Earnings Transcript for 0142.HK - Q2 Fiscal Year 2024

Sara Cheung: Good day, everyone. Thank you for joining this online briefing to discuss the First Pacific 2024 First Six Months Financial and Operating Results. This results presentation is available on First Pacific website, www.firstpacific.com under the Investor Relations section, Presentation page. This results briefing is being recorded and a replay will be available on First Pacific's website this evening in the Investor Relations section. For participants from the media, please note that Q&A session is open for investors and analysts only. If you would like to ask us questions, please contact us when the meeting finished. Today, we have with us Mr. Chris Young, our Executive Director; our Chief Financial Officer, Mr. Joseph Ng; Associate Directors, Mr. John Ryan and Mr. Stanley Yang; and other Senior Executive from First Pacific Head Office. Over to you, John, for the presentation.

John Ryan: Thank you very much. A quick reminder on Page 2 of this presentation which went up at lunch time on our website. Our key assets are listed here via their logos. And we all recall we've got four areas of business that we love very much, particularly because they are in our preferred geography, emerging Asia. They're mostly [defense industries] fast-growing economies, and that's how we get to on Page 3, a compound annual growth rate in our gross asset value of 7% over the past 20 years. Now the pie chart there is a little bit old, at the end of June, because these are the half year results after all and our GAV was $4.9 billion, broken down here, as you see. Indofood remains as has been for some time, our single biggest asset, a little over $1.6 billion. MPIC, most of you will recall, was delisted, I think, formally on October 9 last year. And that price you see there is the current U.S. dollar value of the peso value of MPIC when it was privatized at PHP5.20 a share. And as you can see, we're fairly proportionate through our core holdings. Right, straight to the first half results. As we've been saying to you every six months or so for the past couple of years, record high and highest ever. To make it easy for me to read, I put it all in red. I'd like to draw your attention to the contribution from operations, and that's led by Indofood and MPIC, and that's clear, as you can see in the column chart on the top right there. Recurring profit, again, to a record high, $340 million, up about $40 million from the last year. Now the net profit number might actually be why we were down, I think, $0.03 today on, again, large volume of about 12 million shares. Now that net profit figure is simply only a reflection of weakening of the Rupiah against the U.S. dollar and how that has affected Indofoods 10-year and 30-year U.S. dollar bonds. There is no cash element in that at all. In the previous reporting period, first half of 2023, that negative number was a positive number because of strengthening of the Rupiah. I urge you look more closely at recurring profit because these are the numbers which are comparable from year to year. And in the first half of this year, highest ever recurring earnings per share of $0.08. That led the Board of Directors to confidently expand the interim payout by $0.015 to a full $0.12 per share and I think you've got about two weeks-or-so until September 12 to buy those shares. If you're a shareholder of record September 12, you'll get the money on September 30, I believe. I'm rubbing my hands in glee. Now the last bullet point on this page might be the most important one in the whole book. We are confident of continuing earnings growth in the medium term. All of you on the call know that we've got fast-growing economies in that part of the world has been the trends they've been on for a very, very long time. Sometimes you get currency crises. We all remember 1998. And this year, we've got a pretty serious weakening of the Rupiah and Peso. But medium term, spending power per capita is growing in our markets. And in all of our businesses, we're either controlling shareholder or big enough to influence how the businesses are managed, and that's the root of our confidence. Now a key source of our strength is the balance sheet and our investment-grade ratings, which I'll discuss on the page after this one. First, let me draw your attention to the fact that we have no borrowings falling due until 2026. Our interest bill has gone up a little bit over the past couple of years. As you can see, the blended interest cost is 5.6% over the first half of the year, and that's a little bit up from the full year of 2023. But as we all know, we've got an outlook for falling interest rates. And in fact, our P&L and cash flow forecast over the next few years indicate that we are going to be paying a smaller interest bill over the next few years, and we are planning essentially for our net debt to be unchanged over these next few years. Now, if we're looking at those pie charts down there, generally speaking, we prefer the bond element to be bigger than just under a quarter. It's about 23%, I think. We like it to be maybe closer to half. But at any case, with interest rate swaps and the like, our commando treasury team has managed to make 48% of the borrowings at fixed rates. Now those of you who worry about the financial strength of First Pacific will want to look at the bottom left chart where the blue line shows you a strengthening interest coverage ratio over the