SMC Company Review (FY 2010) Part 2




For Part 1, click this link: SMC Company Review (FY 2010) Part 1.

Profitability:
ROE = 5.35%
Average ROE for 5 years = 10.15%
OCF/Equity = 16.98%
Net Profit Margin = 8.16%

SMC's ROE for 2010 is lower than the accepted profitable level but this doesn't mean that the company is losing money. New assets from acquisitions have expanded the equity thus decreasing the return of equity. Net Income and ROE are expected to pick-up once this new assets starts earning. Net Profit Margin has to be improved as well but high expenses are expected due to their massive diversification.

Growth:
Annual Net Income Growth Rate (5 Yrs.) = 8.47%

In a disclosure filed by SMC as shown here, it was mentioned that the company is planning to invest more than $4billion to double its sales in 5 years or P1 trillion.


Debt and Risk:
DE Ratio = 211%
Current Ratio = 1.6

DE Ratio is high compared to the acceptable level of 100% (see post: Definitive Guide to Stock Picking). However, high debt level is expected from a rapidly growing company since more leveraging is needed to be able to acquire more assets. Current ratio level is a good sign of healthy liquidity though meaning that the company is capable of obliging to its financial obligations. Recently, SMC conducted a secondary offerings of shares which are expected to address this leverage level issue while at the same time raised funds for its capital and acquisition expenditures.

Dividend:
Dividend Yield (2010) = 4%

In 2010, common shareholders received a total dividend of P6.75/share. Dividend Yield of 4% is computed based on the 2010 year end closing price of P168.90 per share.

Other Factors:
Last month, SMC conducted a secondary share offering of P110 per share for a total of 110 Million common shares and at the same time sold exchangeable bonds at a total of USD600 Million The bond will bear 2% annual interest rate. The bonds maybe exchanged to common shares at initial exchanged price of P137.5/share and at fixed currency exchange rate of P43.4 to USD anytime starting June 15, 2011 up to April 28, 2014. This is 18.5% premium compared to P116 closing price as of May 10,2011.

Valuation:
PE Ratio = 18.89
PB Ratio = 1.21
Intrinsic Value = P279.4/share
Current Share = P116/share
Upside = 140.9%

click to zoom


Using discounted cash flow analysis, intrinsic value is calculated based on 2010 Annual Report. Cash flow are expected to grow at 15%. Discount rate used is also 15% based on historical Philippine 91-day T-bills rate plus margin of safety. In addition, I assumed that all exchangeable bonds will be converted to common shares which is equal to 190M shares thus a total of 2,556Million outstanding shares. 

Conclusion:
Strong buy is recommended to SMC. The current depression in its stock price is mainly due to the shortsightedness of the speculators which currently holds some shares of the company.


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