July 26, 2015 – A Bet on SBS IPO Offering is a bet on Mr Necisto Sytengco’s Trading Skills & Highly Valued Non-Core Assets

Listing: August 10, 2015

Offer Price: P2.75

Dividend Policy: 20% of Retained Earnings (Previous year)

Start of Offer Period: July 28, 2015 9AM

Deadline: July 30, 2015 12 NN

LSI: 42M shares

PSE Trading Participants: 84M shares

Issuer: BDO Capital

Total Outstanding Shares: 1.2 Bil shares

Market Cap: P3.3B 35% listed to the public or 420M million shares

****** Use of Proceeds

Gross proceeds : P1,155,000,000

Net proceeds: P1,097,413,977

Use: Expand its product offering, invest in capital expenditures to promote operational efficiencies, partially retire a term loan from BDO Unibank, Inc. which is the parent company of BDO Capital & Investment Corporation, the Sole Issue Manager, Lead Underwriter & Bookrunner, and for working capital purposes

****** Company Overview:

-Major chemical trader-distributor in the Philippines supplying a diverse customer base of more than 1,800 customers with over 3,000 chemical products sourced from more than 500 suppliers

For the years 2014, 2013 and 2012, the Company registered total sales of P933,080,958, P785,947,148 and P993,927,489, respectively.

As of March 2015, total sales amounted to P243,208,756. The Company offers a comprehensive selection of chemical products to service its wide set of clientele in the following industries: (i) food ingredients, (ii) industrial, (iii) feeds, agriculture and veterinary care, (iv) pharmaceutical and (v) personal care and cosmetics. At present, the Company’s top customers in terms of sales include RDL Pharmaceutical Laboratory, Inc., UniPresident (Phils) Corporation, Zamboanga Carrageenan Manufacturing Corporation, Empire Chemical Company, Inc. and Zeno Chemical Industries, Inc. Top products in terms of sales are monosodium glutamate, starch, potassium chloride, hydroquinone and menthol crystals.

The Company also takes advantage of the opportunities in the real estate market and acquires real properties with valuable growth opportunities to (i) build its capital base, (ii) provide leverage capability, and (iii) produce a diversified income base .

Post IPO the Sytengco Family will continue to own directly and indirectly 64.98% of the Company Since the 1990’s the Company has become an important chemical supplier to leading manufacturing businesses in the country such as, but not limited to, D&L Industries Group of Companies, Uni-President (Philippines) Corporation, RDL Pharmaceuticals, Inc., Universal Robina Corporation, and San Miguel Corporation, Inc. It further expanded its distribution warehousing facilities and product portfolio to serve the chemical requirements of high growth markets such as food ingredients, industrial, feeds, agriculture and veterinary care, pharmaceutical, personal care and cosmetics

For the year ended 31 December 2014 and the three months ended 31 March 2015, the Company’s product sales comprise of 90% Commodity Chemicals and 10% Non-Commodity Chemicals. Food ingredients chemicals such as food additives, processing aids, nutritional supplements, dairy and egg products, starch and bakery ingredients accounted for the largest portion of the Company’s 2014 sales, contributing a 33.8% share, followed next by industrial segment at 24.5% with chemicals such as caustic soda, hydrochloric acid, absorbents, and mineral products. Feeds, agriculture and veterinary care chemicals such as feed additives and premixes, quinolones and coccidiostatics accounted for at 22.8%. As of 31 March 2015, the Company posted sales of P243 million, with food ingredients, industrial and feeds, agriculture and veterinary care segments accounting for 38.06%, 35.11% and 16.8%, respectively of sales turnover for the period.

With over 3,000 types of chemical products sourced from more than 500 suppliers and distributed to a diverse customer base of more than 1,800 customers, the Company is one of the major chemical wholesaler-distributors in the country. The Company recorded a sales turnover of P933.1 million in 2014, P786 million in 2013 and P994 million in 2012, for a combined turnover of P2.7 billion for the three year period ended December 31, 2014. As of 31 March 2015, the Company posted sales of P243 million. More than three (3) decades San Miguel Corporation, Uni-President (Phils.) Inc., and Universal Robina Corporation are among the Company’s oldest clients with relationships dating back to the 1980s up to the present. Screen Shot 2015-07-26 at 3.32.29 PM Screen Shot 2015-07-26 at 3.36.06 PM Screen Shot 2015-07-26 at 3.53.44 PM Screen Shot 2015-07-26 at 3.55.02 PM

