Universal Robina Corporation FRI 06 AUG 2021

2Q21 core earnings drop

amid higher input costs
2Q21 core earnings drop on flat sales and input cost pressures. URC’s headline income
in 2Q21 rose by 42.6% y/y to Php5.0Bil, mainly due to a one-time gain on the sale of idle
land worth Php3.3Bil and the impact of the CREATE law. Excluding one-off items, core
BUY
earnings declined by 7.8% y/y in 2Q21 amid flattish sales and higher input costs. This
brought 1H21 core earnings to Php7.6Bil, up 2.1% y/y. First half earnings were in line with TICKER: URC
COL estimates, accounting for 50.2% of our full-year forecast. URC’s sales in 2Q20 ended FAIR VALUE: 188.00
flat as domestic branded sales dropped 9.2% amid lower volumes, partially offset by the CURRENT PRICE:
continued recovery in its international business. Meanwhile, URC’s EBIT margin contracted 136.60
by 120 bps y/y to 11.5% as the company felt the impact of higher commodity prices like UPSIDE: 37.63
palm oil and wheat, among others. While URC’s first half results were in line with our
estimates, weak consumer sentiment and higher raw material costs present some downside
risk to our forecast.

Domestic branded business contracts amid lower volumes and higher input costs.
Sales of URC’s domestic branded consumer foods business (DBCF) declined by 9% y/y
to Php14.2Bil in 2Q21. Lower sales were partly due to the high base last year with URC
benefitting from the pantry stocking. However, URC also recorded a 5% drop in sales
quarter-on-quarter as consumer spending remained weak amidst the tough economic
backdrop and delayed economic recovery. Hence, key consumer goods extended double-
digit declines seen in 1Q21. For the first half, URC’s snacks, biscuits, noodles, and coffee
segments saw lower sales. This was partially offset by the recovery in sales of chocolates and
wafers and RTD tea, which were negatively affected by the pandemic last year. Lower sales
volume, unfavorable shift in sales mix coupled with higher input costs caused operating
profit of DBCF to decline by 14% y/y in 2Q21.

Maintain BUY rating. We will be reviewing our estimates considering higher commodity
prices and their impact on the company’s margins. However, we continue to like URC for
its market leadership position in several fast-moving consumer goods categories and
favorable long-term growth prospects. We currently have a BUY rating on URC with a FV
estimate of Php188/sh.

FORECAST SUMMARY

Year to December 31 (Php Mil) 2017 2018 2019 2020 2021E 2022E
Revenues 125,008 127,770 134,254 133,140 137,040 144,248
% change y/y 11.0 2.2 5.1 -0.8 2.9 5.3
EBIT 14,952 13,381 15,017 16,047 16,438 18,175
% change y/y -5.1 -10.5 12.2 6.9 2.4 10.6
Operating Margin (%) 12.0 10.5 11.2 12.1 12.0 12.6
Core Profits 13,747 11,800 13,540 14,661 15,202 16,988
% change y/y -8.8 -14.2 14.7 8.3 3.7 11.8
Core Profit Margin (%) 11.0 9.2 10.1 11.0 11.1 11.8
Net Income 10,888 9,204 9,772 11,607 11,814 13,229
% change y/y -15.4 -15.5 6.2 18.8 1.8 12.0
Net Profit Margin (%) 8.7 7.2 7.3 8.7 8.6 9.2
EPS 4.94 4.18 4.43 5.27 5.36 6.00
% change y/y -16.3 -15.5 6.2 18.8 1.8 12.0

RELATIVE VALUE
P/E(X) 27.7 32.8 30.9 26.0 25.6 22.8
P/BV(X) 3.7 3.6 3.4 3.2 3.0 2.9 Justin Richmond Cheng, CFA
ROE(%) 13.4 11.0 10.9 11.8 11.9 12.6 Senior Research Analyst
Dividend Yield (%) 2.4 2.3 2.4 2.1 2.4 2.5 justin.cheng@colfinancial.com
So urce: URC, COL estimates

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 EARNINGS ANALYSIS I URC: 2Q21 CORE EARNINGS DROP AMID HIGHER INPUT COSTS

