Puregold Price Club, Inc.

PGOLD
Monday, July 20, 2020 BUY TP: Php 52.13
Reference: Claire T. Alviar
Company Report

PHILSTOCKS ACTION PLAN COMPANY KEY STATS

Last Traded Price Php 48.65

BUY shares of PGOLD as we project its FY2020 earnings to spike by 11%, and its growth Entry Point </= Php 44.00
for the next two years to hit 8.5% and 8.1%, respectively. We expect the company to outper- Target Price Php 52.13—61.14
form this year given the resilience of its products in this time of pandemic, evidenced by
Potential Upside / Downside (Based on entry point) 18.48% - 38.94%
higher net income for the first quarter 2020, surging 16.75% y/y, higher than its 5-year
52 wk High and Low Php 26-55.05
CAGR of 11%.
20 MA Volume 3.01M
Accumulate shares around or below the P44.00 support area. Technical-wise, it is currently P/E Ratio 19.87
at consolidation—an accumulation phase before the anticipated uptrend. P/B Ratio 2.20

YTD performance 22.39%

KEY INVESTMENT HIGHLIGHTS Year to Date Performance (YTD)

Upside risks

Resilience against Covid-19 pandemic impact

 Unlike many companies that have suffer losses or earnings growth slowdown, Pureg-
old’s financials remained strong in the first quarter. Revenues grew 17.38% y/y, to
P40.95 billion; Net income jumped 16.75% y/y, to P1.76 billion.
 Inventory turnover (days) also improved to 51.4 days in the first quarter from 55.4 days
in 2019.
 S&R posted a stellar performance despite the community quarantine in the Philippines.
Gross profit surged 32.2% y/y, faster than revenue growth of 16.6% y/y, while net in-
come jumped 41.6% y/y.
 Unlike other businesses, PGOLD’s expansion continues despite the pandemic setting
the retailer up for bright growth prospects.
 Mobile app was launched allowing customers to shop online, meeting their demands
amid the pandemic.
Share remains undervalued COMPANY PROFILE
 Forward P/E of 18.63x is lower than 5 year average of 20x, and peers’ 5-yr average of PGOLD trades goods such as consumer products (canned goods,
housewares, toiletries, dry goods, food products, pharmaceutical and
42.61x. medical goods, etc.) on a wholesale and retail basis. In 2012, the
Foreigners are net buyers year-to-date (as of July 17, 2020) amounting to P219.04 million. company acquired, which was later called “S&R Membership Shop-
ping.”

Downside risks By the end of 1Q 2020, Puregold was operating a total of 232 hyper-
markets, 102 supermarkets, 50 extra, 20 S&R, 39 S&R QSR, for a
total of 443 stores nationwide.
Pre-Covid problems could weigh on growth
 Q1 2020 Gross profit margin (GPM) of 16.90% was narrower than peers’ average of Net Foreign Transactions
(In Million PHP, As of July 17, 2020)
23.83%, amid increasing costs of suppliers.
 For Puregold only, costs have dragged the bottom line which marginally grew by 1.7%,
below its 5-year CAGR of 6.2%. Net margin declined to 3.00% from 3.5% in Q1 2019.
Dividend yield is expected to decline as PGOLD maintains its historical cash dividend at
P0.40 per share for regular and special each.
Employees are at risk of Covid-19 infection which may in turn affect the company’s opera-
tions.