past few years. At the half year, as we have seen, headline is 4.3 times. We have got investment-grade credit ratings from S&P and Moody's. And I think my takeaway from their reviews every now and then with us is, they're pretty solid rating. You'll see that our dividend income was a record high at 2023 and that is rooted in the fact that, we essentially got about two years' worth of dividends from PLP, that's the gold part of that column there in the bottom left there. And as you can see, for 2024, it's visually about half of what that was. And let's remember that we will receive the dividend payment from Indofood later this summer. Now we're going to discuss ESG on the next page, and it's going to be a very brief discussion. We have begun working very closely with our consultants at EY and more importantly, all those operating companies down in Southeast Asia to ensure that we will be prepared for the new Part D coming to Hong Kong listing rules beginning in fiscal 2025. If you'd like to discuss ESG matters a bit further, you can bring it up in the Q&A or bear in mind that if you're coming to Hong Kong for the CLSA conference, you can meet us, not in that conference, because they haven't let us in it for the first time in my professional career. If you're in Hong Kong, give us a call. Otherwise, we are going to North America to visit investors there later in September, and we're visiting Europe later in October, and we are visiting Singapore September 2 and 3, which is quite soon. Now let's go to our biggest holding. Indofood. Fantastic results. The noodles are far and away the most important item in their list of things that they sell. And if you quickly flip to Page 9, you can see why. The change in external sales has got that huge long green column. That's noodles. Everything else is really kind of a detail. Okay, let's go back to Page 7. What's going on here? The noodles margin at 27.2% is within a sliver of a recent record high. I think it was full year 2023, it was at a record high. Soft commodity prices have been a great benefit for ICBP, the packaged food arm of Indofood. As you can see, they had a 3.5 percentage point increase in their overall margins, as you see in blue box. Indofood has -- I looked at my spreadsheet, they've had 14 years in a row of revenue growth, net sales growth. This is, of course, in Rupiah terms. I think it's from 2010, I was stunned to see that. And over the past few years, that has led to record high earnings. And as you can see, every single business had double-digit growth in EBIT. Now very quickly on the ICBP page, which is the next one. I'd like to draw your attention to the fact that ICBP is very confident that they'll meet their 2024 EBIT target, there in the very last bullet point. And I think at their earnings call a couple of weeks ago, they were suggesting that the EBIT margin might be better than what the target is, as you see there, 19% to 21%. Let's carry on now. There are details of their financial strength, both at Indofood and ICBP level that we can get into in more detail, if you'd like, in the Q&A. Now if we turn to Metro Pacific on Page 11, you can get a quick reminder of what it is. Like First Pacific, it has four holdings, and they are the power company Meralco, MPTC, 99.9% owned, I believe, toll roads business. In my view, I think it's the biggest in Southeast Asia. Stan might correct me later during Q&A. And Maynilad, biggest water company in the Philippines. Page 12, a very quick review of what happened to Indofood at the end of last year. It was delisted at a price of PHP5.2 per share, that valued us the whole company at just under $3 billion, but the very last research reports and this is old information now, folks, it's about a year old. The last research reports written on MPIC suggested that actually look-through valuation is more than double what we paid for it. Now if we flip over to Page 13, you can see why we regard MPIC very highly. Again, record highs in contribution in core profit. And unless strange things like Black Swan events such as a pandemic comes along, we're probably looking again at continuing growth in these numbers to record highs as continuing demand for power, continuing traffic growth on the toll roads, it's either high single-digit or low double-digits year in, year out on the Philippine toll road network and steady earnings over at the water company. Very briefly, Page 14. Meralco. Again, highest revenues they've ever had, highest core profit they've ever had, and they've got -- Richard, please correct me, their earnings target for core profit PHP43 billion for full year 2024. I apologize for not writing this down when we update this wonderful little booklet, we'll have that figure in there for you. Page 15 has some detail into very big spending on expanding the generation capacity of Meralco. Remember, they've got serious targets for building out generation capacity. Just one of them is 1,500 megawatts of renewables. And I think that's by the end of the decade. Now jump to Page 16, where you can see very strong growth in MPTC, the toll roads business. Bear in mind now that MPTC and MPIC led by our CEO, Manny Pangilinan, I think, will join us in a few minutes. They are actively working out [indiscernible] sorry. We've been joined by our Chief Executive and 7% shareholder of MPIC, Manny Pangilinan. They've been record high numbers on the toll roads business. I'd like to thank all of you shareholders who voted a couple of days ago