Competition Third party local distributors such as Himmel Industries, Inc., Neco Philippines, Inc., Alysons Chemical Enterprises, Inc., subsidiaries of key global chemical distributors such as Brenntag Ingredients, Inc., DKSH and Connel Brothers and chemical producers such as BASF and Dow Chemicals. Most competition comes from domestic chemical distributors. ***** Screen Shot 2015-07-26 at 8.55.07 PM

These new product lines may include innovative sulfate-free chemical ingredients for cosmetic and personal care to address health and wellness trends in the beauty industry and natural flavors and ingredients and natural-based preservatives for food products which are the largest and fastest growing trend for the food and beverage industry. Some of these natural products include natural flavors and extracts, colors from natural sources, natural sweetening systems, seasonings and taste modifiers which go through non-chemical pasteurization processes. The Company will also introduce more eco-friendly plant based ingredients for detergents in line with the growing trend for green cleaning products. These new product purchases are intended to be made within the first half of 2016. This is consistent with the longterm strategy of the Company to expand and diversify its product portfolio to respond to consumer preferences and drive innovation in the food and wellness industries. Screen Shot 2015-07-26 at 8.57.50 PM Screen Shot 2015-07-26 at 8.59.43 PM

****

The Business model is reliant on Mr Necisto Sytengco.   He is the strength and also the weakness of this company.  He is 61 years old.  He’s built the business since the 1980s and thus with 15 warehouses and multiple real estate properties, we can only infer that his commodity trading skills have been top notch such that his commodity trading sales portfolio has reached in the realms of billions.  The problem is scalability.  How can they continue to sustain earning?  It is a difficult task because it is all about his trading ability.   To offset the volatility of commodities, SBS Philippines had largely diversified in real properties.

sbs bm

Investments in Real Properties
To build its capital and have some recurring income base, the Company takes advantage of the opportunities in the real estate market and buys real properties for Company’s value enhancement. These non-core assets are financed through internally-generated cash, borrowings and proceeds from sale of some investments. Such assets are held as investments for capital gains and provisionally offered for commercial leasing for passive cash flows until such time that these properties are eventually sold. The Company engages in and adjusts such selective land acquisition program in response to competition as well as the prevailing and anticipated economic conditions. The gains from these real estate investments would grow and diversify the Company’s income streams and work to counterbalance some of the fluctuations in the chemicals business. For the year ended 31 December 2014, investments in real properties contributed 7.23% in revenue while chemical sales contributed 92.17%. For the quarter ended March 31, 2015, revenues from property investments amounted to 9.56% of total revenues while 89.11% were accounted by chemical sales.

Since 2002, the Company has been intensifying its land acquisition program with prime land acquisitions as the real estate market is seen to offer rich opportunities for Company’s asset value creation given the robust economy, rising foreign exchange inflows, availability of credit and lower financing terms, and the growing requirements of the property development industry. To improve return on capital, the Company seeks to make more efficient use of its resources and capital by aiming its land acquisition program towards net value asset accretion.
The Company believes that it has achieved successful investment performance as the total fair value of these properties as of 31 December 2014 determined by reference to current and most recent prices for similar property in the same location amounts to P2.9 billion from an investment carrying amount of P955 million.

*****

Mr Necisto Sytengco is SIMPLY A VERY VERY GOOD TRADER IN PRIME PROPERTIES.  Note the billions of pesos he made on paper in his non-core assets.

These prime non-core assets are described as follows:
1.) Ayala Avenue Property
This property consists of two (2) adjoining lots located at 6790 Ayala Avenue, Makati City and containing a combined area of Two Thousand Four Hundred (2,400) SQ M. This property was acquired for P 390 million and as of 2013, the property was appraised to have an estimated fair market value of P1.166 billion. This property is being provisionally leased out for use as a temporary parking lot.

2.) Las Pinas Latex Property
This property consists of seven (7) contiguous lots situated along the Zapote Road, in Barangay Pamplona, Las Pinas City, with an old office building improvement and for a combined area of Thirty Four Thousand Two Hundred Sixty Three (34,263) SQ M. This property was acquired for P 266 million and as of 2013, the property was appraised to have an estimated fair market value of P753.78 million.

