CNPFs higher margin products. CNPFs
Fair Value Php 21.22/sh
strategy of marketing health products further takes advantage of the local and global movements
Potential Upside 24.80% towards nutritious products. Aside from the projected 11% CAGR growth in its flagship brand
Source: Team Computations Century Tuna, this is beneficial for subsidiaries CPAVI and SMDC. This is manifested by Vita
Cocos U.S. revenues growing by a whopping 640% from 2010 to 2015, and the projected
FIG 4. CNPF KEY METRICS (2015) growth of the Philippines underpenetrated dairy market.
Total Assets Php 16.8 bn
Net Income Php 1.9 bn The ASEAN integration, GSP+ program, and Philippine tax reform are all especially beneficial
Net Income Margin 8.29% for CNPF. Combined, these result in preferential, duty-free tariffs for CNPFs export tuna within
Return on Assets 11.52% the ASEAN and to EU, as well as lower local taxes for CNPF compared to its competitors.
Return on Equity 18.69%
Debt to Equity Ratio 21.75% SOLID FINANCIALS WILL SUSTAIN AGGRESSIVE STRATEGIES
Source: Team Computations
CNPFs rapid growth, high profitability and healthy cash balance will allow it to sustain its
aggressive growth strategy and venture into additional markets through M&As. Third quarter
revenues this year increased by 22% from last years third quarter and is expected to grow at a
FIG 5. EPS FORECAST
CAGR of 13.05% to reach Php 43.1 billion in 2020. Accompanying growth is high profitability as
1.60
evidenced by a 2016 Return on Assets of 9.7% and a Return on Equity of 16.85%, above the
1.40
20.4% CAGR median of both local and regional peers. With Free Cash Flows to Firm expected to grow at a
1.20
CAGR of 15.97% up to 2020, CNPF will be well funded to both invest in additional CAPEX and
1.00
return value to its shareholders via dividends.
0.80
0.60
0.40
CNPFs underleveraged position also gives the company the financial flexibility needed to
0.20
acquire new debt that may be used to further fuel their growth. The companys Debt to Equity
0.00
ratio in 2015 was 21.75%, much lower than the local median of 33% and significantly lower than
2015 2016 2017 2018 2019 2020 the regional median of 57%. With CNPFs Times Interest Earned ratio also improving, debt may
Source: Team Computations be acquired with minimal interest costs to maintain the companys superior margins
 FIG 6. PHILIPPINE CANNED
BUSINESS DESCRIPTION
With 38 years of operations under its belt, Century Foods Pacific Inc. (CNPF) has established
SEAFOOD MARKET SHARES
itself as one of the leading food producers and distributors in the Philippines. CNPF is best
known for their extensive line of canned fish, canned meat, and dairy products. They boast a
portfolio of high-quality and trusted brands that have become staples in Philippine households,
14% such as Century Tuna, Argentina Corned Beef, and Angel Milk. CNPF also exports raw tuna to
CNPF markets internationally. Despite the already varied portfolio, CNPF has recently ventured into the
13% Liberty coconut industry with their recent acquisition of Century Pacific Agricultural Ventures Inc.
54% Youngstown (CPAVI). The companys Business Model Canvas can be seen in Appendix A5.
19% Others
MARKET LEADERSHIP IN CANNED FISH AND MEAT
CNPFs undisputed market leadership illustrates its expertise across its different business
segments. The company is the Philippines leading canned food producer as evidenced by its
leadership in canned & preserved food in general with a market share of 35%. Specifically, the
company leads in both canned & processed fish and canned meat with market shares of 54%
Source: CNPF Investor's Presentation
and 37% respectively (See Figures 6 and 7). CNPF further shows its dominance in specific sub-
segments such as corned meat (46%), luncheon meat (34%), and canned tuna (84%).
FIG 7. PHILIPPINE CANNED MEATS
MARKET SHARES
GROWTH PLATFORM: CPAVI
At the end of 2015, CNPF invested Php 4.5 billion to acquire a 100% stake in Century Pacific
Agricultural Ventures Inc. (CPAVI), which produces high-value organic coconut products for both
the local and export markets. With the demand for coconut products growing rapidly, both within
20% and beyond the Philippines, the acquisition is expected to increase CNPFs revenues by up to
CNPF 8%. The companys margins are also forecasted to improve due to CPAVI enjoying relatively low
37% PF variable costs as compared to global competitors due to the geographical advantage of having
13% CDO operations in the Philippines where coconuts are abundant.
Others
30% OWNERSHIP STRUCTURE
CNPF is owned by two major stakeholders as well as the public. The first major stakeholder,
Century Pacific Group Inc. (CPGI), whose board primarily consists of members from the
prominent Po family, has a 68.70% stake. The second major stakeholder, Arran Investment
Source: CNPF Investor's Presentation
Private Ltd., which is an affiliate of Singapores sovereign wealth fund GIC Private Ltd has a
stake of 10.40%. The public owns the remaining 20.9% (See Figure 8).

FIG 8. CNPF OWNERSHIP CORPORATE GOVERNANCE

STRUCTURE In line with CNPFs mission of strengthening the company into a world-class, multi-skilled
organization with a strong corporate culture, CNPFs executive committee consists of 7 vice
presidents with a wide variety of education and experience in the industry. Combined, they have
a total professional experience of 280 years from different multinationals such as Johnson &
CPGI Arran Public Johnson, Unilever, P&G, Shell, and many others. For a complete summary of CNPFs Corporate
Governance, see Appendix A8.
69% 10% 21%
CORPORATE KEY DIRECTIONS & GROWTH STRATEGY
CEMENTING CURRENT MARKET POSITION
Aggressive Marketing Campaigns
CNPF CNPF prides itself in being a marketing-focused company. As a company focused on brands,
CNPF consistently strives to further anchor itself in the heart of Filipino consumers through
Source: CNPF Investor's Presentation
effective marketing campaigns such as the Century Tuna 2014 Superbods contest, 555
KumpleTuna commercials, and Argentina Corned Beef Ganado Ka campaign. Proof of their
success in marketing their brands can be seen in their numerous awards for brand building, with
FIG 9. CNPF 2015 REVENUE the most recent being Marketing Company of the Year by the Asia Marketing Federation.
STRUCTURE
Continuous Cost Reduction Efforts
CNPF is currently engaged in eliminating unnecessary costs and reducing their COGS and
OpEx accounts to consistently improve their profit margins. One of their means to do so is
23% through their wide network of alternative suppliers that allow them to hedge against a spike in
Marine
38% the prices of raw materials. CNPF is also working towards a backward integration with
Meat
investments in facilities that will enable them to produce more of their own tin cans. Proof of the
11% Dairy
effects of these cost reduction efforts can be seen in CNPFs improving margins, with its net
Export profit margin improving from 6.82% in 2014 to 8.29% in 2015.
28%
Strengthening of Distribution Network
CNPF intends to strengthen their already expansive distribution network (See Figure 10) and
increase the depth and quality of their local coverage. With 652,000 points of sale across the
Source: CNPF Investor's Presentation archipelago, CNPF intends to expand its nationwide reach in order to tap into potential new
geographic markets. This could not have come at a better time given the Duterte administrations
pro-populist economic policies.
 FIG 10. RETAIL OUTLETS
SERVICED BY CNPF IN THE EXPANSION INTO ADDITIONAL MARKETS
PHILIPPINES Acquisition of Undervalued Brands that Provide Synergy
300 CNPF has shown its capability to take undervalued brands on the verge of bankruptcy and
completely transform them into brands capable of competing with leaders in the market. An
250
example of which is their revival of dairy brand Birch Tree. CNPF intends to continue acquiring
200 undervalued brands that they believe can utilize the companys already established brand equity
and expansive distribution network in order to become competitive.
150

100
Active Search for Compatible Markets to Penetrate
CNPF is committed to grow itself as a premier company in the Philippines and it does so through
50 careful market research and product testing done in world-class research and development
facilities. With its recent acquisition of CPAVI, the company has shown its ability to succeed in
0
2009 2010 2011 2012 2013 2014 2015 2016 multiple markets simultaneously. However, CNPF intends to continue its search for compatible
markets and the company maintains its stance to further grow itself as a food business by
Source: CNPF Investor's Presentation entering untapped and underpenetrated food segments that are in line with trends in Filipino
consumption.
FIG 11. PHILIPPINE GDP-
UNEMPLOYMENT TREND
INDUSTRY OVERVIEW & COMPETITIVE POSITIONING
3500 7.40% INDUSTRY OVERVIEW
3000 7.20% Rising Income to Widen Market Base and Boost Domestic Consumption
CNPF is positioned to capitalize on the following Philippine trends: a falling unemployment rate,
2500 7.00%
a rising GDP per capita (See Figure 11), and a growing middle class. With 60-70% of economic
2000 6.80% growth attributable to increases in consumption, this results in both a wider target market for
1500 6.60% CNPF as well as premiumization among existing customers enabled by an increase in their
disposable incomes (See Figure 12). CNPFs multi-brand strategy catering to different
1000 6.40%
socioeconomic classes with up to 387 SKUs (See Figure 13) put them in a prime position to
500 6.20% capitalize on these trends. Ultimately, we expect these to ramp up CNPFs overall revenue
0 6.00% growth and increase the companys net income.
2010 2011 2012 2013 2014 2015

Growing Emphasis on Health and Convenience in an Urbanizing Society

GDP per Capita (USD) CNPF is expected to benefit from the increasingly evident consumer trend towards valuing
Unemployment Rate convenience. The Philippines is a rapidly urbanizing country, and with urbanization comes a
Source: Philippine Statistics Authority and higher premium on convenience. According to Nielsens 2015 Shopper Trends report, there has
World Bank been a considerable rise in the average Filipinos inclination towards convenient services and
products, which include canned goods, as the average Filipinos lifestyle becomes more urban
FIG 12. HOUSEHOLD ANNUAL and fast-paced.
DISPOSABLE INCOME IN PHP '000
800.00
There has also been a steady movement towards healthier and more nutritious products.
Products advertised as being beneficial to ones health, such as coconut water and Omega-3
700.00 tuna - both offered by CNPF - have begun to command a premium in the market, as consumers
600.00
are becoming more aware of the effect of certain foods on their bodies, and are thus willing to
6.8% CAGR pay slightly more for nutrition and a balanced diet.
500.00

400.00
Growing Demand for Coconut Products
CNPF acquired a 100% stake in Century Pacific Agricultural Ventures, Inc. (CPAVI) last 2015.
300.00 CPAVI supplies coconut water for Vita Coco, the first brand to successfully market packaged
200.00 coconut water, having grown a whopping 640% from 2010 to 2015 in the United States alone.
Vita Cocos global revenues of USD 420 million account for 50% of the coconut water market,
100.00 which is expected to grow at a CAGR of 25% for the forecast period. This is buoyed by the
0.00 global trend toward convenience and health consciousness. CNPF can further capitalize on this
growing demand since the Philippines ranked third in global coconut production in 2013. Just
recently, the Philippines also outperformed its ASEAN peers in terms of global coconut oil
Source: Bangko Sentral ng Pilipinas exports in 2014 with an output reaching up to 800,000 metric tons (See Figure 14).

