May 18, 2015

LT Group Inc (LTG) reports 1Q15 income of P2.1b, down 3.7% YoY

In a disclosure to the Exchange, LT Group Inc (LTG) said its net income fell 3.7% YoY to P2.1b as the tobacco business was still coming off a relatively high base while the banking business growth came in flat. These diluted the robust growth in the beverage and distilled spirits business.

LTG's banking arm Philippine National Bank (PNB) reported a 1% hike in net income to P1.39b as the higher other income from the sale of real and other properties acquired just offset the lower net interest income and lower trading and forex gains. PNB realized other income of P1.36b in 1Q15 vs P916m in 1Q14. Net interest income and trading gains, on the other hand, decreased 4% and 14% to P4.2b and P501m, respectively. Net service fees and commission income was flat at P636m.

LTG’s earnings share from Philip Morris-Fortune Tobacco Corp (PMFTC) fell 29% to P411m but this represents a turnaround from the losses registered in 3Q14 and 4Q14. The company benefited from the significant selling price increase for lower-end brands by its major competitor following the introduction of individual tax stamps on cigarette packs as required by government starting last January as part of the latter's drive against tax evasion. PMFTC is already seeing the positive effects of this measure on its margins but expects to see the full benefit in 2H15.

Asia Brewery registered a 14% increase in net income to P301m in 1Q15 on the back of a 25% increase in sales for its packaging unit. Its water unit which include Absolute and Summit likewise also registered double digit growth. These compensated for the flat growth of its energy drink Cobra as the company found it more difficult to gain additional market share amid the ongoing price wars by major carbonated softdrink producers. Vitamilk likewise continues to enjoy robust sales growth and continues to be the country’s leading soy milk brand. The company presently gets a 6% margin from this product as a localdistributor. It expects margins to rise to 30% next year when it starts manufacturing the product locally.

Distilled spirits arm Tanduay reported a profit of P75m in 1Q15, a turnaround from the P11m loss registered in the same period last year. This was primarily due to two price increases implemented recently (P12/case in Oct 2014 and P28/case in Jan 2015) to cover another round of excise tax hikes. This resulted in a 200-bp increase in margins to 19% in 1Q15 from 17% in 1Q14. While Tanduay’s volume remained relatively flat YoY, its market share according to Nielsen increased to 24.5% from 23.1% in the previous year.

Property arm Eton Properties recorded a 76% increase in 1Q15 net income to P51m due to higher rental income resulting from rental reversions in its BPO office leasing business. Residential sales on the other hand fell 5.4% to P386m in 1Q15 in the absence of project launches over the last two years. Eton plans to resume selling residential projects by 2Q15.

Our take: LTG’s 1Q15 net income accounts for 22% of consensus estimates. While the company’s income is relatively flat and missed market expectations, we believe that the recovery in earnings is gaining traction especially with the rebound in the tobacco business. The company should also benefit from stronger consumer spending which should further be aided by spending related to next year's election. – WealthSec