FRI 17 JAN 2020

Consumer Industry 2020 Outlook:

Better growth on benign inflation
and increased gov’t spending
Concepcion Industrial Corporation
BUY
Consumer companies are poised to perform better in 2020 supported by the better local PHP40.60
macroeconomic environment. In fact, we forecast a faster median EPS growth of 16.3% this Century Pacific Food, Inc.
BUY
year versus 10.2% in 2019. This will be driven by healthy revenue growth and a recovery in PHP20.40
margins amidst benign inflation, better consumer confidence, and increased government D&L Industries, Inc.
spending with the timely passage of the 2020 budget. HOLD
PHP9.20
Emperador, Inc.
Benign inflation to lead to better demand. Inflation eased throughout 2019 with headline HOLD
PHP8.00
inflation dropping as low as 0.8% in October 2019 following lower food prices and lower
transport costs. Meanwhile, inflation in December 2019 picked up to 2.5%, but this is only Jollibee Foods Corporation
HOLD
partly due to the absence of high-base effects considering inflation peaked in October PHP248.00
2018 at 6.8%. For full-year 2019, headline inflation slowed to 2.5% from 5.2% in 2018, and Max’s Group, Inc.
BUY
it is now back within the BSP’s comfort range of 2% to 4%. PHP21.00
Metro Retail Stores Group, Inc.
Exhibit 1: Philippine inflation BUY
PHP3.85
8.0%
Puregold Price Club, Inc.
7.0% BUY
PHP54.50
6.0%
5.0%
Robinsons Retail Holdings, Inc.
BUY
4.0% PHP102.00

3.0% Shakey’s Pizza Asia Ventures

BUY
2.0% PHP13.90
1.0% SSI Group, Inc.
BUY
0.0% PHP4.28
Mar-18
Apr-18
May-18

Aug-18

Aug-19

Dec-19
Sep-18

Nov-18
Dec-18

Mar-19
Apr-19
May-19

Sep-19

Nov-19
Feb-18

Jul-18

Oct-18

Feb-19

Jul-19

Oct-19
Jun-18

Jan-19

Jun-19

Universal Robina Corporation

HOLD
Source: PSA
PHP177.00
Wilcon Depot, Inc.
HOLD
We believe inflation should be manageable this 2020 supported by stable food prices. The PHP15.40
government’s administrative measures like the rice tariffication law passed last February
2019 should keep food prices in check. In fact, the retail price of rice has come down Justin Richmond Cheng
significantly to Php36.7/kg as of end 3Q19, which is roughly 8% lower than the end Research Analyst
justin.cheng@colfinancial.com
1Q19 price of Php39.9/kg. Apart from this, the government increased its 2020 budget for
agriculture by 30% in order to deliver better programs and increase the support to Filipino John Martin Luciano, CFA
farmers. This should help boost agricultural productivity and keep food prices low. Senior Research Analyst
john.luciano@colfinancial.com

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
 CONSUMER SECTOR I CONSUMER INDUSTRY 2020 OUTLOOK: BETTER GROWTH ON BENIGN
INFLATION AND INCREASE GOV’T SPENDING

FRI 17 JAN 2020

Exhibit 2: Rice price

47

45

43

41

39

37

35

Jun 2018
Jul 2018
Aug 2018

Nov 2018

Jun 2019
Jul 2019
Aug 2019

Nov 2019
Jan 2018
Feb 2018
Mar 2018

Jan 2019
Feb 2019
Mar 2019
Dec 2017

Dec 2018
Apr 2018
May 2018

Oct 2018

Apr 2019
May 2019

Oct 2019
Sep 2018

Sep 2019
Source: PSA

Benign inflation should translate to better consumer confidence in the Philippines. Recall
that consumer confidence significantly deteriorated in 2H18 during peak inflationary
pressures. Based on latest BSP data, consumer confidence already rebounded to
positive levels in 3Q19. This already translated to better earnings growth, with consumer
companies registering a median earnings growth of 12.5% in 3Q19, coming from only
1.9% during the first half.

Exhibit 3: Consumer Confidence Index

15

10

-5

-10

-15

-20

-25

Source: BSP

Key risks to inflation include higher oil prices and the depreciation of the peso. Note
that oil prices rallied recently, with Dubai Crude up ~5% in the first three trading days of
January to US$68.27/bbl. This is amidst escalating tensions between US and Iran, which
sparked concerns over global oil supply. Meanwhile, the peso is expected to depreciate
this year as the government’s more aggressive spending is expected to further widen our
budget deficit and current account deficit.

