May 21, 2015

EMP reports 18% drop in 1Q15 net income

In a press statement, Emperador Inc (EMP) reported that its 1Q15 net income fell 18.4%YoY to P1.4b. The company attributed this primarily to higher excise taxes. Revenues for the company grew 16% to P8.89b as the company consolidated Whyte and Mackay Group Limited into its accounts. Cost of goods sold however increased much faster by 32% to P6.21b resulting in an eight-percentage point reduction in gross profit margins to 30.1% from 38.9% in 1Q14.
We believe the increase to be attributable more to the higher costs of WMG than to higher excise taxes. General and administrative expenses likewise grew by more than 7x to P342m in 1Q15 from just P45m in 1Q14 and exacerbated the margin compression and led to a 9-percentage point cut in operating margin to 19.7% from 28.9% in 1Q14.

Our take: EMP’s result is in stark contrast to the turnaround in income posted by rival Tanduay Inc. primarily due to its acquisition of WMG. We believe it would take some time before EMP can fully digest the acquisition and for margins to recover. EMP’s 1Q15 results currently account for 19% of full-year 2015 consensus estimates. – WealthSec