FRI 06 AUG 2021

2Q21 core earnings drop on flat sales and input cost

pressures

URC’s headline income in 2Q21 rose by 42.6% y/y to Php5.0Bil, mainly due to a one-time
gain on the sale of idle land worth Php3.3Bil and the impact of the CREATE law. Excluding
one-off items, core earnings declined by 7.8% y/y in 2Q21 amid flattish sales and higher
input costs. This brought 1H21 core earnings to Php7.6Bil, up 2.1% y/y. First half earnings
were in line with COL estimates, accounting for 50.2% of our full-year forecast. URC’s
sales in 2Q20 ended flat as domestic branded sales dropped 9.2% amid lower volumes,
partially offset by the continued recovery in its international business. Meanwhile, URC’s
EBIT margin contracted by 120 bps y/y to 11.5% as the company felt the impact of higher
commodity prices like palm oil and wheat, among others. While URC’s first half results
were in line with our estimates, weak consumer sentiment and higher raw material costs
present some downside risk to our forecast.

Exhibit 1: Results Summary

% of Forecast
in PhpMil 2Q20 2Q21 % Change 1H20 1H21 % Change
COL Consensus
Revenue 33,950 33,917 -0.1% 67,407 68,529 1.7% 50.0 48.8
Operating Income 4,270 3,889 -8.9% 8,236 8,205 -0.4% 49.9 48.3
EBIT Margin (%) 12.6 11.5 - 12.2 12.0 -
Core Income 3,907 3,601 -7.8% 7,474 7,630 2.1% 50.2 -
Core Margin (%) 11.5 10.6 11.1 11.1
Net Income 3,542 5,050 42.6% 5,528 8,055 45.7% 68.2 64.8
Net Margin (%) 10.4 14.9 - 8.2 11.8 -

Source: URC, COL Estimates, Bloomberg

Domestic branded business contracts amid lower volumes

and higher input costs

Sales of URC’s domestic branded consumer foods business (DBCF) declined by 9% y/y
to Php14.2Bil in 2Q21. Lower sales were partly due to the high base last year with URC
benefitting from the pantry stocking. However, URC also recorded a 5% drop in sales
quarter-on-quarter as consumer spending remained weak amidst the tough economic
backdrop and delayed economic recovery. Hence, key consumer goods extended
double-digit declines seen in 1Q21. For the first half, URC’s snacks, biscuits, noodles,
and coffee segments saw lower sales. This was partially offset by the recovery in sales of
chocolates and wafers and RTD tea, which were negatively affected by the pandemic last
year. Lower sales volume, unfavorable shift in sales mix coupled with higher input costs
caused operating profit of DBCF to decline by 14% y/y in 2Q21.

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 EARNINGS ANALYSIS I URC: 2Q21 CORE EARNINGS DROP AMID HIGHER INPUT COSTS

FRI 06 AUG 2021

Exhibit 2: DBCF sales by product category

Category 1H21
Snacks -8%
Biscuits -15%
Candies +2%
Chocolates & wafers +11%
Coffee -13%
RTD tea 13%
Noodles -3%
Source: URC

Cost pressures drag international BCF results, offsetting

sales recovery

URC’s international branded consumer foods (BCF) business booked Php10.7Bil in sales for
2Q21, up 15.6% y/y. Growth was led by the continued recovery in Vietnam and Thailand,
both of which recorded double-digit sales growth as operations in these countries
continued to recover coming from the challenging performance in 2020. Meanwhile,
sales from the Oceania business inched up 1% y/y. Recall that the Oceania business
enjoyed brisk sales last year amid consumer pantry stocking. Despite the improvement
in sales, international EBIT margins were negatively affected by higher raw material and
freight costs. The company also resumed investments in advertising and promotions
this year. These factors caused international BCF EBIT to drop by 17% y/y. EBIT margin
also contracted by 320 bps y/y given the said cost pressures, which offset the impact of
austerity measures that helped boost margins last year.

