There's value in the mix

PUBLISHED : Monday, 19 November, 2012, 12:00am
UPDATED : Monday, 19 November, 2012, 1:54am

Indonesia and the Philippines are among the best-performing economies and markets in Asia this year. For investors who continue to be sanguine about the prospects of  both and those seeking  portfolio diversification, First Pacific appears to offer a less expensive and convenient (since the stock is listed in Hong Kong and denominated in Hong Kong dollars) way to gain exposure to these markets.

First Pacific is a holding company with four major investments: a  25.6 per cent economic interest in Philippine Long Distance Telephone Company  (PLDT),  59.1 per cent in  Metro Pacific Investment Corporation (MPIC),  31 per cent in Philex Mining Corporation (Philex)  and  50.1 per cent in  PT Indofood Sukses Makmur Tbk (Indofood). 

PLDT, MPIC and Philex are listed on the Philippine Stock Exchange while Indofood is listed on the Jakarta Stock Exchange.

PLDT is the  largest and most diversified telecoms  company  in the Philippines, with more than 68.5 million cellular, 2.1 million fixed line and 3.2 million broadband subscribers. It also offers business outsourcing services.

MPIC  invests in infrastructure projects in the Philippines, including electricity generation and distribution, water treatment,  toll roads and hospitals, while  Philex explores for and extracts minerals and oil.

Based in Indonesia,  Indofood – the world’s largest producer of instant noodles – also makes flour, pasta, dairy products, food seasonings and snack food.  Its agribusiness division owns  more than 250,000 hectares of  palm oil, rubber and sugar cane plantations, and manufactures   cooking oil and margarine.

First Pacific’s stakes in its listed investments based on  market values are worth  HK$62.5 billion in total. After deducting the holding company’s net debt of  more than HK$9 billion  at the end of 2011, First Pacific is valued at   HK$53.4 billion, or  HK$13.93 per share.

The stock is now trading at HK$8.18,  a 41 per cent discount to the sum of its parts and at  10.1 times its 2012 earnings. 

First Pacific is a classic example of conglomerate discount. The company itself has no other business and investors could directly buy the shares of all its underlying major assets, which are separately listed. As a result, its share price becomes discounted by investors who have little incentive to buy into a holding company with a portfolio of disparate assets.

Indonesian tycoon  Anthoni Salim,  First Pacific’s major shareholder and chairman, is probably not losing too much  sleep about it as the holding company structure allows him  to control  some of his largest assets in Asia with  smaller effective investments in them.

In fact, First Pacific bought its stake in Indofood from  Salim during the 1997 Asian financial crisis, which provided him with some much needed cash,  allowing him to retain control of Indofood though his shareholding in First Pacific and shift the ownership of Indofood outside Indonesia, where he had incurred huge debts.

With  Salim holding a 44.3 per cent stake, it would be almost impossible for any third party to gain control of First Pacific and unlock its value.
What about the possibility of  Salim taking undervalued First Pacific private?

Let’s do some arithmetic. Assuming minority shareholders are bought out at, say, a 30 per cent premium over current share price, the total cost would be   HK$22.7 billion. If the transaction is financed entirely by debt, so Salim needn’t find additional equity, First Pacific’s net debt would increase to about HK$32 billion, more than half of the gross value of its assets.

Although First Pacific is asset rich, the resultant debt will put a heavy burden on its cash flows, which consist entirely of dividends received from its investments and amounted to  HK$2.5 billion in 2011. Judging from  Salim’s near-death experience during the Asian financial crisis when his overleveraged corporate empire almost crumbled, it’s not likely he will go down this path on his own.

There may also be some corporate governance discount at work here. The Indofood purchase, notwithstanding the discounted price, could be perceived as a bailout of  Salim. In 2002, Manny Pangilinan,  the current chief executive officer who has run the company since the 1980s, openly derailed  Salim’s plans for First Pacific to sell two-thirds of its stake in PLDT and a  Philippine property company (reportedly due to PLDT’s then heavy investments and poor performance, and as he needed cash for other businesses). The two men  have since patched things up.

First Pacific does seem to be trying to narrow the valuation gap.

Instead of raising dividends which could reposition the stock as a yield play, First Pacific bought back  more than HK$700 million in shares in 2010 and 2011 and will continue to use up to 10 per cent of recurring profit (HK$330 million based on 2011 financials) for share buybacks.

As such, the company is  helping remaining shareholders buy its undervalued stock without needing to stump up any cash.