COL Financial Group, Inc. 2

 CONSUMER SECTOR I CONSUMER INDUSTRY 2020 OUTLOOK: BETTER GROWTH ON BENIGN
INFLATION AND INCREASE GOV’T SPENDING

FRI 17 JAN 2020

Nevertheless, as far as oil is concerned, the government has a measure in place to halt
temporarily the fuel excise tax under the TRAIN law once Dubai crude reaches and stays
above US$80/bbl. This should partly temper the impact of higher oil prices on local
transport costs. Moreover, looming concerns over a global economic slowdown could
keep the rally of oil prices capped. Finally, both the U.S. and Iran have expressed desire
to deescalate tensions and should temper the increase in oil prices.

Meanwhile, although the Philippine peso is expected to weaken this year, it is not
expected to weaken by the same magnitude as it did in 2018. This is because the global
economy is much weaker and the U.S. Fed is no longer in a tightening mode

Exhibit 4: Dubai crude oil price

85

80

75

70

65

60

55

50
Jan-18
Feb-18

Jan-19
Feb-19

Jan-20
Dec-18

Dec-19
May-18
Apr-18

Oct-18

May-19
Apr-19

Oct-19
Aug-18
Sep-18

Sep-19
Jun-18
Jul-18
Mar-18

Nov-18

Jun-19
Jul-19
Aug-19
Mar-19

Nov-19
Source: Bloomberg

Exhibit 5: USDPHP

55

54

53

52

51

50

49
Jan-18
Feb-18

Jan-19
Feb-19

Jan-20
Dec-18

Dec-19
May-18
Apr-18

Oct-18

May-19
Apr-19

Oct-19
Sep-18

Sep-19
Jun-18
Jul-18
Aug-18

Jun-19
Jul-19
Aug-19
Mar-18

Nov-18

Mar-19

Nov-19

Source: Bloomberg

COL Financial Group, Inc. 3

 CONSUMER SECTOR I CONSUMER INDUSTRY 2020 OUTLOOK: BETTER GROWTH ON BENIGN
INFLATION AND INCREASE GOV’T SPENDING

FRI 17 JAN 2020

Timely passage of the national budget to boost consumption

The timely passage of the 2020 national budget should also boost consumer spending
further. Note that the 2020 national budget was recently signed on January 6, 2020. This
is in contrast to the delayed passage of the 2019 national budget, causing the Philippines
to operate on a reenacted budget for the first three and a half months of 2019. This
dragged down economic growth as public construction activity lessened and in turn
affected job generation. Furthermore, since 2019 was an election year, implementation of
these infrastructure projects was also affected by the national construction ban.

Under the 2020 budget, the government plans to increase expenditure by 12%, while
spending on infrastructure by the DPWH and DoTr is expected to increase by 25.2% and
45.0% respectively.

Seeing faster earnings growth for 2020

We forecast median revenue growth of consumer companies to be sustained at 10.6%

in 2020. This is underpinned by the positive outlook for consumer spending this year.
Margins are also expected to improve, allowing 10 out of the 13 companies that we cover
to deliver faster earnings growth. Note that we forecast median EPS growth of consumer
companies to accelerate to 16.3% in 2020 from 10.2% in 2019 as we forecast gross profits
margins to increase by a median rate of 20 basis points.

Exhibit 6: Consumer sector revenue growth forecast

Revenue Growth (%)

Company 2019E 2020E 2021E
CIC 8.9% 10.6% 8.9%
CNPF 10.3% 10.1% 8.4%
DNL -15.8% 9.3% 8.5%
EMP 6.6% 7.1% 5.9%
JFC 10.9% 22.5% 10.5%
MAXS 11.5% 11.8% 9.4%
MRSGI 12.6% 15.7% 12.8%
PGOLD 11.9% 11.2% 10.5%
PIZZA 12.0% 13.5% 8.9%
RRHI 28.9% 10.4% 9.9%
SSI 9.2% 7.2% 7.1%
URC 7.4% 5.9% 5.8%
WLCON 19.4% 20.9% 15.6%
Median 10.9% 10.6% 8.9%