URC fully divests Oceania business to focus more on

growth segments

URC announced that it sold its remaining 60% stake in the Australia and New Zealand
businesses (Unisnack ANZ) to its joint venture partner, Intersnack Group. Note that URC
initially acquired these two businesses for roughly ~US$900Mil back in 2014, and the said
businesses account for 15% of the company’s sales and profits. Management has not yet
disclosed the transaction price and will wait after the deal closes in three to four months.

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 EARNINGS ANALYSIS I URC: 2Q21 CORE EARNINGS DROP AMID HIGHER INPUT COSTS

FRI 06 AUG 2021

We view the full divestment of Unisnack ANZ as a neutral to positive development for
the company since it marks URC’s exit from a mature and competitive market. This will
also allow the company to focus more on emerging growth segments across developing
markets. Note that before the pandemic, sales in Australia grew by low-to-mid-single
digits, while the New Zealand business recorded flattish sales in 2019 after falling by
11% in 2018. The lackluster performance was mainly due to the highly competitive
environment and mature snacking industry in Oceania. Consumer preference has also
shifted towards healthier snacks, hurting the salty snacks and sweet biscuits segments of
Unisnack ANZ.

Investing for growth and optimizing shareholder value

With the proceeds from the Oceania divestment, URC has put together several initiatives
that will focus on growth and raising shareholder value. These include investments in
additional capacity, replacement of old fixed assets, and investments in new or adjacent
product categories. In addition, URC will continue to invest in additional supply network
improvements that will help optimize operations. Finally, management said they are also
looking at some property acquisitions using proceeds from the sale. Apart from these
initiatives, URC raised its dividends to shareholders by Php0.15/sh. Specifically, URC
declared Php1.80/sh in special dividends to be paid on September 15. Based on URC’s
total dividend of Php3.30/sh for 2021, the resulting dividend yield is 2.5%. Furthermore,
URC’s Board of Directors approved a share buyback program worth Php3.0Bil, further
enhancing shareholder value.

Maintain BUY rating

We will be reviewing our estimates considering higher commodity prices and their impact
on the company’s margins. However, we continue to like URC for its market leadership
position in several fast-moving consumer goods categories and favorable long-term
growth prospects. We currently have a BUY rating on URC with a FV estimate of Php188/
sh.

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 EARNINGS ANALYSIS I URC: 2Q21 CORE EARNINGS DROP AMID HIGHER INPUT COSTS

FRI 06 AUG 2021

Universal Robina INCOME STATEMENT (IN PHPMIL)