in the Special General Meeting about the Trans-Java purchase, which is, I think, just a bit under 700 kilometers of toll road across Java, that long skinny Island in Indonesia, which is home to, I think, over half the population, over half of the GDP, and it's like all built out and it's like instant revenue and instant earnings growth. When all of that settles down, we'll put details of it into our book. Very briefly about the water company because I'm running longer than I planned. An enormous increase on Page 18 of this tariff people pay per cubic meter of water beginning in January 2024 as part of resolution of some issues with its regulator, MWSS, came into effect, and that was key to enormous growth to, again, record high revenues and extremely strong core profit. As you can see on the bottom right, that's driven hard by the average effect of tariff, which has gone up very strongly with the resolution of their tariff dispute with MWSS, and we will all recall that Maynilad must see 30% of its equity sold to the public or listed by a deadline of January 2027. Those are the core companies over at MPIC, and we haven't got to PLDT yet. On Page 20, again, service revenue is record high. EBITDA, record high. And we've had seven second quarters in a row of strong earnings growth. And the increase in service revenues is very, very clear. It's data. Data, I think, makes up 89% of revenues in the individual business, which is their cell phone business, which has had a difficult time lately, but it's getting a little bit better. There's some details on Page 21, but the earnings growth in the first half was led by the Home business and the Enterprise business, which has energized their 11th data center, just last month, a couple of months ago, in July anyway. It will come fully online by year-end. And they're biggest in the Philippines. They've got about a 70% market share. The Home business is seeing extremely strong growth in their fibers revenue. Some details are here. They're up 6%. And the individual business seeing service revenues grow, as you can see the number there, 4%. The ARPU growth, I think, is a very interesting number, and it's all due to continually strong growth in demand for data. 2022 describes the leading digital banking platform in the Philippines. Let's recall, we are the only telco to have a digital banking license in this entire country of well over 100 million people. And we see here, we've learned that it was cash flow positive in the second quarter of 2024. And as they promised, I think, last year, they're on course to breakeven by the end of 2024. It's a very exciting company, as you can see, enormous growth in loans they are giving out number of depositors and deposit balances. It is not valued very highly in the previous funding round. Stan remembers, you can ask in the Q&A. We are, I think, a 1.4% direct shareholder, and we all know PLDT is the biggest. Right, that's enough with PLDT. PacificLight Power, Page 24, has seen its earnings come down from absolutely crazy 2023 when people paid the highest prices for electricity than they've ever seen in sunny city state of Singapore. Revenues, as you can see, they're down quite significantly. It's all 28%. EBITDA down by a similar number. Core profit down a bit more than that, lower blended non-fuel margins. The full year of 2024 is going to be really quite okay. As you saw in the first half, they gave us a very healthy dividend. Their balance sheet is very, very strong. I think their net debt is some silly small number, like SGD50 million. We've got a plan to import electricity from a solar project from Bulan Island in Indonesia and that is progressing forward. Now, a little gem on the following page, Philex Mining, with gold prices at or near record highs, has managed to eke out profits into its 65th or 67th year of operating the Padcal mine, even though we've got lower volume milled and lower grades, cash production costs up by a low double-digit number, but bless them, they're still profitable as they push the Silangan project towards entering commercial operations by the end of 2025. And as you can see, comparisons there in those blue boxes. Silangan on the left, Padcal first half numbers on the right. You've got far richer reserves of gold and copper down at Silangan. You'll all recall that there was a very small rights offering in August 2022 to raise the equity necessary to finance development of that mine. They've done all the borrowing they need for it. So it looks like development risk is close to behind us. But if you speak to our CFO or financial controller, both of whom are Directors at Philex, they might discuss how we're going with on the arrival of various pieces of equipment and things to get the mine going for the opening as we hope by the end of 2025. Now with the delisting of MPIC, I trust all of you have noticed we've added many pages about MPIC to this presentation because if you want access to it, you have to come to us or you have to go to GT Capital who are listed in Manila, and they own much less of MPIC than we do. That's enough about the operating companies. Let me just end by saying we are quite confident in the outlook. And I think the investor community maybe has begun to figure this out and agree with us after rising 32% in the course of 2023. And I think up until today, it's up maybe another 28%, 29%. And frankly, when people digest our numbers, I think next week is going to be pretty good, too. Sara, that's it.