Source: COL Estimates

COL Financial Group, Inc. 4

 CONSUMER SECTOR I CONSUMER INDUSTRY 2020 OUTLOOK: BETTER GROWTH ON BENIGN
INFLATION AND INCREASE GOV’T SPENDING

FRI 17 JAN 2020

Exhibit 7: Consumer sector GPM forecast

GPM change
Company 2019E 2020E in bps
CIC 34.8 34.9 10
CNPF 22.2 22.6 40
DNL 21.1 21.3 20
EMP 20.8 21.7 90
JFC 15.3 15.8 50
MAXS 27.8 28.1 30
MRSGI 22.7 22.9 20
PGOLD 16.8 17.2 40
PIZZA 28.1 28.1 0
RRHI 22.6 22.7 10
SSI 42.0 42.0 0
URC 31.0 31.0 0
WLCON 31.6 32.0 40
20

Source: COL Estimates

Exhibit 8: Consumer sector EPS growth forecast

EPS Growth (%)
Company 2019E 2020E 2021E
CIC -2.4% 16.9% 12.4%
CNPF 11.2% 23.7% 15.7%
DNL -18.1% 16.3% 14.4%
EMP 10.2% 9.9% 8.7%
JFC -26.3% 13.6% 26.4%
MAXS 18.2% 23.3% 15.5%
MRSGI 7.5% 19.9% 22.4%
PGOLD 5.2% 16.1% 13.4%
PIZZA 10.2% 13.4% 10.5%
RRHI -5.3% 17.3% 14.8%
SSI 35.2% 16.0% 9.0%
URC 19.8% 15.8% 13.6%
WLCON 15.3% 21.2% 18.9%
Median 10.2% 16.3% 14.4%
Source: COL Estimates

COL Financial Group, Inc. 5

 CONSUMER SECTOR I CONSUMER INDUSTRY 2020 OUTLOOK: BETTER GROWTH ON BENIGN
INFLATION AND INCREASE GOV’T SPENDING

FRI 17 JAN 2020

Food manufacturers: Beneficiary of better consumer

spending

We believe food manufacturers are in for a better year in 2020. These companies stand
to benefit from better revenues and steady input costs as poor consumer sentiment,
which tempered sales in 2019, has already improved. However, EMP and other liquor
companies might not completely enjoy stronger sales due to the ratification of the bill
to increase excise taxes on alcoholic beverages. This could dampen volume growth as
liquor players pass on higher taxes through an estimated 5% to 10% increase in average
selling price. On the positive side, the final version of the excise tax hike is significantly
less aggressive compared to the Senate version, making it more manageable for liquor
companies to pass on the tax increase.

Restaurants: Cautious on competition and cost headwinds

Despite the favorable outlook for consumer spending in general, our outlook for
restaurants remains cautious as the emergence of third-party food aggregators leads
to more intense competition. Note that in 2019, restaurants registered weak same
store sales growth as they lost market share to smaller restaurants with limited store
network and no in-house delivery through food aggregators. Aside from hurting sales,
the heightened competitive pressure may lead to higher sales and marketing expenses.
Furthermore, restaurants may suffer higher raw material costs as the African Swine Fever
outbreak has not yet been contained and could push meat prices higher.

Retailers: Better operating environment to lead to margin

recovery

Aside from healthy sales resulting from the favorable outlook of consumer spending,
retailers are expected to enjoy a recovery in gross margins in 2020. We believe the
improving sales outlook justifies higher spending by suppliers on advertisements. Recall
that despite the lower inflation in 2019, retailers did not see a recovery in supplier
support. Most likely, companies budgeted lower advertising spend in 2019 given the
high inflation in 2018 and uncertainties on when consumer spending would improve.
Hence, we expect 2020 to be the year where supplier support improves as lingering
inflationary pressures have faded.

COL Financial Group, Inc. 6

 CONSUMER SECTOR I CONSUMER INDUSTRY 2020 OUTLOOK: BETTER GROWTH ON BENIGN
INFLATION AND INCREASE GOV’T SPENDING

FRI 17 JAN 2020

Attractive valuations

Most companies, with the exception of WLCON and RRHI, are already trading at very
attractive valuations. In fact, 11 out of the 13 consumer companies that we cover are
trading between -0.5 to -2.3 standard deviations away from their 5-year historical average
P/Es. Even the two largest capitalized consumer companies, JFC and URC, are already
trading close to -1 standard deviation from their 5-year average P/Es.