Corporation (URC) Revenues

2017
125,008
2018
127,770
2019
134,175
2020
132,572
2021E
137,040
2022E
144,248
% Growth 11.0% 2.2% 5.0% -1.2% 3.4% 5.3%
COMPANY BACKGROUND Gross Profit 39,314 37,437 40,313 41,097 42,482 44,717
Universal Robina Corp. (URC) is a leading % Growth 8.6% -4.8% 7.7% 1.9% 3.4% 5.3%
EBITDA 21,056 19,750 22,322 22,996 24,117 26,339
snacks and beverages company in the
% Growth -1.6% -6.2% 13.0% 3.0% 4.9% 9.2%
Philippines with key brands such as Jack EBIT 14,952 13,381 15,012 15,785 16,438 18,175
& Jill, Great Taste, and C2, among others. % Growth -5.1% -10.5% 12.2% 5.2% 4.1% 10.6%
Aside from this, URC operates its branded Interest Expense (1,427) (1,662) (1,670) (1,429) (1,429) (1,429)
Other Income/Expense 426 (174) (1,446) 61 193 242
food and beverage business in several
Pretax Income 13,950 11,545 11,896 14,417 15,202 16,988
markets across the Asia Pacific region. Tax Expense 2,797 2,082 1,782 2,850 3,003 3,352
Aside from this, URC also has operations Net Income 10,888 9,204 9,772 11,204 11,814 13,229
outside its branded food business through % Growth -15.4% -15.5% 6.2% 14.7% 5.4% 12.0%
EPS (Php) 4.9 4.2 4.4 5.1 5.4 6.0
its Commodity Food Group (flour & sugar)
% Growth -16.3% -15.5% 6.2% 14.7% 5.4% 12.0%
and Agro-Industrial Group (feeds & farms).
BALANCE SHEET (IN PHPMIL)
2017 2018 2019 2020 2021E 2022E
REVENUE BREAKDOWN
Cash & Equivalents 14,498 13,023 20,484 31,044 34,957 39,834
Trade Receivables 16,116 14,405 15,999 14,528 15,018 15,808
9.2% Inventories 18,465 22,086 24,375 18,796 19,430 20,452
Other Current Assets 4,623 4,896 3,987 3,854 3,854 3,854
10.6% PPE 48,254 51,950 54,626 55,635 56,452 57,231
Other Non-Current Assets 45,684 45,576 49,182 48,679 48,710 48,761
1.2%
45.2% Total Assets 147,641 151,936 168,653 172,537 178,421 185,940
Accounts Payable 21,571 22,767 21,298 23,808 24,611 25,905
ST Debts 2,009 2,461 3,848 3,848 3,848 3,848
Other Current Liabilities 4,419 6,740 9,787 5,945 6,111 6,377
LT Debts 33,226 31,457 30,386 30,386 30,386 30,386
33.8%
Other Non-Current Liabilities 4,729 4,517 8,149 8,149 8,149 8,149
Total Liabilities 65,955 67,942 73,468 72,137 73,105 74,666
Total Equity 81,686 83,993 95,185 100,400 105,316 111,273
Domestic Branded Consumer Total Liabilities & Equity 147,641 151,936 168,653 172,537 178,421 185,940
omestic Branded Consumer
Food Food International Branded Consumer Food
BVPS 37.1 38.1 43.2 45.6 47.8 50.5
ackaging Commodity Food Group
International Branded
Consumer Food CASHFLOW STATEMENT (IN PHPMIL)
gro-Industrial
45.1% Group
Packaging
2017 2018 2019 2020 2021E 2022E
Income (loss) before income tax 13,950 11,545 11,896 14,417 15,202 16,988
Commodity Food Group
Depreciation & Amortization 6,104 6,370 7,310 7,211 7,680 8,164
Other Non-Cash Exp (Gains) 920 1,528 2,142 1,168 1,036 987
Agro-Industrial Group
Net interest income (expense) (1,078) (1,168) (1,041) (1,168) (1,036) (987)
Increase (decrease) in Working Cap (2,185) (1,059) (2,391) 5,851 (155) (251)
Income tax expense (3,458) (2,559) (2,305) (2,850) (3,003) (3,352)
Operating Cash Flow 14,253 14,658 15,611 24,628 19,723 21,550
Capex (8,130) (8,642) (8,989) (8,219) (8,496) (8,943)
Other Investments (278) (38) 7,236 503 (31) (51)
Investing Cash Flow (8,408) (8,680) (1,753) (7,716) (8,528) (8,994)
Proceeds (Payment) Debts 434 (531) 1,329 - - -
Payment of Cash Dividends (7,171) (6,943) (7,237) (6,352) (7,283) (7,679)
Others 41 22 265 - - -
Financing Cash Flow (6,696) (7,452) (5,643) (6,352) (7,283) (7,679)
Change in Cash (851) (1,474) 8,214 10,560 3,912 4,877

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 EARNINGS ANALYSIS I URC: 2Q21 CORE EARNINGS DROP AMID HIGHER INPUT COSTS

