JG Summit looks to take flight

Lance Gokongwei, the president and chief operating officer of JG Summit, ushers us into his office at Robinsons-Equitable Tower in Manila, stacked with papers, airplane models and a cupboard full of snacks produced by JG Summit’s subsidiary Universal Robina Corp. Despite being the only son of one of Philippines wealthiest men – John Gokongwei – he remains down-to-earth and understated.
Speaking quietly, he told FinanceAsia about how his father, who left Xiamen, China at a young age to carve out his fortunes in Cebu, has influenced him.

“I hope I learnt something from him because he started with nothing over 70 years ago and built a very successful business,” Gokongwei says. “What I admire most is his entrepreneurial ability, particularly in managing risk and being open to new opportunities and ideas”.

Gokongwei has not shied away from taking a few bets. In December last year, JG Summit, the holding company for the Gokongwei group, completed the acquisition of a 27.1% stake in electricity distribution company Manila Electric Co (Meralco) from Philippine brewer San Miguel for Ps72 billion ($1.6 billion).

Gokongwei views the acquisition as a way to gain exposure to the Philippines’ rapidly growing power sector. Meralco is the largest electricity distributor in the Philippines, with about half the market. It also has plans to expand into power generation, having acquired 20% of Global Business Power, an independent power producer in the Visayas with a total capacity last year of 627 megawatts.

“We view it as [an] investment which is a play on the Philippines’ growing economy,” said Gokongwei. “Power consumption will grow. Aside from that, we think it [Meralco] has a lot of opportunities in generation, both here in the Philippines and internationally,” he said.

The deal was struck last year when Credit Suisse, which was advising San Miguel, showed the deal to JG Summit. JG Summit did not hire any advisors, like in 2011 when it acquired a minority stake in Philippines Long Distance Telephone (PLDT) in exchange for its stake in Digital Telecommunications. “[It was] just the circumstance. We were comfortable with our judgment and execution capabilities in both transactions,” Gokongwei explains.

The Meralco deal further cements the group’s partnership with companies run by Philippine tycoon Manny Pangilinan, who is the chairman of PLDT, Meralco and Metro Pacific. Last year, JG Summit partnered Metro Pacific to bid for a project to modernize the Mactan-Cebu international airport.
However, that bid was unsuccessful and, though it has not yet been awarded, it is widely expected to go to India’s GMR and Filipino-owned Megawide Construction, which submitted the highest bid.
When asked whether he plans to partner Metro Pacific on other projects, Gokongwei is non-committal, noting that other projects haven’t kicked off as yet. “Our partnership really relates to Cebu which unfortunately [we] did not win,” said Gokongwei.

Room for acquisitions

Despite having just made a big-ticket acquisition, Gokongwei says that JG Summit’s balance sheet is strong enough to handle more acquisitions. “Post-transaction our net debt-to-equity is still [in the] 0.5 range. [We] could do more either at the parent company level or at our subsidiaries,” Gokongwei said.

JG Summit’s core subsidiaries – food and beverage company Universal Robina Corp, airline carrier Cebu Pacific and property developer Robinsons Land – are all listed on the Philippine Stock Exchange and, according to Gokongwei, have direct access to capital markets and can raise funds to support their own growth.

So far, investors have been supportive of the company’s fund-raising plans. In February, JG Summit raised Ps30 billion ($663 million) through a triple-tranche domestic peso bond, which was the largest peso bond since 2009 when San Miguel Brewery tapped the domestic bond market with a Ps38.8 billion bond. “That was a landmark transaction for us,” said Gokongwei. “It shows the depth of the capital markets and also the strong support for the credit.”

JG Summit also raised $200 million through a share placement in November and another $280 million when it sold shares in Universal Robina Corp last year. With those fund-raising activities, the Meralco acquisition is fully funded.

According to Gokongwei, the company is looking to bulk up in areas it is already operating but is wary of dabbling in too many businesses. “We want to do transactions that further improve the strategic position of the businesses we are already operating in,” Gokongwei said. “As it is, we are quite diversified and our philosophy is that diversification is good, but there is such as thing as too much diversification.”

Focusing on core business

While its investments offer steady dividend income, JG Summit is also investing to expand its own enterprises. Its capital expenditure this year will be about Ps40 billion ($886 million) and will revolve around four businesses – namely Universal Robina, Robinsons Land, Cebu Pacific and its petrochemical business – for which it is expected to spend Ps9 billion, Ps14 billion, $220 million and $150 million, respectively.

One analyst at a bank who declined to be named said the two areas that have been a concern to investors are JG Summit’s petrochemical business, which has been losing money, and its airline Cebu Pacific, which has faced keen competition from rival carrier Philippine Airlines.

According to Gokongwei, JG Summit plans to turn around the petrochemical business in the last quarter of its current fiscal year, which ends in September. “Hopefully, [during the] fourth quarter this fiscal year, we can move it to Ebitda break-even,” Gokongwei said. Together with Japan’s Marubeni, JG Summit operates the first integrated polyethylene and polypropylene plant in the Philippines.
He conceded that the airline industry, in which Cebu Pacific operates, is a “tough business” with capacity outstripping demand last year. Since brewer San Miguel took a 49% stake in Philippine Airlines in April 2012, the carrier has been ramping up capacity aggressively. Gokongwei notes that the intense competition is “not a sustainable situation” but that overall, Cebu Pacific has a strong brand within the Philippines and about half the market share in the domestic market.

JG Summit’s snack subsidiary Universal Robina has been a solid performer. The company, which produces the popular Jack n Jill branded snacks, cup noodles and biscuits, is a beneficiary of growing consumption in Asia.

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