Vous êtes sur la page 1sur 58

s

Services Sector
Midas Investments Research Retail Industry
This report is published for educational purposes only
by students competing in the CFA Institute Research
Challenge. Puregold Price Club, Inc.
29 November 2012 Ticker: PGOLD Recommendation: BUY
Price: PHP 32.20 (USD 0.79) Price Target: PHP 40.16 (USD 1.00)
Exchange Rate Pure consumer play outpacing market on defensive
USD/PHP: 40.88
growth
Figure 1: Share Price Performance We recommend a BUY for PGOLD, the Philippines‟ fastest growing grocery retailer and
the only pure, direct and broad-based domestic consumer play in the market, at a price
35 target of Php 40.16, a 24.72% upside from current price of P32.20. Our positive outlook is
30 based on growing and resilient domestic consumption that is captured by an EDLP (Every
25 Day Low Prices) Strategy targeting low to middle-income consumers bringing in traffic of
20 18 million each week. Through the Tindahan ni Aling Puring (TNAP) reseller program, it
15 is the only major retailer to focus on the widely popular traditional sari-sari store. By
10 acquiring membership shopping club S&R, it also captures a growing niche of high-income
5 consumer spending. With aggressive store expansion underway, we forecast sustainable
0
long-term growth for this defensive stock.
5-Apr-12
5-May-12
5-Nov-11

5-Feb-12

5-Aug-12
5-Sep-12

5-Nov-12
5-Dec-11
5-Jan-12

5-Jun-12
5-Jul-12
5-Oct-11

5-Mar-12

5-Oct-12

 Focus on domestic consumption driving resilient earnings against volatile global


financial system: As the only pure direct and broad-based domestic consumer play on
the local market, PGOLD‟s stock price has outpaced the Philippine stock market by
PGOLD PSEi (rebased) MSCI (rebased) 77.2% (see Figure 1) driven by revenue growth of 39.69% (2012E) on the back of
16% growth in domestic consumption. With consumption expected to continue to
YTD 1m 3m 12m grow by 8% annually through 2016, we forecast same store sales growth (SSSG) to
Abs 79.2% 7.5% 10.1% 111.1% grow by a five-year CAGR of 6.41%. As a defensive stock, PGOLD‟s earnings
growth is cushioned from risk surrounding Western economies with 70% of product
Rel 50.3% 3.0% 1.5% 77.2%
revenues from essential spending on food items and 90% of customer revenues
Source: PSE, MSCI Asia-Pacific expected to come from low-income consumer segments and traditional re-sellers. The
surge in the local economy has benefited the S&R format, which is expected to boost
consolidated net margins to 5.58% (from 4.83% in 2011) with its high-margin product
Figure 2: Market Data portfolio.

Market Capitalization P 89,078,281,250  Aggressive national roll-out catalyzing revenue growth: By adding 51 stores outside
Metro Manila this year alone, Puregold revenues are slated to grow by 39.69% in
Shares Outstanding 2,766,406,250
2012. Four-year revenue CAGR of 23.6% is expected on the back of aggressive
Free Float 34% expansion raising total store count to 260 by 2016 (See Figure 2). A key catalyst will
52week Price Range P 14.98 - P33.00 be expansion into the unsaturated and attractive market of Visayas and Mindanao
where we calculate a potential of 91 hypermarkets to be added. With a hypermarket
Ave. Monthly Volume 78,233,692
opening in Palawan today, it has already begun operating its first store outside of the
Beta 0.81 island of Luzon.
 Scalable asset-light model translating to strong margins and abundance of free
cash: PGOLD has a scalable asset-light model that relies on property leasing and
third-party logistics from suppliers. Fixed Asset Turnover is seen to improve from
6.49 to 10.96 (2011-16E), showing potential for growth. This translates to impressive
ROE and profit margin at 21.95% and 8.85% respectively, both above industry
averages. PGOLD generates an abundance of free cash enough to meet the expected
yearly annual capex of Php 3.46B allocated for expansion from 2013 to 2016. With
issuance of additional debt, special Dividend Payout Ratio (DPR) at 2016E is 43.82%
on top of the actual DPR of 14.91%, giving a total DPR of 58.73%
 Valuation confirms BUY rating: FCFE analysis indicates a price of Php 40.16 at a
24.72% upside from current price, supporting our positive long-term outlook. PER
analysis with Asia-Pacific grocery retailers indicates a discount of 20.75%, confirming
the attractiveness of PGOLD. Investment risks include: execution of VisMin
expansion and competitive risks from SM Retail.
In Php mil 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Revenues 24,112 29,108 38,988 59,541 81,273 100,718 122,258 148,707
EBIT 458 985 2,216 4,682 7,985 10,899 14,465 19,097
Net Income 132 510 1,545 3,156 5,384 7,423 9,919 13,160
Ratios
EPS N/A N/A 1.10 1.29 1.95 2.68 3.59 4.76
Profit Margin 0.56% 1.97% 4.83% 5.58% 6.62% 7.37% 8.11% 8.85%
Cur. Ratio 0.93 0.76 1.10 1.11 1.24 1.28 1.37 1.47
ROA 0.96% 5.28% 11.29% 7.47% 9.64% 10.77% 11.80% 12.75%
ROE 11.28% 29.48% 21.74% 12.24% 16.10% 18.50% 20.34% 21.95%
CFA Institute Research Challenge November 29, 2012