FIG 13. CURRENT COMPANY Dairy industry remains underpenetrated in the Philippines
PORTFOLIO IN STORE KEEPING The dairy industry remains an underpenetrated market in the Philippines, as dairy consumption
UNITS (SKU) in the country still remains significantly lower than regional peers (See Figure 15). However,
USDA Foreign Agricultural Service reports that the Philippine dairy industry is forecasted to grow
in the next few years as milk consumption increases due to rising income. Rising household
14
44 consumption, growing at a CAGR of 5.55%, and disposable income, growing at a CAGR of
Marine 6.82%, as well as an increasing trend towards healthy living, further affirm this forecast. Thus,
Meat CNPFs dairy segment (SMDC) remains an attractive venture and a reliable source of future
90 Dairy growth.
239 Export
CNPF and the ASEAN Integration
The advent of the ASEAN integration brings new competition to the local consumer industry, but
Source: CNPF Investor's Presentation also opens the opportunity to operate in neighboring ASEAN nations with no tariffs and lower tax
rates. Locally, consumer goods that have weak branding are expected to have compressed
 margins due to the influx of competition. Philippine companies that currently export to ASEAN
nations would benefit from the more lenient trade and tax regulations. Despite the threat of
FIG 14. GLOBAL COCONUT OIL additional competition however, CNPF would benefit from the ASEAN integration through
EXPORTS AS OF 2014 (IN '000 MT) superior branding and strategic regional partnerships with firms such as Thai Union.
1000.00
CNPF and the GSP+ Program
800.00 Similar to the AFTA, the Generalized System of Preferences Plus (GSP+) allows developing
countries to export to the European Union (EU) with reduced tariffs. Philippine tuna, at present,
600.00 now enjoys duty-free access to the EU. Prior to this, the Philippines was charged tax of up to
20%. With the EU accounting for roughly 44% of CNPFs total exports, this translates into higher
400.00 margins for the company. Furthermore, just recently in 2015, CNPF management issued a
media statement saying that the company is currently eyeing the EU for market expansion.
200.00

Philippine Tax Reform Beneficial to CNPF, Detrimental to Competitors

0.00
Philippines Indonesia Malaysia USA The impending tax reform in the Philippines is expected to be beneficial to CNPF but serve as a
detriment to key competitors Coca-Cola, RFM and Universal Robina Corporation (URC). The tax
Source: CNPF Investor's Presentation reform proposed by the new Philippine administration is expected to reduce both corporate and
personal income tax by 22%. This would translate to an increase in overall income and domestic
FIG 15. 2016 DAIRY CONSUMPTION consumption - both beneficial to CNPF. The reform however also includes plans to increase the
IN '000 MT countrys sin tax. Because sugar-filled drinks, which are included in the sin tax, are among the
major products of CNPFs competitors, their margins are expected to decline.
1000.00

800.00 PORTERS FIVE FORCES ANALYSIS

The industry analysis can be summarized in a Porters Five Forces Analysis. The findings are
600.00
outlined in Table 1 and Figure 16.
400.00
Porter's
200.00 Level Description
Force
0.00 With a wide variety of options in the market, consumers have the
Bargaining
freedom to pick whichever brand they prefer. Furthermore,
Power of High
Filipinos are highly price-sensitive. CNPFs numerous products
Buyers
targeted at varying price points however may mitigate this.
CNPFs operations depend highly on an adequate supply of raw
Source: Trading Economics
Bargaining materials. CNPF is particularly subject to fluctuations of tuna and
Low to
Power of sardine prices. However, the presence of relatively
FIG 16. PORTER'S ANALYSIS Moderate
Suppliers undifferentiated suppliers forces suppliers to accept market prices
Bargaining Power of as well.
Buyers With five major production facilities around the Philippines, CNPF
Rivalry of has economies of scale that new entrants would be hard pressed
Bargaining Threat of Low to
Existing to achieve. While the ASEAN integration could result in more
Power of New Entrant Moderate
Competitors
Suppliers
players in both the canned tuna and meat markets, CNPFs brand
equity gives it an edge over possible new entrants.
A wide array of canned and processed food serves as substitutes
Threat of for the core businesses of CNPF. The company however
Threat of New
Threat of
Substitute Moderate maintains a superior brand equity and a top of mind awareness in
Entrants Substitute
Products the consumer market. Innovative products at multiple price points
make it difficult for substitutes to challenge CNPF.
Source: Team Analysis
While CNPF has enviable bargaining power for shelf space with
FIG 17. CNPF Brand Portfolio retailers as well as a dominant distributor network, the presence
Rivalry of of aggressive rival brands (San Miguel Pure Foods and CDO)
Segment Market Brand
Existing Moderate results in price competition and a constant need to innovate. A
Mass Lucky 7
Competitors key advantage CNPF can use to mitigate this however is their
Fresca Tuna superior marketing and ability to capture the market with
Middle 555 innovative campaigns.
Marine
Blue Bay
Premium Century COMPETITIVE POSITIONING
Tuna Leading Brands at Varied Price Points to Capture Different Market Segments
Lucky 7 In line with CNPFs vision to nourish everyone, everyday, everywhere, the company ensures
Mass
Wow that its products cater to the entire socioeconomic spectrum of Filipino consumers. Its brand
555 catalog highlights how CNPF positions itself from mass markets all the way up to high-end
Meats Middle
Shanghai premium segments. This characteristic applies to all of CNPFs product lines - marine, meat, and
Argentina dairy (See Figure 17) - and allows them to capitalize on the widening market base driven by the
Premium
Swift Philippines rapid economic growth.
Mass Home Pride
Middle Angel Health Conscious Branding to Adjust to Market Tastes
Dairy
Kaffe de Oro With market tastes moving towards healthier foods, Century Pacific has both expanded into
Premium
Birch Tree healthier products, and marketed their existing products as having nutritional benefits. In
Source: CNPF Investor's Presentation acquiring leading coconut brand Vita Coco, the company has capitalized on the health benefits
generally associated with coconut water. Furthermore, in marketing their tuna products as
having Omega-3, Century Pacific has established an image of healthy eating, bucking the
 FIG 18. R&D PROCESS FLOW conventional wisdom that canned goods are unhealthy.

Strong Local Knowledge and R&D to Maintain Market Position

Conceptualization
CNPF has proven itself capable of both following successful trends as well as innovating new
products, inspired by its 38 years of experience in the Philippine market. CNPF adopts a
Formulate & Establish Process
standardized R&D process flow for their products (See Figure 18) and as a proof of their
capabilities in research, the company has launched products such as Angel Kremdensada,
Batch Trial Run Century Bangus Tocino, ready-to-eat meals, and many others. CNPF is also capable of adapting
products of its competition; after the success of rival San Marinos corned tuna, the company
subsequently launched its own version to protect its market share. Overall, these prove the
company is well-equipped to handle the dynamic landscape of the consumer goods market.
No
CONSUMER
Extensive Distribution Network to Facilitate Growth
TEST CNPF has 9 major distribution centers and 652,000 points of sale (24% CAGR from 2008-2014)
Yes in key locations across the Philippines. Its multi-channel distribution network includes sari-sari
stores, convenience stores, and supermarkets. The company is expected to benefit from the
Commercial Production
strong growth of supermarkets where 60% of sales are made, as well as the rise of convenience
stores due to rapid urbanization increasing the demand for ready-to-eat consumer food, such as
Send to Market canned tuna and powdered milk. Close attention to retail trends puts CNPF at the forefront of
opportunities to maximize its presence in the market.
Source: CNPF Investor's Presentation
Strategic Positioning of Production Facilities to Optimize Costs
FIG 19. CNPF OPERATING CNPF has invested heavily in processing plants, facilities, and warehouses in strategic locations
MARGINS throughout the Philippines. This results in high food quality, faster and more efficient distribution,
32% and lower costs. Refer to Appendix A6 for a summary of these strategic locations.
31%
30%
29%
INVESTMENT SUMMARY
We issue a buy recommendation on CNPF with a year-end 2017 target price of Php 21.22/sh,
28%
presenting an upside of 24.80% from the December 14, 2016 closing price of Php 17.00/sh. The
27%
fair value of CNPF was calculated using a Discounted Free Cash Flow to Firm Analysis. We
26%
expect the companys Earnings Per Share (EPS) to grow at a CAGR of 20.37% and reach Php
25%
24%
1.39/sh in 2020 from its current value of Php 0.55/sh. This strong buy recommendation is driven
23%
by CNPFs undisputed market leadership and superior brand equity, favorable macroeconomic
2014 2015 2016E 2017F 2018F 2019F 2020F and industry trends that CNPF are poised to capitalize on, and the companys solid financials
that will serve as a strong yet flexible foundation for future growth. Furthermore, while a number
Source: Team Estimates of risks exist that pose a threat to CNPF, the company is well prepared with various mitigating
efforts to minimize the likelihood and impact of these risks.
FIG 20. CNPF FORECASTED NET
INCOME IN MILLIONS PHP AND DOMINANT MARKET POSITION WITH MULTIPLE PRODUCT OFFERINGS
GROWTH RATES CNPF is the largest manufacturer of canned food in the Philippines, with a dominant market
6,000 30.00% share of 35%. We expect the company to sustain this market leadership with its strong brand
5,000 25.00%
equity and scale advantage. The companys multi-brand portfolios in key consumer segments
allow for extensive market penetration across all income levels. Furthermore, the companys
4,000 20.00% expansive distribution network with production facilities strategically located at optimal points in
3,000 15.00% the country allow CNPF to access their wide consumer base efficiently with minimal costs.
Economies of scale complement CNPFs revenues growing at a CAGR of 13% with operating
2,000 10.00%
margins expected to improve - reaching 14.45% in 2022 (See Figure 19). Consistent product
1,000 5.00% innovations and financial flexibility further strengthen our confidence that CNPF will outperform
0 0.00% its peers and the market.
2016E 2017F 2018F 2019F 2020F

Source: Team Estimates MACROECONOMIC AND INDUSTRY TRENDS OPEN OPPORTUNITIES

CNPF is poised to enjoy significant earnings growth of roughly 20.46% CAGR up to 2020 (See
FIG 21. NET PHILIPPINE VIRGIN Figure 20) spurred by the global demand for coconut products in addition to domestic
COCONUT OIL EXPORTS IN MT consumption of its current portfolio. The Philippines' GDP growth remains the fastest in Asia,
7,000
with a 7% annualized growth rate for the first half of 2016. Household consumption is growing at
a CAGR of 5.7% and disposable income, driven by a rise in overseas remittances (10% of
6,000
Philippine GDP) and the Philippine BPO sector, is also expected to grow at a CAGR of 6.8%.
5,000 104% CAGR
4,000 Continued urbanization will result in consumers seeking more convenient sources of high-value
3,000
nutrition and CNPF's product line is best suited to capitalize on this trend. The company will also
benefit the most from the organic growth in the consumer industry owing to its market
2,000
leadership.
1,000

