Ginebra San Miguel: A Stable Alcohol Beverage Company (OTCMKTS:GBSMF)

Investment Thesis

Ginebra San Miguel (OTC:GBSMF) is a leading alcohol beverage company in the Philippines. The company primarily competes in the Spirit industry with its trademark product, ‘Ginebra Gin.’

Even with the stock price selling at an all-time high, with an EV/EBIT multiple of around 7.5x and an intrinsic value of ₱343, it is still undervalued by 25% at the current price of ₱257 per share as of this writing. Furthermore, Ginebra’s stability, growth potential, and demonstrated financial performance make it an even more attractive stock to buy. Thus, I recommend a ‘Buy’ rating on this stock.

Brief Company And Industry Overview

The Philippine Spirits market has three leading players: Ginebra San Miguel, Emperador, and Tanduay from LT Group. These companies are leaders in their respective spirits categories: Emperador is a leader in Brandy, Ginebra San Miguel in Gin, and Tanduay in Rhum.

The chart below shows that these three companies control 90% of the Philippines spirit market.

While each of the three players competes in multiple price ranges, these companies are well known for their products that cater to price segments of ₱100-200 per liter.

This price range is ideal for the target market of these drinks; despite high GDP growth, the country remains relatively poor, with 46% of families still considering themselves poor. In the Philippines, the current minimum wage for the most dense city, Metro Manila, is ₱610 per day; it is lower in other parts of the country, especially in the northern and southern parts of Luzon, where Ginebra dominates. In my personal experience, anything above ₱500 per liter of spirit drink is too expensive for an average Filipino since most of their income goes to other non-discretionary expenses such as food, electricity, rent, and water. Additionally, a Filipino family needs to earn around ₱25,000 each month for a ‘decent’ living, which is far beyond the monthly minimum wage earnings of around ₱14,600 of one individual. This showed how the cost of living in the Philippines made these low-cost spirit drinks popular among a large part of the population.

The popularity of these three brands led to the Philippine spirit consumption being dominated by the categories they represent.

While consumer preference may change, resulting in some categories outperforming gin, rum, and brandy, Ginebra’s strong brand recognition is enough to ensure its growth in the future. Their established market presence, scale, and brand recognition will continue driving positive business performance, which I will further explain below.

A Stable Business That is Likely To Continue

Ginebra’s strength lies not in its taste but in its brand equity. Decades of advertising with multiple artists, singers, and sports ambassadors have embedded the Ginebra brand into Filipino culture. As a testament to this, Ginebra is the country’s most beloved and popular basketball franchise, filled with a rich history and memorable moments among fans. Moreover, Ginebra, with its GSM Blue, has also appealed to younger consumers who love mixing it into different-flavored cocktails that are very popular at gatherings. Ginebra used to be known as a drink that was only popular with hard drinkers or, in Filipino terms, ‘Lasengero.’ Their marketing efforts and product innovation, like introducing flavors catering to different market segments, allowed them to appeal to a diverse population and expand their brand to a wider population.

Additionally, Ginebra’s strong brand equity guarantees its shelf space in multiple physical retail outlets, which include supermarkets, hypermarkets, groceries, and mom-and-pop stores. Due to its low price, Ginebra isn’t very conservative about its distribution; its goal is for its product to be available everywhere regardless of the type of distribution channel, resulting in immense scale and near-monopoly status in the low-price gin category since retail shelf space is very limited and reserved to those brands that can guarantee sales for the retailers. The importance of shelf space is further highlighted by the fact that the price segment Ginebra serves typically involves in-person transactions, as customers in this segment usually prefer to purchase the product physically in-store and on demand. Thus, this segment is somewhat protected from the rise of e-commerce, which other brands use to get around the challenge of securing shelf space.

Although drinkers sometimes switch to different types of spirit drinks, they eventually stick to their preferred ones. I believe Ginebra will continue to dominate the low-price gin category, and the only entrants I expect are from imported brands. Still, they will require a specialized distribution channel like specialized online or brick-and-mortar stores. They will position themselves in the upscale part of the market since they won’t be able to compete in price due to tariffs, lack of brand awareness, and scale in the Philippines.

Ginebra is also introducing new products that cater to upper-price segments. Consumers tend to buy more expensive drinks as their financial capacity improves. The recent success of The Keepers Holdings’ Alfonso brandy confirms this, as more people seek premium spirits offerings. Thus, they are positioning the company to take advantage of this scenario.

Exceptional Financial Performance

Ginebra’s financial performance is nothing but spectacular, as shown below.

Their return on invested capital, which is clearly above the cost of capital, explains their expanding EBIT margin since 2015. Their high ROIC indicates an exceptional allocation of capital since not only are their returns on investment in CAPEX and working capital returning superb profits, but they have also consistently increased their dividends. This creates a win-win scenario for shareholders who want to own a growing business while gradually getting a cash return from their investments through dividends.

