SHARE DATAUniversal Robina Corporation:Slowing growth prospects already priced in, upgrading to BUY3QFY15coreincomeupPhp10.8%toPhp3.9Bil.URCreported3QFY15coreincomeof Php3.9Bil,higherby10.8%y/y.Thisbrought9MFY15coreincometoPhp12.2Bil,higherby 14.1% y/y. Results missed estimates, accounting for 73.7% of our full year forecast due to weak salesfromthedomesticbrandedsegmentduring3QFY15.Domesticbrandedsalesgrewby only1.7%duringthequarterduetohighbaseeffects,lowersalesintheVisayas-Mindanao region, and PET capacity constraints. However, the weakness in revenues was partially offset by better-than-expected margins. Operating margin improved by 100 basis points to 16.0% in 3QFY15 due to sales mix and higher volumes leveraging on the fxed expense base. Domesticsalesfattishin3Qascoffeecomesoffahighbase.URCreportedthatsales ofthedomesticbrandedsegmentgrewbyonly1.7%in3QFY15.Thiswaspartiallydueto coffee coming off a high base. Recall that URC implemented a 12% price increase for coffee in May 2014. Trade loading ahead of the price increase also contributed to tougher year-on-year comparables. Nonetheless, despite heightened competition, URC was able to defend and even increase its market share in coffee by one percentage point to 30%. Management highlighted that it will deploy resources as necessary to defend its share but that it will be prudent in doing so. Slowergrowthoutlookpricedin,upgradingtoBUY.Wearereducingoursalesgrowth forecast to factor in decelerating market share growth in coffee. Assuming URC grows its coffee business in line with the industry, we estimate that domestic branded foods to grow at a 5-year CAGR of 8%. This is already conservative in our view given that domestic branded sales growth has averaged 14.8% over the past 10 years. At the same time we are rolling over to end-2016 estimates. Consequently, our FV estimate fell slightly to Php228/sh from Php230/sh. Our new FV estimate implies a 2016E P/E of 33.5X. We are also upgrading our rating on URC to BUY as we believe much of the risk has been priced in. Note that since it reached a high of Php234/shlast April,URCssharepricehasgonedownby14.5%asinvestorswerealreadybracing foradisappointingsetofsecondquarterearningsresults.However,evenafterfactoringina conservative growth outlook for domestic sales growth, capital appreciation potential based on our reduced FV estimate remains signifcant at 14%. Rating BUYTicker URCFair Value (Php) 228.00Current Price 200.20Upside (%) 13.89Jed Frederick Pilarcajed.pilarca@colfnancial.comYear to September 30 (Php Mil) 2012 2013 2014 2015E 2016ERevenues 71,204 80,995 92,376 111,577 122,478 % change y/y 6.0 13.8 14.1 20.8 9.8Operating Income 7,810 10,279 14,119 17,580 19,730 % change y/y 13.0 31.6 37.4 24.5 12.2 Operating Margin (%) 11.0 12.7 15.3 15.8 16.1Core Profits 8,377 11,263 14,214 16,382 18,749 % change y/y 17.6 34.4 26.2 15.2 14.5 Core Profit Margin (%) 11.8 13.9 15.4 14.7 15.3Net Income 7,763 10,045 11,559 12,944 14,866 % change y/y 66.8 29.4 15.1 12.0 14.9 Net Profit Margin (%) 10.9 12.4 12.5 11.6 12.1EPS 3.70 4.60 5.30 5.93 6.81 % change y/y 63.7 24.3 15.2 12.0 14.9RELATIVE VALUEP/E(X) 54.7 43.4 37.7 33.7 29.3P/BV(X) 9.2 8.6 7.8 7.1 6.4ROE(%) 16.8 19.8 20.7 21.1 21.9Dividend Yield (%) 0.9 1.2 1.5 1.7 1.9Source: URC, COL est imat esFORECAST SUMMARYTUESDAY, 11 AUGUST 2015ABSOLUTE PERFORMANCEMARKET DATA1M 3M YTDURC 8.22 0.10 2.86PSEi 2.41 -2.67 4.70Market Cap 436,736.69MilOutstanding Shares 2,181.50Mil52 Wk Range 159.88 - 234.003Mo Ave Daily T/O 552.15MilSHARE PRICE MOVEMENT809010011011-May-15 11-Jun-15 11-Jul-15 11-Aug-15URC PSEiP HI L I P P I NE E QUI T Y R E S E A R C HTUESDAY, 11 AUGUST 2015page 2URC I EARNINGS ANALYSIS3QFY15 core income up Php10.8% to Php3.9BilURC reported 3QFY15 core income of Php3.9Bil, higher by 10.8% y/y. This brought 9MFY15 core income to Php12.2Bil, higher by 14.1% y/y. Results missed estimates, accounting for 73.7% of our full year forecast due to weak sales from the domestic branded segment during 