Philstocks Research 2020 1 |Page

FINANCIAL RESULTS

For the first quarter of 2020, net sales increased 17.4% y/y, to P40.95 billion, STATEMENT OF FINANCIAL CONDITION
driven by its fully operated new organic stores in addition to the like-for-like In Million Pesos (Except
stores sales. However, cost of sales grew faster by 18.25% y/y, bringing gross for EPS)
profit to P6.9 billion with gross margin at 16.9%, lower compared to the 17.5% For the three Months
2020 2019 % Change
margin in the same period last year. On the bright side, net income margin period ended March 31
was maintained at 4.3%, with net income growing by 16.8% y/y, to P1.76 Net Sales 40,953.00 34,889.00 17.38%
billion outperforming its 11.94% y/y growth in the same period last year and its Cost of Sales 34,018.00 28,767.00 18.25%
5-year CAGR of 10.84%. According to the company, this was driven by the
Gross Profit 6,935.00 6,122.00 13.28%
continuous expansion of stores due to sustained strong consumer demand,
The stellar performance of PGOLD was also seen to be caused by the strong Other Operating Income 823.00 729.00 12.89%
demand during the Enhanced Community Quarantine (ECQ) which triggered Gross Income 7,758.00 6,851.00 13.24%
panic-buying.
Operating Expenses 4,791.00 4,280.00 11.94%
On its balance sheet, Total Assets contracted by 1.22% as of the first quarter Operating Income 2,967.00 2,571.00 15.40%
compared with its year end 2019 figure. This was primarily due to the 3.5%
drop in current assets driven by the lower receivables (-33%) and investments Other expenses-net - 476.00 - 433.00 9.93%
in trading securities (-28.6%) vs the amount in year end 2019. This was Net income before tax 2,491.00 2,138.00 16.51%
partially offset by the 0.11% increase in Noncurrent Assets. The slight uptick
Income tax expense 728.00 628.00 15.92%
was driven by the recognition of deferred tax in compliance with the PFRS 16-
Leases, with deferred tax asset, +8.3%. This was partly neutralized by the Net Income 1,763.00 1,510.00 16.75%

decline of other noncurrent assets and right-of-use assets by 5.1% and 0.4%,
respectively. Current liabilities were reduced by 21.2% brought by the partial
settlement made to Kareila Management, Inc. under the short-term loans STATEMENT OF FINANCIAL POSITION
payable account. Settlement of due to related parties account contributed to March 31, 2020
December
% Change
31, 2019
the decline of current liabilities. As current liabilities fell more than current
assets, current ratio was brought to 3.16x, higher than 2019’s 2.58x. Debt Total Current Assets 38,640.00 40,040.35 -3.50%
ratio remained stable at 0.41x. Meanwhile, return on assets and return on Total Noncurrent Assets 68,671.00 68,594.44 0.11%
equity in the first quarter recorded 1.60% and 2.80%, respectively. TOTAL ASSETS 107,311.00 108,634.80 -1.22%

Inventory days have improved to 51.4 days, compared with 55.4 days in 2019.
LIABILITIES AND STOCK-
This is good for the company as faster inventory turnover generates more HOLDERS' EQUITY
revenue. PGOLD also turned trade receivables quicker to 5.4 days vs 6.6 Total Current Liabilities 12,213.00 15,490.81 -21.16%
days in 2019. This means the company collects receivables more effectively.
Total Noncurrent Liabilities 31,435.00 31,245.00 0.61%
Trade payables were also paid within a shorter time period from 22.9 days in
Total Liabilities 43,648.00 46,735.00 -6.61%
2019 to 17.1 days in Q1.
Retained earnings 35,414.00 33,650.25 5.24%
Moreover, Puregold’s only foot traffic declined by 4.3%. Nonetheless, average
Total Stockholders' equity 63,663.00 61,899.35 2.85%
net ticket grew 22.9% to P749. These figures are seen to be driven by the
panic-buying in Mid-March. For S&R, growth remained with foot traffic TOTAL LIABILITIES AND
107,311.00 108,634.80 -1.22%
increasing 9.5% and average net ticket growing 9.3% STOCKHOLDERS' EQUITY

Traffic (in M) PGOLD S&R

2018 178 8.20
2019 180 8.90
1Q 20 42 (-4.3%) 2.3 (9.5%)

Average Ticket (in Php)

2018 612 3,959

2019 656 4,212

1Q 20 749 (22.9%) 4,327 (9.3%)
Source: Puregold Price Club, Inc. 1st Quarter 2020 Presentation, Financial Statements

Philstocks Research 2020 2 |Page

FINANCIAL RESULTS

For Puregold only, GPM narrowed to 14.8% in the first

quarter from 16.4% in the same period last year. This was
due to the Cost of Goods sold’s growth of 20% which was
faster than the revenue growth of 17.66%. This weighed
on its bottom line which grew by only 1.7%, slower than
its 5-year CAGR of 6.2%. Net margin declined to 3.00%
from 3.5% in Q1 2019.
For S&R, the stellar performance continued in the first
quarter despite some challenges. Gross profit surged
32.2% y/y, faster than revenue growth of 16.6%, with
GPM hitting 24.00%, higher than the 21.2% in the first
quarter last year. S&R’s cost efficiency brought net profit
to P813 million, growing 41.6% y/y, with net margin in-
creasing to 8.50% from 7.00% in the same period last
year.
As of December 31, 2019, PGOLD has a 565,995 sqm
(6,092,319.47 sqft.) stores’ net selling area. Sales, net
selling area , and sales per square foot area are consist-
ently increasing each year but at a slowing pace.