As indicated in its dividend policy, Ginebra intends to pay 50% of its profit from the previous year.

Ginebra benefits not only from its management’s efficient capital allocation but also from high revenue growth.

GSMI benefits from economies of scale, as increasing revenue is always favorable for a business with high fixed costs due to running and maintaining production equipment.

This demonstrated performance clearly indicates effective management and strategy. Although their revenue growth benefitted from the high growth of the gin category and the Philippines’ GDP from 2018 to 2022, we can’t disregard that their effective marketing strategy to strengthen their brand equity and recognition has provided an additional boost to their revenue performance.

While I believe this kind of growth is not sustainable in the long term, I still expect them to achieve close to double-digit or double-digit growth in the coming years due to the Philippines’ GDP growth and its competitive position.

Valuation

Due to Ginebra’s stable business, I believe the Discounted Cash Flow method is the most appropriate valuation method. Additionally, I will use other valuation methods, such as its dividend yield and EV/EBIT multiple, to emphasize how attractive its current valuation is, even though it is selling at an all-time high.

Based on the graph above, which indicates a gin CAGR of around 5.7%, we will assume a 6% revenue growth. I believe this is conservative enough, as the Philippines’ GDP growth is projected to grow at the same pace, and companies tend to outperform GDP growth. As for my EBIT margin, even though I expect further expansion of their margin due to increasing volume, just to be conservative, I will simply use their recent EBIT margin, which is around 13%.

I will use their historical percentage as revenue for Depreciation and Amortization, Changes in Networking Capital, and CAPEX.

With an intrinsic value of around ₱343 per share, it is undervalued by around 25%. Of course, I can model a bit more optimistic revenue outlook. Still, I think it is better to emphasize that despite all of Ginebra’s potential, the stock is undervalued regardless of whether the assumption is conservative or not.

Additionally, The stock is selling at around 7.5 EV/EBIT multiple, further emphasizing its undervaluation.

A word of caution: My intrinsic value calculation shows that Ginebra has a lot of cash on its balance sheet when compared to its debt, which explains why PE is a bit higher than EV/EBIT. Even though this constitutes a strong balance sheet, carrying this much cash reserve isn’t justified given the stable nature of the industry in which Ginebra is participating.

In the Philippines, public companies are often majority-controlled by a few powerful families and conglomerates. Due to their overwhelming control, there is often no voice in the board of directors’ room that prioritizes what’s best for the minority shareholders. Thus, these majority controlled tend to undertake ventures like mergers and acquisitions that damage shareholder value. For example, some corporations will do a share-swap acquisition even though their stock is selling at a very low valuation compared to the overall market. Additionally, companies often hoard significant amounts of cash on their balance sheets despite the lack of external factors that justify it, such as competition. The lack of influential activist investors, which often serve as corrective forces on undervalued stocks, means the board has little pressure to distribute dividends or initiate buybacks to reward the minority shareholders during times when it makes sense to do so. Despite undervalued companies demonstrating great financial and business performance and evidence showing that they will likely continue to do so, there is no guarantee that the market will put a higher valuation on this prospect. Thus, investing in companies with a dividend policy and a history of increasing their dividends is often prudent to compensate for these factors in the Philippine stock market. I believe the right balance of dividends payout is 40-50%, so companies will still have a buffer to venture into a business that can provide growth for the future, which also benefits the minority shareholders. Furthermore, it is important to think of the opportunity cost. It is wise for the current dividend yield to be as close as possible to the prevailing government bond yield. As mentioned earlier, Ginebra intends to distribute 50% of its previous year’s profits to shareholders as dividends.

Ginebra’s current dividend yield is around 4.3% compared to the 10-year Philippine bond yield, which is around 6%. Even though there is a clear gap between the two, I believe that Ginebra’s prospect and history of increasing their dividends is enough to compensate for this.

Risk

Majority Controlled Companies

As mentioned earlier, most public companies in the Philippines are controlled by conglomerates and powerful families, who often control 70% of voting rights. Thus, the concept of mean reversion doesn’t totally apply in this market. But I expect this to change as the Philippine stock market continues to mature.

Changing Consumer Preference

Factors such as prevailing economic conditions, trends, and social interactions, among others, influence changing consumer preferences. The Philippines’ high GDP growth may be a double-edged sword for Ginebra. On one hand, it presents an opportunity for growth. On the other hand, it could lead consumers to opt for more expensive drinks. Thus, Ginebra must introduce new products catering to different price segments.

Conclusion

Ginebra is often categorized by the investment community as a ‘Boring stock.’ Despite being a boring stock, its favorable competitive position and stability behind the rapid growth of the Philippines provide a wonderful opportunity for investors to benefit from this headwind.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.