FRI 06 AUG 2021

INVESTMENT THESIS KEY RATIOS

Proving its resilience amid this pandemic 2017 2018 2019 2020 2021E 2022E
GPM (%) 31.4% 29.3% 30.0% 31.0% 31.0% 31.0%
URC successfully navigated through the
EBITDA Margin (%) 16.8% 15.5% 16.6% 17.3% 17.6% 18.3%
challenging situation amid the COVID-19 OPM (%) 12.0% 10.5% 11.2% 11.9% 12.0% 12.6%
pandemic, allowing it to post a strong core NPM (%) 8.7% 7.2% 7.3% 8.5% 8.6% 9.2%
earnings growth for the first half of 2020. Times Interest Earned (X) 10.5 8.1 9.0 11.0 11.5 12.7
The company was able to shift its operations Current Ratio (X) 1.92 1.70 1.86 2.03 2.12 2.21
to meet the changing consumer demands Net D/E Ratio (X) 0.25 0.27 0.14 0.03 (0.01) (0.05)
Days Receivable 47.1 41.2 40.0 40.0 40.0 40.0
due to the lockdown and implemented
Days Inventory 78.7 89.2 75.0 75.0 75.0 75.0
austerity measures throughout the Days Payable 91.9 92.0 95.0 95.0 95.0 95.0
whole organization to buoy its operating Asset T/O (%) 84.7% 84.1% 79.6% 76.8% 76.8% 77.6%
performance. Going forward, higher ROAE (%) 13.4% 11.0% 10.9% 11.8% 11.9% 12.6%
margins will likely be sustained as URC will
continue with its cost control efforts. MAJOR CORPORATE DEVELOPMENTS (5-YEARS)

URC takes over Hunts-URC joint venture 10/01/2018

Downside risks remain
Downside risks remain for URC as the URC takes over Calbee-URC joint venture 09/27/2018
company prepares for potential second
wave challenges in other regions such as URC sells Hunt's License to Century Pacific Foods, Inc. 05/02/2017
Australia and Vietnam, which have recorded
a spike in cases this July. Furthermore, URC partners up with Vitasoy to form joint venture company Vitasoy-URC 02/16/2017
domestic consumption in 2Q was likely
URC announces its acquisition of Snack Brands Australia for AU$600 Mil (80% debt,
boosted by government subsidies and relief 08/16/2016
20% treasury shares)
operations. Hence, sales could weaken as
consumers tighten up on their spending URC completes acquisition of Griffin's New Zealand for NZ$742 Mil (100% debt) 09/14/2014
in the second half of the year. It is still
uncertain if the government will implement
its planned junk food tax which could hurt
domestic sales going forward.

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 EARNINGS ANALYSIS I URC: 2Q21 CORE EARNINGS DROP AMID HIGHER INPUT COSTS

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Valuation RELATIVE VALUATION

Methodology 2020E
P/E
2021E 2020E
EPS Growth
2021E
Calbee Inc.* 26.5 24.6 2.2% 7.7%
Nestle SA 25.5 23.6 20.4% 8.1%
Nissin Food Holdings Co Ltd* 30.8 28.2 36.4% 9.2%
PepsiCo Inc 25.7 23.2 0.1% 10.8%
Kellogg Co 17.6 17.4 -11.8% 1.1%
Mondelez International Inc. 21.4 19.8 1.7% 8.1%
Kraft Heinz Co 13.5 13.8 -18.8% -2.2%
Mayora Indah 22.9 21.6 15.8% 6.0%
Indofood Sukses Makmur 10.7 9.9 19.5% 8.1%
Want Want China Holdings 16.0 15.2 7.4% 5.5%
Average ex-URC 21.1 19.7 7.3% 6.2%
Median ex-URC 22.2 20.7 4.8% 7.9%
URC 25.6 24.3 14.7% 5.4%
* fiscal year

VALUATION ASSUMPTIONS
For DCF
Risk Premium 6.5%
Risk Free Rate 4.0%
Beta 1.00
Cost of Equity 10.5%
Cost of Debt 5.5%
Tax Rate 30.0%
WACC 8.0%
Terminal Growth Rate 4.0%

PV (2021E-2025E) 61,768
PV of Terminal Value 355,442
Enterprise value 417,209
Less: Net Debt 2,775
Equity Value 414,434
O/S 2,204
FV Estimate 188.00

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FRI 06 AUG 2021

I MP OR TA NT R AT ING DEFINITIONS
BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

I MP OR TA NT DISC L AIM ER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

C O L R E S EAR C H T EAM

APRIL LYNN TAN, CFA

CHIEF EQUITY STRATEGIST
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG, CFA
SENIOR RESEARCH ANALYST RESEARCH ANALYST SENIOR RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

SENIOR RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

C O L F INANC IAL G R O UP, I NC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 8