0 Finally, the company's recent venture into the coconut and beverage industry is expected to be
fueled by a rapidly rising demand for coconut products both locally and globally. With the
Philippines being one of the largest suppliers of coconuts in the world as evidenced by net
Source: CNPF Investor's Presentation coconut oil exports reaching up to 800,000 metric tons in 2014 and net virgin coconut oil exports
growing at a CAGR of 104% reaching 6000 metric tons in 2012 (See Figure 21), CNPF will be
ready to capitalize on this growing demand.
 FIG 22. CNPF GROWTH RATES VS CORE SEGMENTS WILL SERVE AS FOUNDATION FOR GROWTH
INDUSTRY GROWTH RATES (2015) The growth rates of CNPF's core segments are significantly higher than the growth rates of the
25% industries each segment operates in. The company's core segments operate in the canned
seafood, canned meat, and dairy industries. These industries have historically grown at CAGRs
20% of 6.8%, 7.3% and 4.8% respectively. CNPF's growth rates however in 2015 were at 15.55%,
21.79% and 21.17% respectively (See Figure 22). Consolidated revenues in the third quarter of
15%
2016 grew by 22% from last years' Q3 revenues and are expected to reach Php 27.25 billion by
10%
the end of the year. Core revenues composed 76% of CNPF's revenues in 2015 but are
expected to take up 82% by 2020 due to rapid growth in these segments.
5%
CPAVI: A TESTAMENT TO THE SUCCESS OF CNPFs GROWTH STRATEGY
0% The company's recent venture into the coconut industry via their acquisition of coconut
Marine Meat Dairy
manufacturing and distributing company CPAVI is expected to boost the growth of CNPF
Industry CNPF significantly. We expect CPAVI to contribute up to 5% to CNPF's revenues and up to 8% to
earnings due to the superior margins of the coconut product line (See Figure 23). The subsidiary
Source: CNPF Investor's Presentation is expected to contribute up to Php 700 million in earnings in 2016 and grow at a CAGR of 25%
to reach Php 1.7 billion by 2020. With CNPF's management expressing the intent to continue
FIG 23. CPAVI FORECASTED their aggressive pursuit of profitable M&As, CPAVI will serve as a testament to the viability of
EARNINGS CONTRIBUTION their strategy.
6,000

5,000 HEALTHY CASH BALANCE TO FUND AGGRESSIVE STRATEGIES

The company's cash balance is expected to remain healthy in the forecast period, giving it the
4,000
financial flexibility to pursue its aggressive strategy. While the company's cash balance declined
3,000 by almost 40% in 2015, this is primarily due to acquisitions and expansions of plant capacities.
2,000 We expect cash to rapidly rise in coming years however, and reach up to Php 11.5 billion by
1,000
2020 driven by rapid growth in revenues and a widening net income margin from cost reduction
efforts (See Figure 24). We believe future cash flows will be more than sufficient to
0
2015 2016E 2017F 2018F 2019F 2020F
simultaneously fund company expansions, pursue aggressive ventures, and return shareholder
value via dividend payouts.
Core CPAVI
VALUATION METHODS
Source: Team Estimates We utilized a Discounted Free Cash Flow to Firm (DCF) analysis to arrive at our year end-2017
target price of Php 21.22/sh, which presents an upside of 24.80% from the closing price of Php
FIG 24. FORECASTED CASH 17.00/sh on December 14, 2016. Because CNPF operates both independently and through
BALANCE AND NET INCOME multiple subsidiaries that handle their various product lines, the group forecasted each
MARGINS subsidiarys performance independently using trends that we expect will drive the growth of the
14,000 12.00% respective industries. The consolidated free cash flows of CNPF were discounted using a WACC
of 8.95%, which was calculated based on a targeted capital structure of 13% debt and 87%
12,000
equity (See Figure 25). Lastly, a terminal growth rate of 4.5%, based on the growth rate
11.00%
10,000 Philippine household consumption is expected to stabilize at, was used.
8,000
10.00% POSSIBLE INVESTMENT RISKS
6,000
CNPF, like any other company, is exposed to a multitude of risks. Market risks in the form of
4,000
9.00%
volatile commodity prices and foreign exchange rates could potentially drive up both the
2,000
companys cost of goods sold and operational expenses. Aside from this, there is also the
possible scenario of new competition entering the market, especially with the recent ASEAN
0 8.00% integration. Operational risks include setbacks arising from the environmental issues associated
with fishing tuna and sardines, as well as possible execution difficulties with the companys
recent venture into the coconut and beverage industries. A detailed discussion of these key risks
Source: Team Estimates and the various means CNPF is expected to mitigate them is presented in the Investment Risks
section. This is followed by a Sensitivity and Scenario Analysis on these risks.
FIG 25. WACC COMPUTATION
Risk Free Rate 4.50% VALUATION
Market Premium 6.00% DISCOUNTED FREE CASH FLOW TO FIRM VALUATION
We used a Discounted Free Cash Flow to Firm (DCF) analysis to arrive at our year end-2017
Beta 0.95 target price of Php 21.22/sh, which presents an upside of 24.80%. CNPF operates both
Cost of Equity 9.98% independently and through subsidiaries SMDC, GTC and CPAVI in five business segments
(canned seafood, canned meat, dairy and mixes, tuna export, and coconut products). The
After Tax Cost of Debt 2.30% revenues were independently forecasted for each segment using growth rates of key drivers. To
Weight of Equity 87% provide further granularity into our DCF valuation method, see Appendix D4.
Weight of Debt 13%
CORE SEGMENTS: MARINE, MEAT & DAIRY
WACC 8.95% The sales of each of CNPFs core segments were forecasted individually using two components
Source: Team Computation - (1) the growth rates of the respective industries each core segment operates in; and (2) a
premium that indicates how much CNPF is expected to outperform each industry. The core
segments of CNPF operate in the canned seafood, canned meat, and dairy industries. The
canned meat operations are handled by their subsidiary The Pacific Meat Company Inc. (PMCI),
dairy operations are handled by their subsidiary Snow Mountain Dairy Corporation (SMDC) while
 canned tuna and canned sardine operations are handled by their two subsidiaries Century
FIG 26. GROWTH RATES PER Canning Corporation (CCC) and Columbus Seafood Corporation (CSC).
CORE SEGMENT
The canned seafood, canned meat and dairy industries in the Philippines have historically been
25.00%
growing at CAGRs of 6.8%, 7.3% and 4.8% respectively. CNPF however has outperformed
20.00% these growth rates by significant amounts. A premium was therefore calculated and incorporated
into the industry growth rates to arrive at final growth rates of 13.41%, 20.47%, and 21.17% for
15.00% canned seafood, canned meat and dairy respectively in 2016 (See Figure 26). These growth
rates were then diminished at a marginal rate of decline using individual logarithmic equations
10.00%
(See Appendix D5). Because of CNPFs position at the top of the market, their wide scale
5.00% distribution network, and their superior brand equity, we expect that it will take at least 15 years
before these growth rates stabilize with the industry and as such took this into account in the
0.00% equations. A summary of the forecasted growth rates can be found in Appendix D5.
2016E 2017F 2018F 2019F 2020F
Marine Meat Dairy
CNPFs core segments are heavily influenced by the prices of the raw materials needed. To
account for fluctuations possible in these commodities, we forecasted key expense line accounts
Source: Team Computation based on the forecasted movement of the market. These adjustments led to an estimated Gross
Profit Margin of 27.14% in 2016. This margin is expected to improve to 31.08% in 2020 due to
FIG 27. COCONUT WATER MARKET CNPFs strong cost reduction initiatives and their ability to hedge against commodity price
IN THE US - MILLIONS USD spikes.
700
EXPORT SEGMENT: GENERAL TUNA CORPORATION (GTC)
600 When CNPF was founded more than 30 years in the past, their initial operations only included
500 exporting locally sourced tuna to markets around the world. Their subsidiary General Tuna
400 Corporation (GTC) has been operating therefore for as long as CNPF itself. While exports still
account for roughly a fifth of CNPFs net revenues, the growth of the companys export arm in
300
2015 was only at 1.86%. This is understandable as CNPF has shifted its focus to the local
200 markets. We therefore took a conservative approach and kept the revenue growth rate of GTC
100 steady at 1.86%. A significantly higher growth rate is unlikely due to the shift in focus towards
0
CNPFs other core segments and their recent acquisition CPAVI.

Similar to how commodity price hikes could severely impact the margins of CNPFs core
segments, rising freight prices could also impact the export arm of CNPF as a considerable
Source: Trading Economics portion of its operating expenses comprise of the fees paid to ship the tuna abroad. We
individually forecasted this line item as well based on the expected movement of freight charges
FIG 28. CAPEX SCHEDULE IN in the Philippines, but also accounting for a possible drop in prices due to the recently amended
MILLIONS PHP Cabotage Law which is expected to lift several regulations on vessels entering and exiting
1,600 Philippine shores.
1,400
1,200
GROWTH SEGMENT: CENTURY PACIFIC AGRICULTURAL VENTURES (CPAVI)
Aside from the companys core branded businesses, fast earnings growth is expected from the
1,000
CNPFs 2015 acquisition: CPAVI. An integrated coconut manufacturer with established business
800
both locally and globally, CPAVIs revenues are projected to grow at a 25% CAGR to PHP 1.7
600
billion in 2020. Their strategy of exporting CPAVI products takes advantage of the growth of the
400 US and EU coconut water markets which are growing at CAGRs of 26% and 23% respectively
200 from 2015-2019 (See Figure 27). As an added benefit, the diversification of products this entails
0 reduces susceptibility to risk from a single market.
2016E 2017F 2018F 2019F 2020F

Growth Maintenance
CAPITAL EXPENDITURES (CAPEX)
The expected annual CAPEX for the forecast horizon of CNPF comprise of maintenance CAPEX
Source: Team Estimates and growth CAPEX. Maintenance CAPEX is equal to the previous years depreciation expense
based on gross PPE. This is under the assumption that CNPF reinvests back its annual
FIG 29. HOUSEHOLD depreciation expense as maintenance CAPEX. Company management has allocated Php 1.1
CONSUMPTION RATES IN THE billion as growth CAPEX for 2016 and they expect this to cover plant and capacity expansions
PHILIPPINES for three years. As such, we allocated an additional Php 1.1 billion as growth CAPEX for 2019
6.20% (See Figure 28). The complete CAPEX schedule can be found in Appendix D8.
6.00%

5.80%
WEIGHTED AVERAGE COST OF CAPITAL (WACC)
Using the Philippine Stock Exchange Index (PSEI) as the benchmark index, we calculated
5.60%
CNPFs beta to be 0.95 (See Appendix D6). With a market premium of 6% and a risk-free rate of
5.40% 4.5%, we obtained a cost of equity of 9.98% using the Capital Asset Pricing Model. The
5.20% companys cost of debt fluctuates based on the countrys interest rates as we expect its short-
5.00%
term debt-requirements to be rolled over to maintain its net debt to equity ratio. Given the yield
curve of interest rates, we expect a cost of debt of 3.29%. The target capital structure of the
4.80%
2016F 2017F 2018F 2019F 2020F
company is deduced to be 13% debt and 87% equity, to maintain a healthy net debt to equity
ratio. The team thus calculated the WACC used in the DCF analysis to be 8.95%.
Source: Bank of the Philippine Islands
TERMINAL GROWTH RATE
The terminal growth rate used for the DCF analysis is 4.5% - based on current household
consumption in the Philippines, which we expect to stabilize with a growth rate of 4.5% (See
 FIG 30. PHILIPPINE GDP- Figure 29). This growth rate is within the range of consensus terminal growth rate for the
CONSUMER EXPENDITURE Philippine consumer industry of around 4% to 5%.
RELATIONSHIP
RELATIVE VALUATION
3500 74.50% The team used a Price/Earnings to Growth (PEG) Ratio valuation method as a supplementary
3000 74.00% analysis to our DCF model. We utilized both revenue and net income growth rates to compute
73.50% for the median PEG Ratio of both local and regional peer groups and computed for the weighted
2500
73.00% average Price-to-Earnings Ratio applicable to CNPF (See Figure 31). We multiplied this to our
2000 72.50% forecasted earnings per share (EPS) in 2017 of Php 0.81/sh to arrive at our year-end 2017
1500 72.00% target price for CNPF of Php 22.32/sh. This presents a potential upside of 31.29% from the
1000
71.50% current price of Php 17.00/sh. This is close to the target price of Php 21.22/sh that we derived
71.00% from our DCF analysis and further supports the argument that the stock is undervalued. The
500 70.50% relative valuation therefore solidifies our BUY recommendation. A more detailed discussion on
0 70.00% the relative valuation computation is presented in Appendix D9.
2010 2011 2012 2013 2014 2015