Source: Puregold Price Club, Inc. 1st Quarter 2020 Presentation, Financial Statements

CAPITAL EXPENDITURE GUIDANCE

The company has allotted P3.4 billion for capital expenditure this year, P600 Format Number of stores to be opened Amount ( PHP)
million of which is for maintenance expenses. It will be funded by internally
Puregold Stores 25 1 billion
generated funds and short term loans, if necessary. As of the first quarter
S&R stores 2 1.6 billion
2020, it has 443 stores nationwide, 37.5% of which are in Metro Manila. Thirty-
S&R QSR 10 200 million
seven stores will be added this year, amounting to P2.8 billion.
Total 37 2.8 billion

Source: Puregold Price Club, Inc. 1st Quarter 2020 Presentation,

RELATIVE VALUATION
Outstanding Mkt Cap (in Forward P/E
LTP (As of 07/02) EPS 1Q P/E 1Q BVPS 1Q P/B 1Q GM: 1Q20 OM: 1Q20 NM:1Q20
shares (In Mn) Mn) FY2020*
PGOLD 2,884.23 46.40 133,828.39 2.45 18.94 20.00 22.18 2.09 16.90% 7.20% 4.30%
Average 3,330.43 39.50 46,420.35 1.01 42.61 29.38 12.63 12.22 26.46% 2.49% 1.41%
RRHI 1,573.06 65.00 102,248.91 2.67 24.34 25.32 46.14 1.41 21.81% 3.48% 2.54%
SEVN 756.41 126.50 95,686.91 1.90 66.58 66.33 10.76 11.76 35.02% 3.10% 0.79%
MM 7,594.93 3.29 24,987.34 0.03 109.67 - 0.07 47.00 7.80% 1.95% 1.05%
MRSGI 3,429.37 1.58 5,418.41 0.21 7.52 12.65 2.70 0.59 21.59% 0.27% 0.09%
SSI 3,298.40 1.14 3,760.18 0.23 4.96 22.94 3.49 0.33 46.10% 3.62% 2.60%
*Based on 5-year average

PGOLD’s trailing twelve months (TTM) 2020 first quarter EPS printed higher than most of its peers, bringing its P/E ratio to 18.94x which is
more attractive than the industrial average of 42.61x. Puregold is also more marketable relative to peers in terms of P/B Ratio, with PGOLD’s at
2.09x, lower than the industrial average of 12.22x. Take note that the industry average was pushed by MerryMart’s high P/B ratio. In terms of
margins, PGOLD lags behind most of its peers in managing direct costs with its gross margin at 16.90%, below the industrial average of
26.46%. Nonetheless, Puregold beats peers in managing overall expenses, recording the highest net margin at 4.30%. This means that Pureg-
old is good at keeping other expenses lower, while direct costs could somehow depend on suppliers.

Philstocks Research 2020 3 |Page

VALUATION

As of July 17, 2020, Puregold is trading at 19.87x P/E TTM, a 32.36% discount from its 5-year peers’ average of 29.38x. Looking forward, the
estimated 11% EPS growth this year to P2.61 makes the stock more attractive based from its current price. At 20x P/E, the stock price is
seen to reach P52.13. Using moving CAGR, PGOLD’s growth for the next two years is projected at 8.5% and 8.1%, respectively. Given this,
market price could hit P61.14 in the year 2022.

