Hidden Gem: Wala Pa Rin Tatalo sa Alaska (AMC - P5.40)
As the tagline says: nobody can beat Alaska. I guess the phrase aptly describes my investment argument(s) for Alaska Milk. As the market hits new highs, it's very hard to find bargains that can likely return 50% - 100% in the next few months. Indeed Alaska is one of the few hidden gems still to be discovered by the market.
From the outside, there is nothing "sexy" investing in a milk company. However, looking closely, Alaska has the potential to beat the "hot" sectors right now like mining and property stocks over the next 12 months. The way liquidity is flowing into the market, I guess, it is a matter of time before investors start re-rating Alaska. Here's why:
Earnings + revenue growth. For 2007, earnings are expected to grow by at least 50% to P600m. Growth will be driven by better margins and higher revenues from the acquisition of Nestle's milk business. Alaska expects the acquisition to add at least P3.0bn to its full year revenue. So by 2008, Alaska should be generating at least P9.5bn in sales compared to P6.0bn in 2006.
Nestle acquisition = monopoly. What's surprising is that the market has ignored the potentials of the Nestle acquisition. The combined Alaska and Nestle business will have a virtual monopoly in the local canned milk market. This is a classic case of "1+1=2.5". Alaska is strong in the the retail market whilst Nestle is big in the institutional segment. So moving forward, Alaska will be strong on both ends of the milk market. Added to this, the existing infrastructure of Alaska can readily support both businesses. Thus, there is synergy from day 1.
One of the most "tried and tested" investment philosophy is to buy when there is an obvious change in paradigm. The "new" Alaska is a totally different animal from the "old" Alaska. It is now the undisputed industry leader.
5.5% dividend yield = margin of safety. Alaska pays around P0.375 per share in cash dividend per year. This translates to an annualized yield of 5.5%. At this rate, Alaska pays an even better yield compared to the 365-days T-bill rate which currently is around 5.1%. This is a classic case of investing with adequate margin of safety. At worst, you will still be getting a decent return on your investment. This beats leaving your money with the government.
Valuation is sexy. Alaska currently trades at 7.0x PER and 4.x EV/EBITDA. It's cash per share amounts to P2.20. So effectively, the market is paying a mere P3.20 for the value of its milk business. To my mind, Alaska should be trading at 10.0x PER and 12.0x EV/EBITDA to capture the full value of its business. At those levels, Alaska is easily worth between P7.60 and P10.0 per share. I guess, to be able to buy a stock at single digit PER, generating 50% earnings growth makes an investment sexy. Assuming my assumptions are correct, this should translate to 50 - 100% return in the next 12 months.
From the outside, there is nothing "sexy" investing in a milk company. However, looking closely, Alaska has the potential to beat the "hot" sectors right now like mining and property stocks over the next 12 months. The way liquidity is flowing into the market, I guess, it is a matter of time before investors start re-rating Alaska. Here's why:
Earnings + revenue growth. For 2007, earnings are expected to grow by at least 50% to P600m. Growth will be driven by better margins and higher revenues from the acquisition of Nestle's milk business. Alaska expects the acquisition to add at least P3.0bn to its full year revenue. So by 2008, Alaska should be generating at least P9.5bn in sales compared to P6.0bn in 2006.
Nestle acquisition = monopoly. What's surprising is that the market has ignored the potentials of the Nestle acquisition. The combined Alaska and Nestle business will have a virtual monopoly in the local canned milk market. This is a classic case of "1+1=2.5". Alaska is strong in the the retail market whilst Nestle is big in the institutional segment. So moving forward, Alaska will be strong on both ends of the milk market. Added to this, the existing infrastructure of Alaska can readily support both businesses. Thus, there is synergy from day 1.
One of the most "tried and tested" investment philosophy is to buy when there is an obvious change in paradigm. The "new" Alaska is a totally different animal from the "old" Alaska. It is now the undisputed industry leader.
5.5% dividend yield = margin of safety. Alaska pays around P0.375 per share in cash dividend per year. This translates to an annualized yield of 5.5%. At this rate, Alaska pays an even better yield compared to the 365-days T-bill rate which currently is around 5.1%. This is a classic case of investing with adequate margin of safety. At worst, you will still be getting a decent return on your investment. This beats leaving your money with the government.
Valuation is sexy. Alaska currently trades at 7.0x PER and 4.x EV/EBITDA. It's cash per share amounts to P2.20. So effectively, the market is paying a mere P3.20 for the value of its milk business. To my mind, Alaska should be trading at 10.0x PER and 12.0x EV/EBITDA to capture the full value of its business. At those levels, Alaska is easily worth between P7.60 and P10.0 per share. I guess, to be able to buy a stock at single digit PER, generating 50% earnings growth makes an investment sexy. Assuming my assumptions are correct, this should translate to 50 - 100% return in the next 12 months.
posted by jack galt at
4:17 PM
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