GDP per Capita (USD) FINANCIAL ANALYSIS

Consumer Expenditure % of GDP HEALTHY GROWTH OF CORE BUSINESSES
Source: Euromonitor, Philippine Statistics CNPF posted revenues of Php 23.3 billion in 2015, a 14.12% increase from revenues in 2014.
Authority and World Bank Although the revenues generated by the companys export arm GTC only increased by 1.86%,
this was offset by superior growth in core segments marine, meat, and dairy with the revenues of
FIG 31. RELATIVE VALUATION these segments growing by 15%, 22%, and 21% respectively in 2015. Revenues grew even
SUMMARY faster this year with 2016 Q3 revenues being 22% greater than 2015 Q3 revenues. With GDP
PEG/Peer Local Regional per capita rising and key industry drivers expected to fuel further growth, we expect CNPFs
Group Peers Peers revenues to grow at a CAGR of 13.05% in the next five years, reaching Php 43.1 billion in 2020
Revenue (See Figure 32).
102.9 194.55
Growth
Earnings Because of the much faster growth in the companys marine, meat and dairy segments as
187 184.95 compared to the companys export arm, we expect CNPFs core businesses to comprise 82% of
Growth
Weighted CNPF revenues in 2020, as opposed to the current 76%. The export business will remain important to
28.25x CNPF however and management intends to remain open to the possibility of distributing their
P/E
local products abroad in addition to the raw tuna they already export internationally.
2017F EPS Php 0.81/sh
Target Price Php 22.32/sh HIGH PROFITABILITY ACCOMPANYING SOLID GROWTH
Potential Upside 31.29% Accompanying CNPFs solid revenue growth is high profitability across the board. The
Source: Team Computation companys Return on Assets (ROA) and Return on Equity (ROE) in 2016 is expected to be
10.97% and 17.25% respectively. These values are superior to both local and regional peers
FIG 32. REVENUES IN MILLIONS with the local median ROA and ROE being only 9.70% and 16.85% respectively, while the
PHP regional median ROA and ROE being only 3.64% and 7.32% respectively (See Figures 33 and
34). This high profitability is expected to further improve in coming years driven by an expected
50,000
improvement in the companys margins. We forecast Return on Assets to reach 13.87% and
40,000 Return on Equity to reach 19.56% in 2020.

30,000
ATTRACTIVE CASH BALANCE AND FREE CASH FLOW TREND
20,000 Healthy business growth and superior cost management sustains the companys attractive cash
and free cash flow balances. The companys estimated cash balance by the end of 2016 is Php
10,000 2.94 billion and is forecasted to grow to be Php 11.51 billion by the end of 2020. The attractive
0
cash balance gives the company more financial flexibility and liquidity, and may serve as a war
chest for future acquisitions and ventures. The companys Free Cash Flow to Firm is forecasted
to be Php 2.7B in 2017 and will grow at a CAGR of 15.97% throughout the forecasted period
Marine Meat Dairy Export Coconut (see Figure 35) which proves attractive to the most fundamental of all investors.

Source: Team Estimates EFFICIENT MANAGEMENT LEADS TO SUPERIOR MARGINS

CNPFs superior raw material sourcing and management efficiency allow the company to
FIG 33. CNPF RETURN ON EQUITY maintain cost advantages over its competition. The companys 2015 gross margin was 26.57%,
RELATIVE TO PEER MEDIAN presenting an improvement over the margins in 2014. This is well above the local industry
25.00% median of 20.05%. Furthermore, increased vertical integration and strategic placement of
facilities allow the company to reduce its operating expenses. As a result, the companys net
20.00% income margin is projected to be 11.39% in 2020, which is superior to both the local industry
median of 8.25% as well as the regional industry median of only 3.16% (See Figure 36). We
15.00%
expect CNPFs margins to continue improving with gross margins reaching up to 31%, EBITDA
10.00% margins reaching 17% and Net Income Margins reaching 11% in 2020.

5.00% UNDERLEVERAGED POSITION OPENS AVENUES FOR NEW VENTURES

CNPFs underleveraged position allows the company to sustain its growth strategy of actively
0.00%
2015 2016E 2017F 2018F 2019F 2020F
pursuing new ventures without the need for raising new equity. The company currently has a
Times Interest Earned (TIE) Ratio of 47.72 in 2016, but this is expected to improve to 93.42 by
Local Median
year end 2020. An improving TIE Ratio would allow CNPF to raise new debt at the lowest
Regional Median
possible interest rates. The companys current Debt-to-Equity Ratio of 17.34% is significantly
Source: Bloomberg and Team Estimates lower than the local and regional peer median of 32.75% and 56.83% respectively (See Figure
 37). Moreover, the companys Net Debt-to-Equity Ratio is also continuously improving, allowing
FIG 34. CNPF RETURN ON ASSETS further financial flexibility. Net Debt-to-Equity is estimated to be -4.81% in 2016 and is forecasted
RELATIVE TO PEER MEDIAN to improve to -36.69% by 2020. This is a testament to the companys stringent debt
management and attractive cash balance.
14.00%

12.00%
INVESTMENT RISKS
10.00%
MARKET RISK | COMMODITY PRICES RISK (MR1)
8.00%
As a food manufacturer, CNPFs requires large quantities of raw materials such as tuna and
6.00% livestock. The prices of these raw materials heavily fluctuate depending on the state of the global
4.00% markets. Tuna prices in particular significantly increased in 2015 due to the low catch worldwide.
2.00% Skipjack tuna prices, which CNPF processes in their products, rose to as much as USD 1,450
0.00%
per ton from USD 900 per ton. Significant price spikes can decrease CNPFs margins and
2015 2016E 2017F 2018F 2019F 2020F reduce the companys profitability. However, CNPF has a wide network of suppliers who can
Local Median provide substitutes to their raw materials. In addition, CNPF can capitalize on an expected
Regional Median decrease in freight costs coming from the recently amended Cabotage Law lifting a number of
restrictions on foreign vessels entering the Philippines.
Source: Bloomberg and Team Estimates

MARKET RISK | POLITICAL RISK (MR2)

FIG 35. CNPF CASH AND FREE
Euler Hermes has recently assigned a country rating of B2 to the Philippines, which translates to
CASH FLOW FORECAST IN
moderate political risk. The political risk associated with the country involves inconsistencies
MILLIONS PHP
regarding the public statements of the new president-elect Rodrigo Duterte and whether his
14,000 radical approach in solving crime will prove effective. However, these are not expected to
12,000 hamper CNPFs operations. Moreover, the new administrations focus on improving
10,000
transportation and infrastructure, cracking down on corruption, lowering income taxes, and
urbanizing the provinces is expected to greatly benefit CNPF.
8,000

6,000 MARKET RISK | FOREIGN EXCHANGE RISK (MR3)

4,000 Foreign exports accounted for roughly 17% of CNPFs revenues in 2015 and is expected to
2,000
increase due to the recent acquisition of coconut product manufacturer CPAVI. Furthermore, a
considerable portion of CNPFs raw materials are imported from suppliers abroad. Due to this,
0
2016E 2017F 2018F 2019F 2020F
CNPF has begun engaging in foreign currency hedging activities to mitigate the risk of reduced
profitability that may result from fluctuations in foreign exchange rates.
Cash Free Cash Flow
Source: Team Estimates INDUSTRY RISK | ENTRY OF NEW COMPETITORS (IR1)
The new administrations promises of more inclusive growth and less red tape in business
FIG 36. CNPF NET INCOME MARGIN regulations pose the possibility of the entry of another major player in the canned food industry.
RELATIVE TO PEER MEDIAN CNPFs superior brand equity and long operational history of 38 years however give them a
competitive advantage in the market that will be difficult to challenge. San Marino for example, a
12.00% tuna brand offered by CDO Foodsphere Inc., attempted to topple Century Tuna as the leading
10.00% brand but failed to challenge CNPFs market share.
8.00%

6.00%
INDUSTRY RISK | EL NIO PHENOMENON (IR2)
The El Nio weather pattern the country regularly experiences may cut the countrys coconut
4.00%
output by up to 6.9%, implying a risk for CNPFs newly-acquired coconut venture CPAVI.
2.00%
However, despite lower national coconut output, management still expects the acquisition to be
0.00% 7-8% accretive to consolidated revenues, perhaps suggesting that CNPFs brand equity and
2015 2016E 2017F 2018F 2019F 2020F
wide export network are enough to mitigate the effects of the phenomenon.
Local Median
Regional Median OPERATIONAL RISK | ENVIRONMENTAL TUNA FISHING ISSUES (OR1)
Source: Bloomberg and Team Estimates Policies governing canneries operations have been tightened over recent years as a result of
increased environmental awareness. To mitigate against this, CNPF engages in sustainability
FIG 37. CNPF DEBT TO EQUITY practices such as the use of hand line fishing for tuna. Moreover, the company has maintained
RATIO RELATIVE TO relationships with multiple sustainability regulators and advocates (See Appendix A3) - a
COMPETITORS testament to their efforts to maintain the welfare of the environment. Just recently, CNPF was
80.00% ranked first among Philippine and Indonesian companies, the only company with a passing
70.00% grade, by Greenpeace in terms of compliance to environmental regulations governing tuna
60.00% canning.
50.00%
40.00%
OPERATIONAL RISK | EXECUTION RISK (OR2)
30.00%
CNPFs recent acquisition CPAVI is still in its early phases of operations and the success of the
venture into the coconut industry has yet to manifest itself. Because CPAVI is a novel business
20.00%
and was not within CNPFs previous product portfolio, the company might encounter difficulties
10.00%
launching the different products and making it profitable for its first years. However, given
0.00%
CNPF JFC EMP Sajo BerjayaSuntory
CNPFs strong research and development focus, and the companys efforts to secure the most
knowledgeable and skilled management team, we are confident that they will be able to mitigate
Local Median
any execution risks with CPAVI.
Regional Median
Source: Bloomberg and Team Estimates OPERATIONAL RISK | CORPORATE GOVERNANCE RISK (OR3)
As a previously-owned family business by the Po family, CNPF may encounter issues of conflict
 of interest as it attempts to diversify its product portfolio and expand its market reach.
FIG 38. RISK MATRIX However, the Po family maintains a good standing among investors in the Philippines.
Moreover, CNPFs Board of Directors consists of two Independent Directors who can balance
family interests when necessary.
IR2
SENSITIVITY ANALYSIS ON VALUATION ASSUMPTIONS
OR1
The team identified key parameters that play a considerable role in the valuation model. These
parameters were subjected to a sensitivity analysis in order to identify by how many basis points
IMPACT