We think the steep discount is unwarranted given the better outlook for the consumer
sector. Hence, we believe the consumer companies’ share price weakness presents a
good opportunity to accumulate stocks which have attractive earnings growth outlook
and are trading at huge discounts to their historical average P/Es.

Exhibit 9: Standard deviation of current P/E from 5-year historical average P/E

3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0

Source: COL Estimates, Bloomberg

COL Financial Group, Inc. 7

 CONSUMER SECTOR I CONSUMER INDUSTRY 2020 OUTLOOK: BETTER GROWTH ON BENIGN
INFLATION AND INCREASE GOV’T SPENDING

FRI 17 JAN 2020

Exhibit 10: Rating and valuations

12 Month 5-year Std dev

Current Fair % upside
Company Rating Forward Average from
Price Value to FV
P/E P/E average
WLCON HOLD 18.20 15.40 -15% 31.2 28.9 1.0
RRHI BUY 79.50 102.00 28% 22.8 21.0 0.9
EMP HOLD 7.22 8.00 11% 15.5 16.7 -0.5
URC HOLD 140.30 177.00 26% 26.6 28.6 -0.7
SSI BUY 2.66 4.28 61% 9.0 13.3 -0.9
JFC HOLD 206.60 248.00 20% 31.7 34.1 -1.0
MRSGI BUY 2.12 4.32 104% 12.1 18.3 -1.1
DNL HOLD 9.20 9.20 0% 19.3 23.1 -1.1
CIC BUY 32.40 40.60 25% 12.5 17.5 -1.2
MAXS BUY 11.36 21.00 85% 7.0 11.3 -1.3
CNPF BUY 15.24 20.40 34% 14.9 18.0 -1.3
PGOLD BUY 39.70 54.50 37% 15.0 18.4 -1.7
PIZZA BUY 9.30 13.90 49% 13.6 21.2 -2.3
Source: COL Estimates

Top picks: PGOLD, RRHI, CNPF

Our top picks among consumer stocks for this year are PGOLD, RRHI, and CNPF. These
three companies are beneficiaries of better consumer spending and have less headwinds
when it comes to competition unlike the restaurants. Furthermore, PGOLD and CNPF are
trading at relatively more attractive valuations compared to their peers. For RRHI, we like
it given its turnaround story with the successful rationalization of Rustan’s supermarket.

We like PGOLD because of its strong position in the consumer retail sector, which should
be one of the main beneficiaries of the low inflation. We expect PGOLD’s profits to
improve strongly in 2020 driven by better margins through increased supplier support as
companies reinvest in advertisements to take advantage of better consumption trends.
Finally, its fast growing S&R segment looks very promising and is poised to be one of
the main drivers of future double-digit earnings growth given robust SSSG and rapid
store expansion. PGOLD’s valuations are also very attractive, with the stock trading at 15X
2020E P/E. This is already 1.7 standard deviations below its 5-year average P/E.

RRHI is also at the forefront in terms of benefitting from the favorable growth outlook
of the retail sector with its well-diversified portfolio of retail formats. In addition, the
company has made good progress in integrating and rationalizing Rustan’s. In fact,
RRHI managed to make Rustan’s profitable one quarter ahead of expectations. Going
forward, RRHI is still expected to unlock more efficiencies from realigning the operations
of Rustan’s, and this bodes well for RRHI’s growth prospects for the years to come.

COL Financial Group, Inc. 8

 CONSUMER SECTOR I CONSUMER INDUSTRY 2020 OUTLOOK: BETTER GROWTH ON BENIGN
INFLATION AND INCREASE GOV’T SPENDING

FRI 17 JAN 2020

We also like CNPF and we think the company deserves to trade at similar multiples
compared to its peers given its likewise attractive growth outlook, strong brand equity
of its product portfolio, and proven track record of growing revenues and profits. In
addition, the strong performance of its milk segment strengthens our conviction that the
company can meet our double-digit 2020 earnings growth forecasts. Note that CNPF is
currently trading at 14.9X 2020E P/E, which is 1.3 standard deviations below its 5-year
average P/E and is also lower than the consumer sector average P/E of around 18X.

COL Financial Group, Inc. 9

 CONSUMER SECTOR I CONSUMER INDUSTRY 2020 OUTLOOK: BETTER GROWTH ON BENIGN
INFLATION AND INCREASE GOV’T SPENDING

FRI 17 JAN 2020

IMPORTANT RATING DEFINITIONS

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

COL FINANCIAL GROUP, INC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 10