3QFY15. Domestic brandedsalesgrewbyonly1.7%duringthequarterduetohighbaseeffects,lowersalesinthe Visayas-Mindanao region, and PET capacity constraints. However, the weakness in revenues was partially offset by better-than-expected margins. Operating margin improved by 100 basis points to 16.0% in 3QFY15 due to sales mix and higher volumes leveraging on the fxed expense base. Exhibit 1: Results Summary Source: URC, COL estimates, BloombergDomestic sales fattish in 3Q as coffee comes off a high baseURC reported that sales of the domestic branded segment grew by only 1.7% in 3QFY15. This was partially due to coffee coming off a high base. Recall that URC implemented a 12% price increase for coffee in May 2014. Trade loading ahead of the price increase also contributed to tougher year-on-year comparables. Nonetheless, despite heightened competition, URC was able to defend and even increase its market share in coffee by one percentage point to 30%. Management highlighted that it will deploy resources as necessary to defend its share but that it will be prudent in doing so. Also faced weak VisMin sales and capacity constraintsAdditionally, URC cited other factors that affected domestic sales. The company saw weaker sales in traditional trade in the Visayas-Mindanao region. URC believes this may be due to El Nio affecting the agriculture-based economy in that region. Capacity constraints for PET continued to hound URC but additional lines will be ready in the next few quarters. URC will also be augmenting Philippine PET supply from its facilities in Vietnam. COL ConsensusRevenue 23,496 26,298 11.9 69,239 81,943 18.3 70.5 71.5Operating Income 3,515 4,208 19.7 10,525 13,059 24.1 73.6 70.8Operating Margin (%) 15.0 16.0 1.0 15.2 15.9 0.7 - -Core Earnings 3,555 3,937 10.8 10,692 12,195 14.1 73.7 -Core Margin (%) 15.1 15.0 -0.2 15.4 14.9 -0.6 - -Net Income 2,387 3,104 30.0 8,553 9,526 11.4 72.9 68.6Net Margin (%) 10.2 11.8 1.6 12.4 11.6 -0.7 - -in PhpMil 3QFY14 3QFY15 %Change 9MFY14 9MFY15 %Change% of ForecastP HI L I P P I NE E QUI T Y R E S E A R C HTUESDAY, 11 AUGUST 2015page 3URC I EARNINGS ANALYSISBranded margins continue to improveURCs EBIT margin continued to improve in 3QFY15, expanding 100 basis points to 16.0%. This is higher than our full year forecast of 15.3%. Prices continued to be subdued across many commodities. PricesofpalmoilandPETinparticularhavefallenintandemwithoilprices.Cocoaseemstobe the only commodity product that is increasing in price. However, URC has already hedged its cocoa requirements for up to next year. International still facing headwindsInternationalsalesgrewby40%in3QFY15.However,thiswaslargelyduetotheconsolidation ofGriffns.PaceofgrowthinitsURCskeymarketswassustainedup9%inVietnam,13%in Thailand, 39% in Indonesia, and 6% in New Zealand and Australia. However, weak consumption in Vietnam and Thailand remained an issue. Additionally, devaluation of some currencies, particularly theNewZealandDollarandtheIndonesianRupiah,hurtURCsperformance. AccordingtoURC, excluding Griffns, sales grew by 7% in peso terms and 12-13% in local currency terms. Performance was below expected. Factoring in slower growthAfter coming off a high base in 3QFY15, we expect domestic sales growth to normalize for URC in thesucceedingquarters.Thecompanysaidthatdomesticsaleswerealreadyupby13%inJuly after increasing by only 1.7% in 3QFY15. However, the rapid pace of growth in sales which reached an average rate of 21% during the past three years would be diffcult to replicate in our opinion as URCslatestblockbusterproduct,GreatTasteWhite,isalreadymaturing.Wearereducingour sales growth forecast to factor in decelerating market share growth in coffee. Assuming URC grows its coffee business in line with the industry, we estimate that domestic branded foods to grow at a 5-yearCAGRof8%.Thisisalreadyconservativeinourviewgiventhatdomesticbrandedsales growth has averaged 14.8% over the past 10 years. The pace of growth fell to single digits only twice