OR2 IR1 MR1

each parameter would have to shift before a change in recommendation would be necessary.
The results of the analysis are summarized in the table below:
OR3 MR3

MR2 SENSITIVITY ANALYSIS ON VALUATION ASSUMPTIONS

The team identified key parameters that play a considerable role in the valuation model. These
LIKELIHOOD parameters were subjected to a sensitivity analysis in order to identify by how many basis points
Source: Team Analysis each parameter would have to shift before a change in recommendation would be necessary.
The results of the analysis are summarized in the table below:
FIG 39. CNPF RISK SUMMARY
Risk Mitigating Factors CHANGES IN PARAMETERS TO SHIFT RECOMMENDATION TO HOLD OR SELL
Multiple Suppliers, Base Change in Change in
Commodity Parameter Hold Sell
Hedging Instruments, Case Percentage Percentage
Price Hike
Cabotage Law
Weighted Average Cost of
New administration's 8.95% 9.50% 0.55% 9.93% 0.98%
Political plans are seen to Capital
Instability benefit CNPF despite Terminal Growth Rate 4.50% 3.88% (0.62%) 3.36% (1.14%)
the volatility
Foreign
Market Premium 6.00% 6.66% 0.66% 7.20% 1.20%
Exchange Hedging Instruments
Volatility SENSITIVITY ANALYSIS ON PRICE HIKES
Brand Equity and A large portion of CNPFs costs comprises of the prices of their raw materials and their freight
Entrance of
Expansive Distribution expenses. The group conducted an analysis on the different price hike scenarios for both
Competitors
variables and determined the effect each scenario would have on the final recommendation for
El Nino
N/A CNPF. It is important to note that the analysis below considers a yearly price hike and not a
Phenomenon
Sustainable Practices single price hike. The results emphasize that even in the extremely unlikely scenario that both
Environmental and relationships with commodity prices and freight expenses were to increase by 200 basis points year on year for
Issues Environmental five years, our recommendation would remain a solid BUY with a potential upside of 14.30%.
Regulators
Strong R&D Focus,
COMMODITY PRICES
Highly Skilled
FREIGHT COSTS

Management Team, 0 bp 50 bp 100 bp 150 bp 200 bp

Execution Risk
and Leverage on
CNPFs Strong Market 0 bp 24.80% 23.08% 21.34% 19.59% 17.82%
Presence 50 bp 23.95% 22.22% 20.48% 18.72% 16.95%
Strong relationships
with investors and two 100 bp 23.10% 21.37% 19.61% 17.85% 16.07%
Corporate
independent directors to
Governance
balance family interests
150 bp 22.25% 20.50% 18.75% 16.97% 15.18%
when necessary 200 bp 21.39% 19.64% 17.87% 16.09% 14.30%
Source: Team Analysis
SCENARIO ANALYSIS: CPAVI FAILED EXECUTION
FIG 40. TARGET PRICE WITHOUT
As mentioned above, one of the risks CNPF is exposed to is a failed execution on their recent
CPAVI REVENUES
acquisition CPAVI and their recent venture into the coconut and beverage industry in the
Base Target Price Php 21.22/sh
Philippines. Even though CPAVI can leverage on the success and brand equity of CNPF,
Target Price Without continue having access to its former managerial experience (given the close ties between CNPF
Php 20.55/sh
CPAVI and former CPAVI owner CPGI), and utilize its expansive distribution network to access a large
Potential Upside 20.85% consumer base, there are still uncertainties whether these will be enough to keep the venture
Recommendation BUY successful in the long run. However, even if the valuation model does not account for any
Source: Team Computation revenues generated by CPAVI and considers the extremely unlikely scenario where there are
zero returns for the acquisition, the target price will only decrease to 20.55, still presenting an
upside of 20.85% (See Figure 40) which solidifies our BUY recommendation.
ORDER OF APPENDIX
Glossary

Appendix A: Company Profile

Appendix A1: Company Subsidiaries
Appendix A2: Brand Award and Recognitions
Appendix A3: Sustainability Partners
Appendix A4: Brand Portfolio
Appendix A5: Business Model Canvas
Appendix A6: Distribution Network
Appendix A7: Ownership Structure
Appendix A8: Corporate Governance

Appendix B: Industry Profile

Appendix B1: Consumer Expenditure as % of GDP (Philippines)
Appendix B2: Disposable Income Growth in the Philippines
Appendix B3: Urban Consumer Expenditure Growth in the Philippines
Appendix B4: Rural Consumer Expenditure Growth in the Philippines
Appendix B5: Real GDP Growth in the Philippines
Appendix B6: Household Consumption Growth in the Philippines
Appendix B7: Exports Growth in the Philippines
Appendix B8: CPI Inflation
Appendix B9: United States Federal Reserve Interest Rate Forecast

Appendix C: Financials
Appendix C1: CNPF Historical Balance Sheet
Appendix C2: CNPF Historical Income Statement
Appendix C3: CNPF Historical Cash Flow Statement
Appendix C4: CNPF Current Trading Multiples

Appendix D: Valuation
Appendix D1: CNPF Forecasted Balance Sheet
Appendix D2: CNPF Forecasted Income Statement
Appendix D3: CNPF Forecasted Statement of Cash Flows
Appendix D4: Summary of Discounted Cash Flow Analysis
Appendix D5: Growth Rate Premium Computation
Appendix D6: Beta Computation
Appendix D7: WACC Computation
Appendix D8: Capital Expenditure (CAPEX) Schedule
Appendix D9: Relative Valuation

Appendix E: Ratio Analysis

Appendix E1: CNPF Key Ratios
Appendix E2: Local Peer Group Key Ratios
Appendix E3: Regional Peer Group Key Ratios
Glossary
CNPF (Century Pacific Food Inc)
Century Pacific Food Inc. is a leading branded food company engaged in the development, processing, marketing and distribution of
processed fish and meat, as well as processed dairy products in the Philippines. The company serves as the fruit of the corporate
restructuring done by the Century Group in 2013 to consolidate its processed meat, seafood, and dairy under one company.

CCC (Century Canning Corp.)

Century Canning Corporation, established on December 12, 1978, handles the Groups sales and distribution for canned and
processed tuna, sardines, and bamugs. The products are marketed under 555 for sardines, Century Tuna and 555 for tuna.

CPAVI (Century Pacific Agricultural Ventures, Inc.)

Century Pacific Agricultural Ventures, Inc. is the newest subsidiary of CNPF, based in General Santos City. It produces packaged
coconut water, copra, dessicated coconuts and organic Virgin Coconut oil for the domestic and global markets.

CSC (Columbus Seafood Corp.)

Columbus Seafood Corporation, incorporated on December 20, 1994, operates the manufacturing plant for sardines.

GTC (General Tuna Corp.)

General Tuna Corp., a subsidiary of CNPF, was instituted in 1997. It conducts the operations for tuna processing both for local and
export sales. It primarily produces export goods such as private label canned, pouched and frozen tuna products.

PMCI (Pacific Meat Company Inc.)

Pacific Meat Company Inc, which was incorporated in 1994, operates as a canned and processed meat manufacturer and handle the
555, Argentina, and Swift brands. After the restructuring, it has been reassigned to handle the processed meat operations of CNPF.

SMDC (Snow Mountain Dairy Corp.)

Snow Mountain Dairy Corp., instituted in 2001 and retained as subsidiary of CNPF, handles the companys business operations for its
dairy and sinigang mix segments. It specifically handles domestic brands such as Birch Tree, Angel, Kaffe de Oro, and Home Pride.

CAPEX: Capital Expenditure

Capital Expenditure (CAPEX) refers to funds used to acquire or upgrade fixed assets for the business. This outlay can be classified as
either growth or maintenance CAPEX. Growth CAPEX is used to increase the scope of the companys operations, while maintenance
CAPEX is used to sustain the current scope of the companys operations.

OPEX: Operating Expenses

Operating Expenses (OPEX) are expenses incurred during the normal operations of the company. Examples of which are employee
cost, outside services, rent & utilities, advertising & promotions, warranty cost, etc.

DCF: Discounted Free Cash Flow to Firm Method

Discounted Free Cash Flow to Firm Method (DCF) is a valuation method used to estimate the attractiveness of an investment
opportunity. Discounted cash flow analysis uses future free cash flow projections and discounts them to arrive at a present value, which
is used to evaluate the potential for investment.

EBITDA: Earnings before Interest, Tax, Depreciation, and Amortization

Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) is also called operational income. This indicates how much the
company is making from its main operations. It is computed as Revenue minus the sum of Cost of Goods Sold and Operating
Expenses.

ROE: Return on Equity

Return on Equity (ROE) is the amount of net income return as a percentage of shareholders equity. This measures profitability of a
company and is calculated by dividing Net Income by Shareholders Equity.

P/E Ratio: Price-to-Earnings Ratio

Price-to-Earnings (P/E) Ratio is the Price per Share divided by the Earnings Per Share (EPS).

PEG Ratio: Price-to-Earnings to Growth Ratio

Price-to-Earnings Growth (PEG) Ratio is a valuation measure that indicates the trade-off among the price of a stock, the earnings
generated per share (EPS), and the company's expected growth.
Appendix A1: Company Subsidiaries

Subsidiary
Columbus Seafood Corporation
Century Canning Corporation
Snow Mountain Dairy
Corporation
Pacific Meat Corporation
Incorporated
General Tuna Corporation
Century Pacific Agricultural
Ventures Inc.
CNPF Subsidiaries
Segment Stake Description
Columbus Seafood Corporation, incorporated on December 20, 1994,
Marine 100%
operates the manufacturing plant for sardines.
Century Canning Corporation, established on December 12, 1978, handles
the Groups sales and distribution for canned and processed tuna,
Marine 100%
sardines, and bamugs. The products are marketed under 555 for sardines,
Century Tuna and 555 for tuna.
Snow Mountain Dairy Corp., instituted in 2001 and retained as subsidiary
of CNPF, handles the companys business operations for its dairy and
Dairy 100%
sinigang mix segments. It specifically handles domestic brands such as
Birch Tree, Angel, Kaffe de Oro, and Home Pride.
Pacific Meat Company Inc, which was incorporated in 1994, operates as a
canned and processed meat manufacturer and handle the 555, Argentina,
Meat 100%
and Swift brands. After the restructuring, it has been reassigned to handle
the processed meat operations of CNPF.
General Tuna Corp., a subsidiary of CNPF, was instituted in 1997. It
conducts the operations for tuna processing both for local and export sales.
Export 100%
It primarily produces export goods such as private label canned, pouched
and frozen tuna products.
Century Pacific Agricultural Ventures, Inc. is the newest subsidiary of
CNPF, based in General Santos City. It produces packaged coconut water,
Coconut 100%
copra, dessicated coconuts and organic Virgin Coconut oil for the domestic
and global markets.

