(Cosco Capital, Inc:) Results below estimates on underperformance of retail segment

Results below estimates on underperformance of retail segment
1H14 net income flat at Php1.5Bil, below estimates. COSCO reported 2Q14 net income of
Php685Mil, down by 1.7% due to the weak performance of subsidiary PGOLD which reported a
12% decline in net income. This brought 1H14 net income to Php1.5Bil, lower than expected as
this accounts for only 42.7% and 40.2% of COL and consensus estimates, respectively.
PGOLD 2Q14 net income down 12.0% to Php713Mil. PGOLD’s reported 2Q14 net income
of Php713Mil, down by 12.0% y/y due to a decrease in gross margin. This brought 1H14 net
income to Php1.7Bil, lower by 6.5% y/y. Results came in below estimates with 1H14 net income
accounting for only 37.2% and 34.5% of COL and consensus full year estimates. PGOLD’s sales
growth picked up to 19.1% in 2Q14 from only 14.2% in 1Q14. However, this was more than
offset by a decline in gross margin to 15.7% during the second quarter from 17.4% a year ago.
PGOLD’s underperformance weighed on COSCO’s earnings as it accounts for more than half
of COSCO’s net income.
Reducing earnings forecast and FV estimate, but maintaining BUY on valuations. We are
lowering our net income forecasts for 2014E and 2015E by 5.3% and 5.7%, respectively, due
to lower than expected results of the retail business. We are also reducing our FV estimate on
COSCO to Php11.50/sh from Php12.50/sh. However, we are maintaining our BUY rating on
COSCO due to valuations. We believe that the market has not yet priced in COSCO’s liquor,
real estate and other assets. Based on PGOLD’s current market price of Php34/sh, COSCO’s
51% stake in PGOLD, in addition to its net cash position, already approximates the current share
price of COSCO.

SHARE DATA
Rating BUY
Ticker COSCO
Fair Value (Php) 11.50
Current Price 8.00
Upside (%) 43.75

https://ph2.colfinancial.com/ape/Final2/ResearchCompUpdates/Downloads/2014-08-18-PH-E-COSCO.pdf