Stock in Focus: URC by Angping & Associates Securities

Broker: Angping & Associates Securities

Recommendation: HOLD

Target Price: 122.95

Target Price issued on: January 27, 2014

SUMMARY OF BROKER'S OPINION: With its strong free cash-flow and ongoing expansion, URC shareholders that are positioned below market valuations can hold the stock for superior long-term growth. It is not advisable, though, to position in the stock at current prices.

URC achieved its best financial condition in 10 years, with net working capital expanding to its highest level of PHP 18 billion in 2013. Debt-to-equity ratio also improved to its best of 0.31x in FY 2013.

Free cash-flow reached its highest level of PHP 22 billion, while cash dividends paid in 2013 was also URC’s biggest in ten years.

URC’s operating income grew by 31% to PHP 10.28 billion in FY 2013 from PHP 7.85 billion in FY 2012.

In terms of EBITDA, URC’s EBITDA margin improved from 15.76% in FY 2012 to 17.16% in FY 2013.

Following its best year in a decade, URC plans to expand further locally and abroad. URC will spend its highest capex in 10 years of PHP 9 billion. Around PHP 5.73 billion will be used for the installation of new lines to increase capacities in snack foods and grocery products in the Philippines, new plants, beverage and bakery lines in Vietnam and the expansion of biscuits and wafer lines in Thailand. PHP 3 billion will be used for the completion of a bio-ethanol plant, construction

of a power cogeneration plant and for maintenance capex. Around PHP 270 million will be used for farm expansion and handling facilities for the feeds division.

Though still positive, this will reduce free cash-flow significantly and temporarily generate a negative 2014F Return on Invested Capital. 2014 looks promising but will be weighed down by URC’s expansion costs. Revenue growth is seen to be around the same level as with 2013. Costs may be tighter though as the peso has weakened back to August 2010 levels of PHP45:USD1.

RECOMMENDATION: URC is a HOLD. It's Fair Value and Target Price is PHP 122.95 per share. This is based on Discounted Cash Flow valuation taking into account URC's interest-bearing debt.

URC is trading only at a discount to 1x PEG and at a premium to market and fair value. URC is one of the most expensive stocks in our coverage. Though its fundamentals are strong, it is not advisable to position in the stock at current prices. With its strong free cashflow and ongoing expansion, investors that acquired URC below market valuations can hold the stock for superior long term growth.

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