Appendix A2: Brand Award and Recognitions

Grantor Year/s Award Title

Agora Awards 2011 Century Canning Marketing Company of the Year

Readers Digest 2011 to 2013 Century Tuna Trusted Brand (Gold)

Readers Digest 2012 to 2013 Argentina Trusted Brand (Gold)

Agora Awards 2014 Gregory Banzon Awardee for Marketing Excellence

Asia Marketing Federation 2016 CNPF Asias Marketing Company of the Year
Source: Investor Presentation

Appendix A3: Sustainability Partners

Key Partners Description

Western and Central Pacific Fisheries The WCPFC seeks to address problems in the management of high
Commission seas fisheries resulting from unregulated fishing, over capitalization,
excessive fleet capacity, among others.

Bureau of Fisheries and aquatic Resources The BFAR is the Government Agency in the Philippines responsible
for the development, improvement, management and conversation of
the Philippines' fisheries and aquatic resources.

Earth Island Institute/Dolphin Safe Tuna The EII/DST has been a hub for grassroots campaigns dedicated to
conserving, preserving and restoring the ecosystems in the world.

World Wildlife Fund The WWF has been protecting the future of nature for 50 years now. It
is the world's leading conservation organization and works in 100
countries worldwide.

International Seafood Sustainability Foundation Comprised of leading scientists in the tuna industry and WWF.
Source: Company Website
Appendix A4: Product Portfolio

Company Segment Market Segment

Mass Market Middle Market Premium Market

Lucky 7, Fresca
Marine 555 Tuna and Sardines Blue Bay Tuna, Century Tuna, Century Quality
Tuna

Meat Lucky 7, Wow 555 Meats, Shanghai Argentina, Swift

Dairy Home Pride Angel Kaffe de Oro, Birch Tree

Appendix A5: Business Model Canvas

Customer Customer Value Propositions Key Activities Key Partners

Segments Relationships

Consumers in all Kain Po Feeding Provide affordable, Sales and distribution of CPGI (Century
socio-economic Program convenient, and canned and processed Pacific Group,
classes through Public relations accessible food at seafood (e.g., tuna, Inc.)
products across Promotions and different price levels sardines, bangus) Third Parties
different price advertisements Manufacture and sale of (local and
points Sales representatives processed meat international)
Food service Manufacture and export for raw
businesses of private label canned, materials
pouched, and frozen tuna
Production, packaging,
and selling of milk and
dairy products
Manufacture and
distribution of coconut
derived products

Channels Key Resources

Traditional trade (sari- Labor

sari stores) Capital
Modern trade Facilities
(convenience stores, Production and
grocery stores) manufacturing
Private label exports Canning
Business to business Regional storage

Revenue Streams Cost Structure

Product sales Food ingredients

Packaging materials
Capital expenditures
Marketing
Labor
Operation expenses

Source: Team analysis

Appendix A6: Distribution Network

Building Type Location Benefit

Sardine
Located at center of Philippine sardine industry; higher
Processing Zamboanga
quality and lower logistics costs
Facility
Meat Plant Laguna
Close to metropolitan areas; lower distribution costs
Milk Plant Taguig
General Produces 25-30% of tin can requirements, lowering
Tin Can Factory
Santos City variable costs
Cold Storage General
Lowers logistics costs
Facility Santos City
Source: Investor's Presentation

Year Number of Retail Outlets Serviced in the

Philippines

2008 70,000

2009 80,000

2010 126,000

2011 132,000

2012 204,000

2013 229,000

2014 270,00

2015 275,000

2016 281,000
Source: Investor's Presentation

Appendix A7: Ownership Structure

Percent of CNPF Owned Owner

73.7% Century Pacific Group, Inc.

10.4% Singapores Arran Investment Private Ltd (GIC private arm)

15.9% Public
Appendix A8: Corporate Governance

Credentials Position Director

Previously: Management consultant at McKinsey, Managing President and CEO Christopher Po

Director at Guggenheim Partners, and Corporate Planning
head at JG Summit
Summa cum laude from Wharton; MBA from Harvard
Business School

23 years of experience running various business units of the EVP and COO Teodoro Po
Century Group; Designed, built and managed several factories
of the group
Summa Cum Laude from Boston University; Owner/President
Management Program from Harvard Business School

19 years managing the corporate finance, treasury, accounting VP and CFO Oscar Pobre
and controllership at Century Group of Companies
17 years in finance functions at RFM, Cosmos, Dole, and
Meralco

22 years of experience in various general management, VP - GM Canned Fish, Gregory Banzon

marketing and sales roles including VP- Marketing of Johnson Tuna
& Johnson ASEAN, Country General Manager of Johnson &
Johnson Indonesia, and General Manager at RFM

29 years of experience in various technical, operations and VP - GM Canned Fish, Cesar Cruz, Jr.
business development roles at San Miguel and RFM Sardines
President of the Sardine Association of the Philippines

18 years of experience in various technical and manufacturing VP - GM Canned Meat Rex Agarrado
roles at San Miguel, RFM, Quaker and California
Manufacturing Corporation
Director of the Philippine Association of Meat Processors, Inc.,
for which he was previously President

22 years of experience in general and brand management VP - GM Dairy and Mixes Edwin Africa
roles in the Philippines, Taiwan, Thailand, Singapore, Malaysia
and China
Procter & Gamble from 1991 to 2001, Nippon Paint from 2001
to 2004, and Pepsico from 2005-2012

21 years of experience in various management, operations VP - GM Tuna Export Teddy Kho

and technical roles including President and General Manager
of San Miguel Foods Vietnam and Plant Manager of San
Miguel Hoecheong

8 years of experience in sales management roles at VP - Sales Ron Agoncillo

National Sales and Cadbury, Unilever Indonesia &
Philippines, 3M, and Shell
Source: Investor's Presentation
Appendix B1: Consumer Expenditure as % of GDP (Philippines)

Year 2016F 2017F 2018F 2019F 2020F

Value 73.50% 73.60% 75.00% 74.90% 74.90%

75.50%

75.00%

74.50%

74.00%

73.50%

73.00%

72.50%
2016F 2017F 2018F 2019F 2020F

Source: Euromonitor International

Appendix B2: Disposable Income Growth in the Philippines

Year 2016F 2017F 2018F 2019F 2020F

Value 5.40% 6.80% 6.70% 6.90% 6.90%
Source: Euromonitor International

Appendix B3: Urban Consumer Expenditure Growth in the Philippines

Year 2016F 2017F 2018F 2019F 2020F

Value 4.90% 6.40% 6.40% 6.70% 6.70%
Source: Euromonitor International

Appendix B4: Rural Consumer Expenditure Growth in the Philippines

Year 2016F 2017F 2018F 2019F 2020F

Value 6.10% 7.30% 7.10% 7.20% 7.20%
Source: Euromonitor International

Appendix B5: Real GDP Growth in the Philippines

Year 2016F 2017F 2018F 2019F 2020F

Value 6.70% 5.90% 6.80% 6.90% 7.00%
Source: Euromonitor International

Appendix B6: Household Consumption Growth in the Philippines

Year 2016F 2017F 2018F 2019F 2020F

Value 6.10% 5.70% 5.50% 5.50% 5.50%
Source: Bank of the Philippine Islands

Appendix B7: Exports Growth in the Philippines

Year 2016F 2017F 2018F 2019F 2020F

Value 6.40% 6.10% 18% 26.50% 23.10%
Source: Bank of the Philippine Islands
Appendix B8: CPI Inflation

Year 2016F 2017F 2018F 2019F 2020F

Value 2.30% 3.80% 4.10% 4.00% 4.00%
Source: Bank of the Philippine Islands

Appendix B9: United States Federal Reserve Interest Rate Forecast

Year 2016F 2017F 2018F 2019F 2020F

Value 0.75% 1.25% 2.00% 2.00% 2.25%
Source: Trading Economics
Appendix C1: CNPF Historical Balance Sheet

(in millions PHP) 2013 2014 2015

ASSETS
Cash & equivalents 438 1,264 722
Receivables - net 1,034 2,562 3,593
Due from related parties 218 213 41
Held-to-maturity investments - current 0 152 15
Inventories - net 1,602 5,194 5,926
Biological Assets 0 37 31
Prepayments and other current assets 120 119 219
Total Current Assets 3,412 9,541 10,547
Held-to-maturity investments - non current 0 28 13
Intangibles 40 40 2,955
PPE - net 1,036 1,421 3,134
Deferred tax assets 19 57 82
Retirement benefit asset 0 0 0
Other non-current assets 17 101 51
Total Non-current Assets 1,113 1,647 6,235
Total Assets 4,525 11,189 16,782
LIABILITIES
Loans payable 2,215 0 0
Notes payable 0 0 2,250
Trade and other payables 525 4,099 3,864
Income tax payable 1 128 147
Due to related parties 241 286 14
Total Current Liabilities 2,981 4,514 6,274
Long Term Loan 0 0 0
Retirement benefit obligation 0 94 157
Deferred tax liability 0 0 4
Total Non Current Liabilities 0 94 161
Total Liabilities 2,981 4,608 6,435
EQUITY
Share capital 1,500 2,231 2,361
Share premium 0 2,769 4,912
Share based compensation reserve 0 3 5
Currency translation adjustment 14 19 49
Other reserves 31 31 31
Retained Earnings (Deficit) (1) 1,526 2,990
Total Equity 1,544 6,580 10,347
Total Liabilities and Equity 4,525 11,189 16,782
Appendix C2: CNPF Historical Income Statement

(In millions PHP) 2014 2015

Revenues
CCC & CSC 7,723 8,924
PMCI 5,296 6,449
SMDC 2,036 2,467
GTC 5,384 5,485
CPAVI 0 0
Net Revenues
20,439 23,325
Cost of Goods (15,064) (17,128)
Gross Profit 5,375 6,196
Operating Expenses (3,272) (3,529)
Other Income 191 100
Other Expenses (40) (36)
EBIT 2,254 2,732
Finance and Interest Costs (15) (1)
EBT 2,238 2,730
Income Tax Expense (Benefit) (647) (797)
Net Profit/Loss 1,592 1,934

Appendix C3: CNPF Historical Statement of Cash Flows

(In millions PHP) 2013 2014 2015

Profit(Loss) before tax (5.66) 2,238.25 2,730.39
Adjustments for:
Depreciation & Amortization 8.22 152.75 152.38
Adjustment due to currency revaluation 0.00 0.00 0.00
Retirement benefit expense 2.09 18.08 57.82
Loss on inventory obsolescence 4.46 71.19 17.91
Loss on impairment of input VAT 0.00 0.00 13.02
Unrealized foreign exchange loss (gain) 0.00 (0.45) 11.11
Doubtful account expense 0.00 30.31 5.59
Provisions 0.00 0.00 7.85
Loss on decline in value of inventories 0.00 0.00 3.72
Loss (gain) on disposal of property, plant and equipment 1.82 (0.31) 3.55
Share based compensation expense 0.00 3.38 1.89
Finance costs 11.33 15.29 1.16
Loss on transfer of retirement benefit obligation 0.00 16.00 0.00
Interest income (0.50) (9.17) (7.63)
Operating cash flows before working capital changes 21.76 2,535.31 2,998.76
Decrease(Increase) in:
Trade and other receivables 3.93 (1,560.16) (754.69)
Due from related parties (213.68) (903.51) 171.29
Inventories 787.77 (3,663.38) (536.72)
Retirement assets 0.00 0.00 0.00
Biological assets 0.00 (37.48) 6.05
Prepayments & other current assets - net 5.31 24.57 1.08
Deferred tax asset 0.00 0.00 0.00
Other non-current assets 1.84 (78.78) 98.54
Increase(Decrease) in:
Trade and other payables (545.99) 4,008.74 (404.64)
Due to related parties 0.00 500.52 (1,378.30)
Income tax payables 0.00 0.00 0.00
Retirement payable 0.00 0.00 0.00
Deferred tax liability 0.00 0.00 0.00
Exchange differences on translating operating assets and liabilities (21.42) 1.55 (32.75)
Cash generated from operations 39.52 827.37 168.61
Contribution to the retirement fund (1.75) (30.55) (30.62)
Income tax paid (22.61) (534.70) (783.03)
Interest received 0.00 0.00 6.06
Net cash from (used in) operating activities 15.16 262.12 (638.99)