A - Sara Cheung: Yes, that's it. Yes. We can start. We are now ready for questions. Jeff from CLSA.

Jeffrey Kiang: Hey, thanks for the presentation. Thank you for -- I think it's a very good set of results. I have two questions related to the Metro Pacific, basically. So we have seen a few acquisitions in the past few months and also higher dividend payouts to about 30% back to the First Pacific Holdco level. So on a very fair high level, what is the game plan for Metro Pacific? What we're trying to achieve here in the medium term? And the second question is, is there any optimal gearing level for MPI going forward or are we happy with what we are currently at today? That's all. Thank you.

John Ryan: Manny, I guess, that's directed at you.

Manuel Pangilinan: Well, [indiscernible] addressing in the second question first about -- yes. The -- for the past -- the short answer is, no, there are no plans to raise new debt beyond what is currently on the books of MPIC. And for the past three or four years, that has been important to First Pacific Board, MPIC managed to finance its investments in existing and new companies without incurring new debt. So that's maybe the policy. Now there may be big ticket items and that may loom in the horizon, like possibly the hospitals because KKR is -- I think will soon launch or has launched the sale of its [indiscernible] in the hospital. So we're taking -- we're looking at that. So -- but for now, there are no plans to gear up.

John Ryan: The first question relates to dividends?

Manuel Pangilinan: Yes, because I know that we blamed Joseph for that. But the 30% payout, Jeff, you're -- yes. Jeff, can you give a little clarity on your question about the dividend payment?

Jeffrey Kiang: Basically, just trying to understand, we have -- so basically, the question is about, we have seen more acquisitions or investment at MPI and meanwhile, we are giving more cash up to the Holdco level at First Pacific. So just trying to understand the capital requirements there and what are we trying to achieve in the medium term for MPI? So basically, just that we see more cash deployed -- being deployed at the MPI level and just trying to understand the broader strategy here.

Manuel Pangilinan: Well, the -- we set up to establish a dividend policy at MPIC but we're likely to follow what has been the conventional dividend policy of the group, like in the case of PLDT now with Meralco, there's a minimum dividend payout ratio. In the case of both PLDT and Meralco, it is at 60%. And then in the early part of the succeeding year following the year just closed, we will adopt a look-back approach if it's justified we can raise the payout to above 60%. Now in the case of Metro Pacific, we have managed in the first half to pay out 30% of core income. And so, we probably will be at around that level between 30% to 40% of core income. And then after closing of the books, the year following that year, we will look back and see whether we could pay more, because where we're private, certainly, I think shareholders like First Pacific would welcome more dividends from MPIC even as a private company.

Jeffrey Kiang: Great. Thank you.

John Ryan: There I think – you take the mouse Sara and you run the Q&A with the mouse in your hand. It’s probably easier. I think you can just take it to your computer. Take the mouse. Okay [indiscernible]

Sara Cheung: [indiscernible]

John Ryan: [indiscernible] one hand there.

Sara Cheung: Jeff, do you have any follow-up questions?

Jeffrey Kiang: Yes. Just if I may, this is about PLP this time around. So just trying to understand, last year, when we had -- or a few months earlier when we had the same briefing we were talking about we secured some of the retail contracts that hopefully can secure the revenue stream in the next few months. So can we get a little bit of the update on just PLP, the earnings outlook or the revenue? Any color would be very helpful. Thank you.

Stanley Yang: Sure, Jeff. It's Stan. And to the point around the retail contracts, PLP has effectively contracted their retail position for this year. So the balance in the second half say, for some exposure to the pool, but the targeted retail level has all been contracted. In fact, the company has managed to contract a significant portion for 2025. And in some cases, even longer-term contracts, that's a feature of the Singapore market that getting multi-year contracts have made their way into the retail discussions. And so that's helpful. I think when it comes to the performance of the business, the first quarter was slower because there was a shutdown in one of the units. One of the two units was down for an extended period of about six weeks for an upgrade. There was an aero-turbine efficiency program that increased the performance of the business. And so, that increased the capacity for the unit from 400 megawatts up to 415. And so, the business itself continues to be strong. The margins have come down though from the 2023 when we saw the fuel margins -- or sorry, the non-fuel margins over $100 per megawatt hour. And so that was a very high level. That has since come down to just around the $80 to $85 level, but that still remains well above what we've seen historically at the investing level, which is around $50. And so the market continues to remain healthy. The ability to contract the retail contracts also beyond just the next year has been helpful from managing the books.

Jeffrey Kiang: Great. Thank you.

Sara Cheung: Any questions on that?

