May 28, 2012- Puregold Price Club – Assessing the Impact of Parco Acquisition

This May 28, 2012 – Puregold released a disclosure with PSE re the acquisition of Parco Supermarkets from the Gant Group of Companies.  For more details, please read this : http://www2.pse.com.ph/html/disclosure/pdf/2012/pdf/dc2012-4127_PGOLD.pdf

Important Details To Note:

1.) The acquisition shall be via the purchase by PGOLD of all the outstanding shares of stocks of the said selling company. Acquisition price  is less than 10% of the book value of PGOLD as of March 31, 2012 and shall be paid in cash by PGOLD from internally generated funds.

(Total Equity as of March 31, 2012 stands at Php9.78 Bil)

2.)   PGOLD is now operating a total of 131 stores: 106 Puregold Stores, 19 Parco Supermarkets, and 6 S&R  membership shopping clubs. In terms of geographical locations, the 131 stores are located as follows: 71 stores in Metro Manila, 22 stores in north of  Metro Manila, 37 stores in south of Metro Manila and 1 store in the Visayas.

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Personal Analysis:

To answer the question whether Puregold paid cheap or expensive on the acquisition, we need to make estimates.  So below are some educated guesses:

a.) Assuming that we assess each Parco Supermarket to have sales revenues equivalent to Puregold Jr. (This is possibly optimistic, as I would assume Parco’s average sales revenues can be lower by 30%).

These are the current numbers:

Like per Like – As of March 31, 2012, Puregold Price Club has 28 supermarkets, 10 of which were opened in the past 3 quarters of 2011.  These supermarkets contributed Php1,540 Mil in sales revenues and gross margin of 16%.  Average Revenue /store then equates to Php55 Mil/ quarter or Php220 Mil/year.

So the math is really simple if you will crunch the numbers = If an average Parco supermarket enjoys around Php40 Mil (30% less = 38.5 , I rounded it up) – Php55 Mil in sales revenues per quarter, then incremental gross profit to Puregold will be between Php6.4-8.8 Mil (Just gross profits/store/quarter).

Now let’s assume that net margin will be 4% (that’s the current net margin of Pgold), so that’s incremental net income of Php 1.6 – 2.2 Mil per store/quarter.  This means that income of Puregold can likely increase between Php 30.4-41.8 Mil/ quarter.  Since we’re already almost halfway into the year, Puregold can likely increase net income by about Php60.8-83.6 Mil from this acquisition.

The disclosure said that Puregold paid less than 10% of its book value which means it paid less than Php978 Mil.  If one pays 10X P/E to the Php84 Mil, that’s Php836 Mil pesos.  This is cheap considering Puregold Price Club is currently trading at 19-20X forward P/E depending on what estimates you’re using.

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So the question is– how much did Puregold pay for these Parco Supermarkets?

Answer- If it paid at a price nearer to Php600 Mil – That’s cheap.  If it paid at a price nearer to Php800 Mil – That’s still cheap.

Possible Incremental increase in Puregold’s earnings per share? === My personal estimates is that Puregold Price Club (without the S&R) will earn Php2178 Mil this year.  Then this will add around 80 Mil pesos in the net income.

80 Mil / 2766 Mil outstanding shares = 0.03 centavos and assigning a 22X forward P/E is equivalent to a 66 centavos increase in target price.

By the way, the stock increased around 75 centavos I believe awhile ago, closing at Php22.75

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Qualitative Factors We Cannot Forget :

1.) Synergies Expected to Accrue – Most analysts only put in their financial models 25 additional stores from the organic growth of Puregold.  The acquisition of Parco Supermarkets accelerates the expansion of stores, and is a welcome development.

2.) Because of these acquisitions, will Puregold Price Club eventually acquire even other smaller supermarkets?  And if they can pay cheaply in their acquisitions, then this will be accretive to the company.  I believe, that we can never ignore this considering that the company just made 2 acquisitions, one equity share swap and one paid in cash.

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Well there’s still a lot of information lacking — such as how much does Parco supermarkets actually earn?

It’s a gradual process, but every stock buyer must do his/her own due diligence.  Stock participants (especially investors) need to ask more, and compute more. 🙂

Also, just because one can compute things, one needs to understand that all of these are just simply estimates.  Be aware of all the risks inherent in any investment.

Nevertheless, I’m very glad to see that the company is really growing their sales both through organic and through acquisitions.

– Faceless Trader

(Author is long the company)

P.S.

Do your own due diligence.  Above are just mumblings and mumblings.  Thanks. If you lose money, or make money–it’s all just you.  Don’t blame anyone for anything.  Ingats!

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