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisitions of subsidiaries (net of cash acquired) (735.05) 0.00 (3,396.82)
Acquisitions of property, plant and equipment (344.88) (539.74) (1,101.07)
Proceeds from sale of property, plant and equipment 79.70 4.89 364.48
Maturities (Acquisition) of HTM investments 0.00 (182.83) 151.41
Long Term Loans 0.00 0.00 0.00
Investment in securities 0.00 0.00 0.00
Interest income received 0.50 11.33 2.83
Net cash used in investing activities (999.73) (706.35) (3,979.18)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of share capital 1,500.00 3,500.36 2,272.31
Proceeds from notes payable 0.00 0.00 2,250.00
Proceeds (repayment) of interest bearing loans 0.00 0.00 0.00
Dividends paid 0.00 0.00 (446.20)
Net receipts from related parties 129.87 0.00 0.00
Net repayments of loans (196.00) (2,214.60) 0.00
Interest paid 0.00 0.00 0.00
Finance costs paid (11.33) (15.29) 0.00
Net cash from financing activities 1,422.53 1,270.47 4,076.11
Net Increase (Decrease) in Cash & Cash Equivalents 437.97 826.24 (542.06)
Cash & Cash Equivalents, Beginning 0.00 437.97 1,264.21
Cash & Cash Equivalents, End 437.97 1,264.21 722.15
Appendix C4: CNPF Current Trading Multiples (TTM)

CNPF Current Trading Multiples

P/E 22.87

P/B 5

EV/Sales 2.28

EV/EBITDA 15.76

P/CF 73.33
Source: Thomson Reuters, Team Computation
Appendix D1: CNPF Forecasted Balance Sheet

(in millions PHP) 2016E 2017F 2018F 2019F 2020F

ASSETS
Cash & equivalents 2,943 4,931 6,896 8,483 11,506
Receivables - net 3,806 4,283 4,819 5,397 6,015
Due from related parties 43 44 45 47 48
Held-to-maturity investments - current 15 15 15 15 15
Inventories - net 6,514 6,832 7,595 8,387 9,226
Biological Assets 32 33 33 34 35
Prepayments and other current
230 230 256 283 311
assets
Total Current Assets 13,581 16,367 19,659 22,645 27,155
Held-to-maturity investments - non
13 13 13 13 13
current
Intangibles 3,017 3,017 3,017 3,017 3,017
PPE - net 4,144 4,144 4,144 5,036 5,036
Deferred tax assets 82 82 82 82 82
Retirement benefit asset 0 0 0 0 0
Other non-current assets 56 57 57 58 58
Total Non-current Assets 7,312 7,312 7,313 8,206 8,207
Total Assets 20,893 23,679 26,972 30,851 35,362
LIABILITIES
Loans payable 0 0 0 0 0
Notes payable 654 654 654 654 654
Trade and other payables 4,940 5,470 6,081 6,714 7,386
Income tax payable 181 234 281 339 402
Due to related parties 14 14 14 14 14
Total Current Liabilities 5,789 6,372 7,029 7,721 8,456
Long Term Loan 1,650 1,650 1,650 1,650 1,650
Retirement benefit obligation 160 163 167 170 173
Deferred tax liability 4 4 4 4 4
Total Non Current Liabilities 1,814 1,817 1,820 1,824 1,827
Total Liabilities 7,603 8,189 8,849 9,545 10,283
EQUITY
Share capital 3,541 3,541 3,541 3,541 3,541
Share premium 4,912 4,912 4,912 4,912 4,912
Share based compensation reserve 5 5 5 5 5
Currency translation adjustment 49 49 49 49 49
Other reserves 31 31 31 31 31
Retained Earnings (Deficit) 4,753 6,953 9,585 12,768 16,541
Total Equity 13,290 15,490 18,123 21,306 25,078
Total Liabilities and Equity 20,893 23,679 26,972 30,851 35,362
Appendix D2: CNPF Forecasted Income Statement
(In millions PHP) 2016E 2017F 2018F 2019F 2020F

Revenues

CCC & CSC 10,121 11,351 12,630 13,967 15,366

PMCI 7,770 9,258 10,910 12,712 14,645
SMDC 2,952 3,489 4,072 4,692 5,336
GTC 5,587 5,691 5,796 5,904 6,014
CPAVI 697 871 1,088 1,360 1,701

Net Revenues 27,245 30,660 34,497 38,636 43,061

Cost of Goods (19,851) (21,978) (24,433) (26,979) (29,679)

Gross Profit 7,394 8,682 10,064 11,656 13,383

Operating Expenses (4,200) (4,636) (5,214) (5,782) (6,412)

Other Income 146 146 146 146 146

Other Expenses (35) (35) (34) (34) (34)

EBIT 3,306 4,157 4,961 5,985 7,082

Finance and Interest Costs (69) (71) (73) (74) (76)

EBT 3,236 4,086 4,889 5,911 7,007

Income Tax Expense (Benefit) (944) (1,226) (1,467) (1,773) (2,102)

Net Profit/Loss 2,292 2,860 3,422 4,138 4,905

Appendix D3: CNPF Forecasted Statement of Cash Flows

(in millions Php) 2016E 2017F 2018F 2019F 2020F
EBIT 3,306 4,157 4,961 5,985 7,082
Adjustments for:
Depreciation & Amortization 242 242 242 450 450
Finance costs -69 -71 -73 -74 -76
Operating cash flows before working capital changes 3,479 4,328 5,131 6,361 7,456
Decrease(Increase) in:
Trade and other receivables -213 -477 -536 -578 -618
Due from related parties -1 -1 -1 -1 -1
Inventories -588 -319 -763 -791 -839
Retirement assets 0 0 0 0 0
Biological assets -1 -1 -1 -1 -1
Prepayments & other current assets - net -11 -1 -26 -27 -28
Deferred tax asset 0 0 0 0 0
Other non-current assets -5 -1 -1 -1 -1
Increase(Decrease) in:
Trade and other payables 1,076 529 611 634 672
Due to related parties 0 0 0 0 0
Income tax payables 34 54 46 59 63
Retirement payable 3 3 3 3 3
Deferred tax liability 0 0 0 0 0
Exchange differences on translating operating assets and liabilities 0 0 0 0 0
Cash generated from operations 3,773 4,116 4,464 5,658 6,706
Contribution to the retirement fund 0 0 0 0 0
Income tax paid -944 -1,226 -1,467 -1,773 -2,102
Interest received 0 0 0 0 0
Net cash from (used in) operating activities 2,829 2,890 2,997 3,885 4,604

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisitions of subsidiaries (net of cash acquired) -62 0 0 0 0
Acquisitions of property, plant and equipment -1,252 -242 -242 -1,342 -450
Proceeds from sale of property, plant and equipment 0 0 0 0 0
Maturities (Acquisition) of HTM investments 0 0 0 0 0
Long Term Loans 1,650 0 0 0 0
Investment in securities 0 0 0 0 0
Interest income received 0 0 0 0 0
Net cash used in investing activities 336 -242 -242 -1,342 -450

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of share capital 1,180 0 0 0 0
Proceeds from notes payable -1,596 0 0 0 0
Proceeds (repayment) of interest bearing loans 0 0 0 0 0
Dividends paid -529 -660 -790 -955 -1,132
Net receipts from related parties 0 0 0 0 0
Net repayments of loans 0 0 0 0 0
Interest paid 0 0 0 0 0
Finance costs paid 0 0 0 0 0
Net cash from financing activities -945 -660 -790 -955 -1,132
Net Increase (Decrease) in Cash & Cash Equivalents 2,221 1,988 1,965 1,587 3,023
Cash & Cash Equivalents, Beginning 722 2,943 4,931 6,896 8,483
Cash & Cash Equivalents, End 2,943 4,931 6,896 8,483 11,506
Appendix D4: Summary of Discounted Cash Flow Analysis
CNPF DCF Valuation (in millions Php, except number of shares)
2016E 2017F 2018F 2019F 2020F
EBIT 3,306 4,157 4,961 5,985 7,082
Income Tax Rate 0 0 0 0 0
EBIAT 2,314 2,910 3,473 4,190 4,958
Depreciation & Amortization 242 242 242 450 450
Change in NOWC -295 -212 -667 -703 -750
CAPEX -1,252 -242 -242 -1,342 -450
Unlevered Free Cash Flows 1,009 2,697 2,806 2,594 4,208
WACC 8.95% 8.95% 8.95% 8.95% 8.95%
PV of Free Cash Flows 1,009 2,476 2,364 2,006 2,987
Total Value 10,841
Long Term Growth Rate 4.5%
Terminal Value 98,885
PV of Terminal Value 70,191
Enterprise Value 81,032
Net Debt 5,907
Equity Value 75,124
No. of Shares 3,541,028,895
Value per Share Php 21.22
Upside 24.80%

Appendix D5: Growth Rate Premium Computation

The canned seafood, canned meat and dairy industries in the Philippines have historically been growing at CAGRs of 6.80%, 7.30%
and 4.80% repsectively. CNPFs canned seafood, canned meat, and dairy segments however have outperformed these industries with
growth rates reaching 15.5%, 21.8% and 21.2% in 2015 respectively. To account for the expectation that CNPF will continue to
outperform the market, we assigned a premium of 8.75%, 13.17% and 14.88% respectively and added these values to the industry
growth rates to arrived at the growth rate for CNPF in 2015.

While CNPF is expected to maintain its market position and high growth, it is normal for growth to slowly decline and eventually
stabilize with the industry. We estimate that it should take at least 15 years before this stabilization will occur and factored this into the
logarithmic equations below. The equations were used to decline the growth of CNPF at a marginal rate of decline until 2020.