INDUSTRY OVERVIEW

The consumer retail industry is one of the resilient sectors in this time of pandemic. During the first implementation
of enhanced community quarantine (ECQ) in Luzon, panic buying was prevalent as consumers bought goods at
high quantities to prepare for the stringent measures. The situation benefited the company which resulted to higher
average net ticket in the first quarter. Foot traffic declined however due to strict lockdown measures. Fortunately,
grocery is one of the essential businesses that remained open even during the ECQ.
Meanwhile, the general price level is seen to be supportive of retail operations as inflation is expected to remain
benign in the coming years. The Bangko Sentral ng Pilipinas (BSP) sees the price increases tamed in the next three
years, with average inflation outlook for 2020 at 2.3% -still within the 2 to 4 percent target. This can boost purchasing power, which could
lead to more sales, along with the positive effect of the tax reform law wherein taxpayers with a net taxable income of P250,000 and below
are exempted from paying personal income taxes.
To meet customers’ needs, PGOLD has launched SALLY-your shopping ally, a mobile app that lets you shop online to avoid hassle queue
when shopping which encourages more customers, particularly in the middle of the coronavirus pandemic.
Sentiment-wise, the optimism on expectation of higher sales due to panic-buying has dissipated as quarantine measures get downgraded.
Still, strong fundamentals are expected to remain.

FORECASTS AND ESTIMATES

2018A 2019A 2020E 2021E 2022E

Revenue 141,139,261,418 154,490,309,082 174,223,800,896.24 195,803,829,701.37 218,718,713,806.79
Revenue growth 13.18% 9.5% 12.8% 12.4% 11.7%
Net income 6,199,500,293 6,772,787,778 7,517,794,433.58 8,156,090,346.24 8,816,427,404.69
Net income growth 12.84% 9.2% 11.0% 8.5% 8.1%
Net income margin 4.39% 4.38% 4.32% 4.17% 4.03%
EPS 2.15 2.35 2.61 2.83 3.06
Dividend yield 0.47% 0.50% 0.77% 0.71% 0.65%
Price (Php) 43 39.76 52.13 56.56 61.14

Philstocks Research 2020 4 |Page

 Philstocks Research
TECHNICAL ANALYSIS JUSTINO B. CALAYCAY, JR
AVP-Head, Research & Engagement
(632)588-1962

JAPHET LOUIS O. TANTIANGCO

Sr. Research Analyst
(632)588-1927

PIPER CHAUCER E. TAN

Engagement Officer/Research Associate
(632)588-1928

CLAIRE T. ALVIAR
Research Associate
(632)588-1925

Ground Floor, East Tower

PSE Center, Tektite Towers
Ortigas Center, Pasig City
PHILIPPINES
Source: Tradingview
DISCLAIMER
The opinion, views and recommendations
PGOLD’s primary trend (>12mos) is still pointing downwards. Nonetheless, its secondary contained in this material were prepared by
the Philstocks Research Team, individually
trend is showing optimistic signs after breaching the trend resistance (broken diagonal
and separately, based on their specific
red line)—indicating a bullish reversal. Previous trend resistance is now the new support. sector assignments, contextual framework,
personal judgments, biases and prejudices,
On the Fibonacci retracement, PGOLD has already crossed above 50% Fib implying that time horizons, methods and other factors.
it may continue to reach the 100% Fibonacci retracement. Given this, accumulate shares The reader is enjoined to take this into
around 0.5 (P42.03) or around 0.618 (P45.11) which act as support levels. Resistance is account when perusing and considering the
contents of the report as a basis for their
at 0.786 or around P49-50.00. stock investment or trading decisions.
Furthermore, projection made and presented
Historically, its first major resistance is at P50.00, next is at P55.00. Support is at P44.00. in this report may change or be updated in
between the periods of release. Ergo, the
Golden cross, a strong buying signal, already showed during the first week of May. The validity of the projections and/or estimates
50-day exponential moving average (EMA) and 200-day EMA will be PGOLD’s dynamic mentioned are good as of the date indicated
support. and may be changed without immediate
notification.

This report is primarily intended for

information purposes only and should not be
considered as an exclusive basis for making
investment decision. The recommendations
contained in this report is not tailored-fit any
particular investor type, situation, or
objective and must not be taken as such.
Determining the suitability of an investment
remains within the province of the investor.
Our estimates are based on information we
believe to be reliable. Nevertheless, nothing
in this report shall be construed as an offer
of a guarantee of a return of any kind and at
any time.

Rating Definitions:
BUY - More than 15% upside base on the target price
in the next 9-12 months

HOLD - 15% or less upside or downside in the next

9-12 months

SELL - More than 15% downside base on the target

price in the next 9-12 months
TRADE - A potential 10% and above short-term upside
base on entry price and selling price.

Philstocks Research 2020 5 |Page