COL has a BUY rating with Fair Value of 39, with the current price of 33 a share, we still have an upside percentage of around 20%. Here is what they are saying:
Acquisition of Company E: A Small Step in the Right Direction. Last January 14, Puregold acquired 100% of Company E Corporation for Php330Mil in cash. Company E owns four Eunilaine foodmarts and 11Grocer E supermarts located in Metro Manila, Rizal, and Cavite with combined sales of Php1.39 Bil. While the acquisition is small, PGOLD explained that the main reason for acquisition is the attractive location of Company E‘s stores. The acquisition price is also very cheap, with the implied Price/Sales at only 0.24X, a discount relative to PGOLD’s current Price/Sales ratio of 1.20X. Moreover, assuming that PGOLD is able to create synergies with Company E such that it also earns a net margin of ~4.0%, based on its revenue of Php1.39 Bil, Company E could potentially generate Php55.0 Mil in profits annually. At Php330 Mil, the implied P/E for Company E is only 6.0X.
Puregold to grow another 25 stores in FY13. Meanwhile, PGOLD expects to open 25 Puregold supermarkets this year, bringing the total number of stores in its portfolio to 156 by the end of FY13. Out of the 25, four will be located in Mindanao, marking Puregold’s entry into the region. PGOLD also disclosed plans to open 23 stores in FY14. Given the aggressive pace of expansion, PGOLD is on track to reach its target of having 200 stores by 2015.
S&R driven by higher net ticket sales and membership growth. During 9M12, S&R performed better than expected with same store sales growing by 29% on the back of a 26% increase in net ticket sales and a 3% increase in traffic. Membership as of the end-September grew by an estimated 16.4% to 250,000. To capitalize on the success of S&R, management plans to open one S&R Membership Club annually in the next five years, expanding its current portfolio of only six stores. For 2013, the company is scheduled to open S&R Davao in May, while it plans to open S&R Shaw Blvd in 2014.
Parco to be re-branded into Puregold. According to management, it plans to rebrand all 19 Parco Supermarkets into Puregold. Management expects Parco’s gross margins to align with that of Puregold (at 14.0%) by the end of 1Q13. Recall that prior to being purchased, Parco earned lower gross margins compared to Puregold as it relied on distribution channels. In contrast, Puregold earns higher gross margins because it purchases directly from suppliers.
Reiterate BUY rating. We reiterate our BUY rating on PGOLD with a FV estimate of Php39.00/sh. We like PGOLD given that it is well positioned to capitalize on the existing growth opportunities in the country’s modern retail sector with its well-recognized brand, differentiated focus on all income segments and resellers, and aggressive expansion plan. Although PGOLD’s implied 13E P/E at our FV estimate is quite hefty at 26.2X vs. the 23.7X average of its consumer sector peers, we believe that the premium is warranted given the defensive nature of its business and its resiliency to volatile commodity prices.