John Ryan: Folks, let us remind you, if you're in town for the CLSA conference, please scold them for not letting us in. I think there are a number of companies which aren't attending that conference. Maybe it's cost-cutting, maybe it's signification, I don't know. But if you're in to get in touch with us, we'll be very happy to meet you. A couple of weeks after that, we'll be visiting North America, U.S.A. and Canada. And then following our October Board meeting, we will visit European investors. With the return, the slow gradual return to the new normal following the pandemic, we've found that we've been meeting more new people, and we have seen in our own internal analysis using data from Orient Capital that a lot of these new people we're seeing are buying shares in First Pacific. We've modified Page 42 just a little bit, and it shows you changes over a year-or-so of the top 25 minority shareholders. Huge increase from mainland investors. We've got an initiative to get more mainland investors because through Stock Connect they can escape the shackles of China and Hong Kong, which are not all popular and good at the fast-growing economies of emerging Asia. We're very confident that's all that I can say. Manny, could you please wind us up with a few words to these investors on the call?

Manuel Pangilinan: Well, thank -- first of all, thank you for joining us this afternoon to this investors briefing. Well, I think as John indicated, the full year would be another record year for First Pacific and for the group, in general. And so we look forward to seeing you, talking to you and also for your results early next year.

John Ryan: Thank you very much, Manny. Thank you.

Sara Cheung: Thanks again for joining today's result briefing. Bye.

John Ryan: There is a question.

Sara Cheung: Sorry, there's a question.

Unidentified Analyst: Hey, hello. Hi. I'm Jash Punjabi from River Valley Asset Management in Singapore. Thank you for the presentation. I wanted to ask a little more about the plans to partially monetize MPTC via share sale or public offering. Could you speak a little more to this effect and elaborate on what these plans might be?

John Ryan: The toll roads business, what are the plans for it.

Manuel Pangilinan: Well, for the Metro Pacific Tollways level, the parent company of all the toll ways that we own, we have engaged a financial adviser, JPMorgan, to raise by way of private placement to raise equity for Metro Pacific Tollways because one of the things that concern us is a fairly high level of debt at MPTC to fund the expansion it has undertaken for the past few years, especially with the Trans-Java investments we've made in Indonesia. So that has started. And -- but with the indication of getting the valuation is very satisfactory to us. I think we are achieving the sort of indicative valuations that we want. So that will involve a moderate dilution in the equity position of MPTC Tollways [indiscernible] equity position in MPTC. So that's ongoing. And I guess, ultimately, we would wish to see MPTC become a public company soon after we have -- we'll consider that soon after we finish this private placement that we have currently -- that we have launched quite recently.

Unidentified Analyst: Okay. Thank you.

John Ryan: Remember, Stan and I will be in Singapore 2nd and 3rd of September. Drop us a note and we'll get our host to sort you out, meeting us.

Sara Cheung: John. There's a question.

John Ryan: From [indiscernible]. Our Chief Financial Officer, Mr. Joseph Ng, who's finished preparing the cash flow and earnings forecast over the next few years is going to tell you the answer to that question.

Joseph Ng: I mean the current plan -- well, clearly, we are still in the first half of -- actually we have finished the first half of 2024, getting into the second half of 2024 and then revised numbers 2024 at end of our years. As of now, to be honest, we do not see any substantial capital investment at the First Pacific level, except perhaps our participation in the Singapore renewable project in which we have indirect interest, roughly 15% interest. And that one is [indiscernible] number of things is a sizable project. It's a very exciting project, it's renewable energy, exporting solar energy from Indonesia to Singapore, sizable and exciting. But we probably need -- we need to put up some capital for it somewhere around 2025. But -- I mean, except funding schedule is subject to the overall project development schedule, and they're subject to a number of things that I mentioned, a number of issues to be resolve between the two governments in Singapore and Indonesia. Not to mention about other technical and commercial issues. So in the horizon of 2025, yes, we may need to put down some capital for it, but not in the course of 2024. But exact timing, exact size are subject to further study and the finalization of the whole project development schedule and the funding schedule, the project size and everything. ING has been appointed as the financial advisor for this project. And clearly, our partners, Amgen, Medco and Gallant Venture will work closely together and monitor the development of this and see how we could get a better sense of our development schedule or funding schedule and the likes.

John Ryan: Thank you very much, Joseph. Sara, have we got more?

Sara Cheung: We already answered.

John Ryan: Okay, folks, pay attention to our stock over the next weeks and months. Our next reporting period is not till March, but all the operating companies will be reporting their nine month numbers in, I think, October, November. In the meantime, get in touch if you need, and thank you very much for dialing in today.

Sara Cheung: Thank you.