3.) Las Pinas LNC Property
This property consists of a parcel of land located along Alabang-Zapote Road, Barangay Almanza, Las Pinas City with an area of Fifteen Thousand Three Hundred Eighteen (15,318) SQ M. This property was acquired for P 162 million and as of 2013, the property was appraised to have an estimated fair market value of P 386 million.
4.) EDSA-Pascual Property
This property consists of two (2) adjoining lots, with an office building improvement and one-storey warehouse facility located in Barangay South Triangle, Quezon City for a total area of Three Thousand Three Hundred (3,300) SQ M. This property was acquired for P 72 million and as of 2013, the property was appraised to have an estimated fair market value of P 355 million. This property is being provisionally leased out for road billboard advertising.

5.) Fort Bonifacio Property
This property consists of a parcel of land located in McKinley Business Park, Bonifacio Global City, Taguig City with an area of One Thousand Eighty Three (1,083) SQ M. This property is not encumbered but subject to jurisdictional boundary dispute between Makati City and Taguig City. This property was acquired for P57 million and as of 2013, the property was appraised to have an estimated fair market value of P275 million.

6.) Gapan, Nueva Ecija Property
This property consists of a parcel of land located at Barangay Sta.Cruz, Gapan, Nueva Ecija with an area of Forty Nine Thousand Nine Hundred Sixty Six (49,966) SQ M. This property was acquired for P 1 million and as of 2004, this property was appraised to have an estimated value of P7.5 million.

7.) Avida Asten Towers
One studio unit with an area of 22.4 SQ M. and one-bedroom unit with an area of 37.49 SQ M., located at the 25/F and 27/F, respectively and two (2) parking slots of the Avida Asten Towers condominium building located at Malugay corner Yakal Streets in Makati City. These properties were acquired for a combined price of P6.2 million. The condominium building project is currently under construction and the Company expects turnover of possession of the units by 2016.

*****

Adding all the fair market value of his non core assets: it’s approximately P3 Bil pesos.

****

Warehouse leasing

leases

People behind SBS Philippines

Necisto U. Sytengco is the founder of the business of the Company and has been its Chairman of the Board since the organization of the Company in 2001. He has over 40 years experience in the chemical trading business and has been responsible for shaping the Company strategy and leading the growth of the Company. He also currently serves as Board Chairman of the corporations owned by the Sytengco Family which includes Aneco Industries Corporation, Anesy Holdings Corporation, Sytengco Foundation, Baler Industrial Corporation, Sytengco Enterprises Corporation, and Swan Insurance Agency Corporation. Mr. Sytengco earned his degree in Mechanical Engineering from the Mapua Institute of Technology

*****

Conclusion:

Income as of 1Q15 was P33M on sales of approximately 230 Mil (up 25% yoy).

The key point about SBS is the lack of predictability or sustainability in terms of income.  The only recurring threshold is the fact that its non-core assets’ fair value is way beyond the market capital and is already equivalent to P3 Bil which essentially values the entire trading skills, cash flows of Mr. Necisto Sytengco at practically zero which makes P2.75 a strong buy.

We learned from the investors’ briefing that the company maintains an inventory of 2 years’ worth which we believe could have typical drawdowns as commodities have largely fallen.  We may not know the exact commodity of these 3000 chemicals but a lot of it will rely on how good Mr. Necisto Sytengco’s trading skills are.

While he has a 40 year experience in the trading business and 15 warehouses and properties all purchased as cash flows from previous years’ operations which can mark the trading skill of a real commodity veteran, the upside is all about how good the commodity cycle is and how good Mr. Necisto Sytengco’s skills are.

Thus, a bet on SBS IPO is simply put a bet on his trading skills + the lack of downside considering the P3 Bil asset pool from the non-core assets listed above.

P2.75 is a good entry price not using any P/E ratio but mainly on the book value of its non-core assets.  However, we hear it is 8 times oversubscribed (as stated by the BDO investment bank during the investors’ briefing) so this is difficult to get hold of.

– Faceless Trader

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One Response to July 26, 2015 – A Bet on SBS IPO Offering is a bet on Mr Necisto Sytengco’s Trading Skills & Highly Valued Non-Core Assets

  1. eightfoldcapital says:

    Who needs to read the Prospectus when everything you need (and more) is provided for you in this post? Great post Faceless Trader as always.

    Like

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