Equation 1 (For Canned Seafood growth rates)

-0.0309 * LN ( X - 2014 ) + 0.0875
where x = current year

Equation 2 (For Canned Meats growth rates)

-0.0679 * LN ( X - 2014 ) + 0.1317
where x = current year

Equation 3 (For Dairy growth rates)

-0.0603 * LN ( X - 2014 ) + 0.1488
where x = current year

These equations led to growth rates as summarized in the following table:

2016E 2017F 2018F 2019F 2020F
Canned Seafood 13.41% 12.16% 11.27% 10.58% 10.02%
Canned Meats 20.47% 19.16% 17.84% 16.52% 15.20%
Dairy 19.68% 18.19% 16.71% 15.22% 13.73%
Appendix D6: Beta Computation
The beta of 0.95 was calculated using the Philippine Stock Exchange Index (PSEi) as the base index. The month and closing price
values of both CNPF (adjusted for stock splits and stock dividends) and PSEi from May 2014 until November 2016 were used in the
Microsoft Excel formula:

Beta = COVAR(CNPF Monthly Percentage Changes; PSEi Monthly Percentage Changes) / VAR(PSEi Monthly Percentage Changes)

Appendix D7: WACC Computation

Parameter Value Source

Beta 0.95 Team Computation
Risk-free rate 4.50% PDS Group
Philippines country premium 6.00% Value Walk
Cost of Equity 9.98% Team Computation
10-year Philippine Treasury Bond Rate &
Cost of Debt 3.29%
Short Term Loan Rates
Effective Tax Rate 30% Bloomberg
After Tax Cost of Debt 2.30% Team Computation
Weight of Equity 87% Balance Sheet
Weight of Debt 13% Balance Sheet
WACC 8.95% Team Computation

Appendix D8: Capital Expenditure (CAPEX) Schedule

The management of CNPF has allocated Php 1.1 billion for 2016 to expand plant capacity and strengthen their already expansive
distribution network. It is estimated however that this budget allocation will only cover the growth capital expenditures needed up to
2018. As such, we incorporated another Php 1.1 billion in 2019 as growth CAPEX. Maintenance CAPEX is set to be equal to the
previous year's depreciation under the assumption that management will reinvest the depreciated amount to sustain their property,
plant and equipment.

CNPF CAPEX Schedule (in

2016E 2017F 2018F 2019F 2020F
millions Php)
CAPEX 1252.38 242.26 242.26 1342.26 449.83
Growth CAPEX 1100.00 0 0 1100.00 0
Maintenance CAPEX 152.38 242.26 242.26 242.26 449.83
Depreciation & Amortization 242.26 242.26 242.26 449.83 449.83

Appendix D9: Relative Valuation

The team has computed for CNPF's implied P/E based on the median PEG values in the tables below, dependent on
whether the peer group is local or regional and if growth rates are based on revenue or earnings.

Local Peer Group Relative Valuation

EMP JFC MRSGI PGOLD RRHI URC Median
P/E (ttm) 17.01 30.44 12.08 18.35 19.03 22.23 18.69
5 year revenue growth 13.60% 13.60% 110.70% 318.10% 15.30% 27.30% 21.30%
5 year earnings growth 8.60% 8.00% 11.20% 35.20% 10.80% 8.60% 9.70%
PEG (revenue) 125.07 223.82 10.91 5.77 124.38 81.43 102.90
PEG (earnings) 197.79 380.50 107.86 52.13 176.20 258.49 187.00
 Regional Peer Group Relative Valuation
Sajo Seafood Foshan Haitian Berjaya Food Kawan Food Suntory Median
P/E (ttm) 11.33 29.98 29.86 30.09 37.1 29.98
5 year revenue growth 5.15% 15.41% 50.44% 12.45% 31.51% 15.41%
5 year earnings growth -9.34% 16.21% 0.71% 11.94% -1.22% 0.71%
PEG (revenue) 220.00 194.55 59.20 241.69 117.74 194.55
PEG (earnings) -121.31 184.95 4205.63 252.01 -3040.98 184.95

CNPF:
P/E Ratio 26.27
Forecasted revenue CAGR 12.12%
Forecasted earnings CAGR 20.95%

Implied CNPF P/E:

Growth Basis\Peer Group Local Regional
Revenue growth 12.47 23.58
Earnings growth 39.18 38.75
Weighted average P/E applicable to CNPF: 28.25

Multiplying the 28.25 P/E Ratio to our forecasted 2017 EPS of Php 0.81/sh, we get a target price of Php 22.32/sh,
presenting a potential upside of 31.29%.
Appendix E1: CNPF Key Ratios
2014 2015 2016E 2017F 2018F 2019F 2020F
Liquidity Ratios
Current Ratio 2.11 1.68 2.35 2.57 2.80 2.93 3.21
Quick Ratio
Cash Ratio 28.01% 11.51% 50.83% 77.38% 98.10% 109.87% 136.07%
Activity Ratios
Receivables Turnover 11.37 7.58 7.37 7.58 7.58 7.56 7.55
Inventory Turnover 4.43 3.08 3.19 3.29 3.39 3.38 3.37
Inventory Days 125.9 126.3 119.8 113.5 113.5 113.5 113.5
Average Collection Period 32.11 48.15 49.56 48.15 48.15 48.25 48.36
Total Asset Turnover 2.60 1.67 1.45 1.38 1.36 1.34 1.30
Fixed Asset Turnover 14.81 5.92 4.02 4.19 4.72 4.98 5.25
Working Capital Turnover 7.49 5.02 4.52 3.45 3.05 2.80 2.56
Accounts Payable Days 96.48 93.81 95.70 95.91 95.57 95.38 95.13
Cash Conversion Cycle 61.49 80.63 73.62 65.70 66.04 66.34 66.68
Profitability Ratios
Gross Profit Margin (%) 26.30% 26.57% 27.14% 28.32% 29.17% 30.17% 31.08%
EBITDA Margin (%) 11.77% 12.36% 13.02% 14.35% 15.08% 16.66% 17.49%
EBIT Margin (%) 11.03% 11.71% 12.13% 13.56% 14.38% 15.49% 16.45%
Net Income Margin (%) 7.79% 8.29% 8.41% 9.33% 9.92% 10.71% 11.39%
Profit Before Tax (%) 10.95% 11.71% 11.88% 13.33% 14.17% 15.30% 16.27%
Return on Equity 24.19% 18.69% 17.25% 18.46% 18.88% 19.42% 19.56%
Return on Assets 14.22% 11.52% 10.97% 12.08% 12.69% 13.41% 13.87%
Solvency Ratios
Debt to Equity Ratio 0.00% 21.75% 17.34% 14.87% 12.71% 10.81% 9.19%
Times Interest Earned 147.42 2,358.85 47.72 58.62 68.39 80.69 93.42
Financial Leverage 1.70 1.62 1.57 1.53 1.49 1.45 1.41
Net Debt to Equity Ratio -19.21% 14.77% -4.81% -16.96% -25.34% -29.00% -36.69%
DuPont Analysis
Tax Burden 70% 70% 70% 70% 70% 70% 70%
Interest Coverage 99.32% 99.96% 97.90% 98.29% 98.54% 98.76% 98.93%
EBIT Margin (%) 11.03% 11.71% 12.13% 13.56% 14.38% 15.49% 16.45%
Asset Turnover 2.60 1.67 1.45 1.38 1.36 1.34 1.30
Leverage 1.70 1.62 1.57 1.53 1.49 1.45 1.41
Return on Equity 33.91% 22.17% 18.91% 19.62% 20.11% 20.72% 20.89%
Other Ratios
Earnings per Share 0.45 0.55 0.65 0.81 0.97 1.17 1.39
Book Value per Share 1.86 2.92 3.75 4.37 5.12 6.02 7.08
Appendix E2: Local Peer Group Key Ratios

Local Peer Group

EMP JFC MRSGI PGOLD RRHI URC Median
P/E Ratio 17.01 30.44 12.08 18.35 19.03 22.23 18.69
Price to Sales 3.06 2.1 3.81 2.73 0.98 0.99 2.415
Price to Book 1.97 5.56 1.53 2.27 1.95 4.27 2.12
5-Year Sales Growth 13.60% 13.60% 110.70% 318.10% 15.30% 27.30% 21.30%
5-Year EPS Growth 8.60% 8.00% 11.20% 35.20% 10.80% 8.60% 9.70%
PEG (Net Income) 197.79 380.50 107.86 52.13 176.20 258.49 187.00
PEG (Revenue) 125.07 223.82 10.91 5.77 124.38 81.43 102.90

Quick Ratio 1.47 1.03 1.97 1.09 0.71 0.69 1.06

Current Ratio 2.3 1.29 2.94 1.5 1.28 1.58 1.54
LT Debt to Equity 33.50% 28.70% 7.90% 10.50% 0% 6.20% 9.20%
Debt to Equity 41.90% 32.70% 32.80% 58.20% 6.50% 15.90% 32.75%

Gross Margin 32.30% 17.70% 18.40% 32.80% 21.70% 17.00% 20.05%

EBITDA Margin 20.50% 8.70% 16.30% 20.80% 7.00% 8.70% 12.50%
EBIT Margin 15.90% 5.30% 14.60% 19.40% 5.20% 7.40% 11.00%
EBT Margin 19.40% 6.40% 3.30% 7.30% 6.40% 14.40% 6.85%
Net Profit Margin 11.40% 4.90% 11.60% 15.90% 4.80% 5.10% 8.25%

Receivable Turnover 10.42 15.44 4.04 3.38 30.51 35.01 12.93

Inventory Turnover 4.39 14.48 4.03 1.87 7.27 6.68 5.535
Asset Turnover 1.16 1.7 1.09 0.44 1.48 1.73 1.32

ROA 12.50% 9.70% 16.20% 8.10% 7.10% 9.70% 9.70%

ROE 20.00% 19.70% 20.70% 14.00% 10.40% 13.50% 16.85%

Appendix E3: Regional Peer Group Key Ratios

Regional Peer Group

Sajo Seafood Foshan Haitian Berjaya Food Kawan Food Suntory Median
P/E Ratio 11.33 29.98 29.86 30.09 37.1 29.98
Price to Sales 0.38 6.71 0.98 5.44 1.05 1.05
Price to Book 0.65 8.86 1.41 3.48 2.89 2.89
5-Year Sales
5.15% 15.41% 50.44% 12.45% 31.51% 15.41%
Growth
5-Year EPS
-9.34% 16.21% 0.71% 11.94% -1.22% 0.71%
Growth
PEG (Net Income) -121.31 184.95 4205.63 252.01 -3040.98 184.95
PEG (Revenue) 220.00 194.55 59.20 241.69 117.74 194.55

Quick Ratio 0.61 2.94 0.45 3.01 0.72 0.72

Current Ratio 1.42 3.44 0.64 3.34 0.9 1.42
LT Debt to Equity 30.15% 0% 41.67% 7.28% 49.61% 30.15%
Debt to Equity 56.83% 0.30% 62.31% 8.53% 69.08% 56.83%

Gross Margin 9.77% 41.20% 43.12% 46.83% 54.92% 43.12%

EBITDA Margin 6.22% 25.93% 14.14% 27.14% 12.73% 14.14%
EBIT Margin 5.08% 26.91% 20.76% 22.39% 5.89% 20.76%
EBT Margin 4.96% 26.76% 5.70% 21.41% 5.51% 5.70%
Net Profit Margin 2.19% 22.51% 3.16% 18.08% 3.14% 3.16%
Receivable
11.75 106.61 13.81 3.79 7.82 11.75
Turnover
Inventory
4.9 9.39 - 7.84 7.28 7.56
Turnover
Asset Turnover 1.05 1.2 0.76 0.67 1.01 1.01

ROA 25.79% 1.98% 10.95% 3.19% 7.07% 7.07%

ROE 31.37% 4.79% 13.19% 7.32% 10.26% 10.26%