during that period 4.2% in 2010 and 6.8% in 2011. The reduction in our sales growth forecast was partially offset by our higher EBIT margin forecast. We believe the downside threat to URCs margins is minimal considering raw material prices have been defated across the board. Exhibit 2: Historical domestic branded sales growth Source: URC, COL estimates0.0%5.0%10.0%15.0%20.0%25.0%30.0%2005 2006 2007 2008 2009 2010 2011 2012 2013 2014P HI L I P P I NE E QUI T Y R E S E A R C HTUESDAY, 11 AUGUST 2015page 4URC I EARNINGS ANALYSISAt the same time we are rolling over to end-2016 estimates. This will partly offset the negative impact ofourlowerearningsforecastonURCsfairvalue.Consequently,ourFVestimatefellslightlyto Php228/sh from Php230/sh. Our new FV estimate implies a 2016E P/E of 33.5X. Exhibit 3: Change in EBIT forecast Source: COL estimatesExhibit 4: Changes in fair value estimate Source: COL estimatesStrategies to secure long-term growth in placeAlthoughconsumptionremainsweakinsomeofURCsinternationalmarkets,thecompany continues to invest for long term growth. Its central Vietnam factory will start production in August. This should alleviate supply constraints for PET. In Thailand, URC has partnered with 7-Eleven. URC haslaunchedSKUsexclusivelyfor7-Eleven.Webelievethepartnershipisahugesteptowards penetrating modern retail in Thailand considering that 7-Eleven is the market leader in Thailand retail. URC also announced that it will begin distributing Griffns products in Asia this year. The frst phase, which will begin in October to December of this year, will involve selling into Hong Kong and Singapore where no product customization is necessary. The second phase will be to sell in the Philippine and Thailand markets and is scheduled to begin in March or April next year. For the said phase, URC will need to customize Griffns products, primarily to reduce pack sizes. The third phase will be to sell Griffn products in all other countries where URC operates. FV estimate % ChangeOriginal 230Revised estimates 205 -10.9%Rollover 228 11.2%05,00010,00015,00020,00025,00030,00035,0002015E 2016E 2017E 2018E 2019E 2020EOriginalRevisedP HI L I P P I NE E QUI T Y R E S E A R C HTUESDAY, 11 AUGUST 2015page 5URC I EARNINGS ANALYSISSlower growth outlook priced in, upgrading to BUYAlthoughURCwilllikelybefacingslowersalesgrowthduetolimitedmarketshareincreasesin coffee, we believe much of the risk has been priced in. Note that since it reached a high of Php234/sh last April, URCs share price has gone down by 14.5% as investors were already bracing for a disappointing set of second quarter earnings results. However, even after factoring in a conservative growthoutlookfordomesticsalesgrowth,capitalappreciationpotentialbasedonourreducedFV estimate remains signifcant at 14%. We are positive on URC in the long run due to its position in PH and ASEAN branded foods. The company continues to make investments to make inroads towards long term growth, specifcally, more production facilities across ASEAN, joint ventures with Danone and Calbee, and the acquisition of Griffns. P HI L I P P I NE E QUI T Y R E S E A R C HTUESDAY, 11 AUGUST 2015page 6URC I EARNINGS ANALYSISInvestment Rating DefnitionsStocks that have a BUY rating have attractive fundamentals and valuations, based on our analysis. We expect the share price to outperform the market in the next six to twelve months.Stocks that have a HOLD rating have either 1.) attractive fundamentals but expensive valuations; 2.) attractive valuations but near term earnings outlook might be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely inline or underperform the market in the next six to twelve months.We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to twelve months.Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report.Important Disclaimers2401-B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, 1605 PhilippinesTel: +632 636-5411Fax: +632 635-4632Website: http://www.colfinancial.comBUY HOLD SELL