I'm writing this from the Philippines. I no longer drink, but in the old days you'd certainly find me with a cold San Miguel in hand. Its maker, San Miguel Corp. (SMGBY) , is one of the biggest conglomerates in the country.
I outlined 10 days ago how Jollibee Foods (JBFCY) , the largest fast-food chain in the Philippines, is being punished unfairly for its efforts at expansion. After buying the Denver-based burger chain Smashburger, it is now taking over Los Angeles-based chain The Coffee Bean and Tea Leaf, for $350 million. Neither deal for unprofitable food companies has gone down well with investors, although they substantially increase Jollibee's international reach.
San Miguel is arguably better-known than Jollibee, though you can say they're the country's only two truly international brands. You will see both brands plastered all over this country, which is one of the economic stars of Asia right now. The economy is set for 6.2% growth in 2019, which will only build to 6.7% in 2020 and 6.8% in 2021, if Nomura's forecasts are correct.
That's just faster than China this year, and a full percentage point ahead of China in 2020. Only India, where domestic religious issues are a minefield and unemployment is a problem, has a faster pace, the same 6.2% in 2019 due to build to 7.1% in 2021.
The Philippines was supposed to be the Asian economy that conquered the world after World War II. The vast majority of the population speaks English, it's a youthful nation, and Americanized in many ways. Yet due to government corruption, the country was plundered rather than driven to prosperity.
The emergence is happening now instead, 60 years later than expected. Businesses such as call centers and other forms of business-process outsourcing, like accounting back offices, are finding a white-collar population that is young, educated, and keen to work for wages that are a fraction of the cost of the developed world.
Consumer stocks are one way to tap that growth. San Miguel trades at a premium, even though its brew is mainstream. It trades at 19-times fiscal 2020 earnings, compared with 12.2-times earnings for Philippines' conglomerates as a whole.
That's largely justified by its strong brand names. Its vast scale also gives it efficiencies that other countries struggle to achieve in a nation of 7,100 islands (give or take, depending on the tides).
The stock is up 20.5% so far in 2019. That's far ahead of the 7.8% gain of the Philippines composite index. Investors are enthused about infrastructure. They are favorably impressed by the group's $2.15 billion acquisition of the cement maker Holcim, while its Bulacan airport project appears to be going well.
Bulacan airport is intended as a second international airport for Manila, easing congestion at the Ninoy Aquino International Airport. Bulacan is about 30 miles to the north of the Philippine capital. The Transportation Department last week finally gave its blessing for the deal, with San Miguel awarded a $14 billion contract.
As a buy-and-hold stock, San Miguel is as close to a lock as you can get in Southeast Asia. Analysts have yet to factor in the Holcim acquisition, since it is still pending regulatory approval. The Bulacan airport will only begin operation in 2025 at the earliest.
So it may take some time for those deals to translate through to the share price. Should you be searching for Southeast Asian exposure, though, SMC is a good core holding.
It is its separately listed subsidiary, San Miguel Food and Beverage -- traded on the Philippine Stock Exchange as FB -- that is causing a drag on profits. The subsidiary is struggling with pricing because the Philippines is suddenly flooded with an overstock of chicken. That doesn't seem like it would rank right up there with the worst of the world's woes, but it does make it hard for the company to push through price increases over the competition.
But there's an infrastructure play on the F&B, too, an unusual long-term gain in a fast-serve business. Food and Beverage is on track with the building of two new breweries, in northern Mindanao and southern Luzon.
Like its parent, San Miguel Food and Beverage is well ahead of the benchmark index. It's up 19.5% in 2019. Its price is running at 32.6-times 2020 earnings, compared with 23.6-times 2020 earnings for other Philippines' food stocks.
Having risen so far in 2019, both San Miguel Corp. and San Miguel Food and Beverage may struggle to eke out further gains in 2019. But they are one of few omnipresent companies in a country that is definitely advancing fast. Consumer plays combined with infrastructure investment that will pay off in the long run make both companies solid holdings for the long term.