Business Description
Figure 3: Expansion Plans Puregold Price Club, Inc. (PGOLD) is the Philippines‟ fastest growing grocery retail chain.
300 Since establishing its first store in 1998, it has reached a total store count of 151 stores as of
260
250 234 Nov. 29, 2012. In a matter of 14 years, it has overtaken established retailers in terms of store
208 count and revenue to be the second-largest grocery retailer in the country. Behind the
200 182
156 company‟s remarkable growth (see Figure 3) is a strategic customer focus on low-income
150 consumers and sari-sari stores.
100
100 62
41 Store Formats and Locations
50
PGOLD‟s operates in four store formats: 74 hypermarkets (Puregold Price Club), 56
0
supermarkets (Puregold Jr. and Parco), 15 discounters (Puregold Extra) and 6 membership
shopping clubs (S&R) (see Figure 4 and Appendix 8). These are strategically located in key
commercial districts and residential areas with access to major transportation hubs. All stores
Puregold Price Club Puregold Jr.
are geographically located in Metro Manila and Luzon except for a single S&R outlet in Cebu.
Puregold Extra S&R Expansion to VisMin is forecasted to begin by 2013 (see Appendix 9). The first hypermarket
Parco outside the Luzon island in Palawan is already in operation.
Source: Company, Team’s Estimates
PGOLD has a highly-scalable asset-light operations model with direct-delivery outsources
logistics to suppliers and third-party agents, and minimizes warehousing and distribution costs.
Figure 4: Store Format Overview Hypermarkets function as warehouses for supermarket and discounter formats. The different
store formats allow PGOLD to quickly enter new locations with minimal upfront costs.

Hyper- Super- Dis- Broad Customer Focus through “Tindahan ni Aling Puring”
Type of Store
market market counter PGOLD is the first and only modern retailer to strategically target sari-sari stores and other re-
No. of Stores sellers as customers through the Tindahan ni Aling Puring (TNAP) program. By selling to
(as of 74 37 15 sari-sari stores, PGOLD penetrates the DE market which comprises 90% of the Philippine
11/29/12) population. TNAP provides rebates, delivery services, training seminars, and even travel
Average Net
1,500- 800- 300- incentives for its members. From its beginnings in 2005, TNAP has grown its member base
Selling Area
7,800 1,500 700 from 30,000 to 220,000 by 2012, representing around 20% of the growing number of sari-sari
(sqm)
No. of SKUs stores in the country (see Appendix 10 and 11). Re-sellers contribute 35% of PGOLD‟s annual
30-50 8-10 1.5-2 revenues (see Figure 5).
(in „000s)
Source: Company Data
Strategic Acquisitions Complete Spectrum of Consumer Segments
By acquiring S&R Membership Shopping and Parco Supermarkets last May 2012, PGOLD
covers the entire spectrum of consumers. S&R membership shopping club which currently
boasts of 215,000 members taps the high spending power of the AB socio-economic class.
Parco, a supermarket chain with 19 stores, will be integrated and rebranded to PGOLD‟s
Figure 5: PGOLD Revenue Breakdown supermarket format Puregold Junior. This will strengthen Puregold‟s reach to households
by Consumer Segments belonging to the CDE socio-economic classes.

Growth Drivers: Same Store Sales Growth and Store Expansion


PGOLD‟s robust revenue generation is heavily supported by competitive pricing, high-margin
products, and steady domestic consumption through population growth. Its EDLP strategy
keeps PGOLD store pricing attractive over local competitors, thus fueling an estimated 6.41%
annual same-store sales growth from 2012 to 2016.

The company has set its organic growth rate at 25 stores per year for the next 5 years.
PGOLD‟s 2011 IPO and 2012 notes issuance which raised P2B and P5B respectively will
Source: Company Data accelerate growth through acquisitions on top of organic expansion within the next 5 years.

Experienced Ownership and Management Team


Puregold Price Club, Inc. was founded by Lucio Co, an experienced entrepreneur with
businesses in different industries spanning from retail to consumer finance. From 1998 to
Figure 6: Grocery Industry vs. GDP 2011, the company was managed and wholly-owned by the Co family. In April 2011, the
Growth Rates and Consumption company launched an initial public offering, issuing 3,000,000 shares. PGOLD is now 33%
publicly-owned, while the Co family retained 67% of ownership (see Appendix 12).

7.8 The Board of Directors has an average of 9 years of working experience in PGOLD and the
6.2 retail industry, while Executive Officers and Key Managers have an average of 8-9 years of
5.5 working experience with PGOLD (see Appendix 13). As they architecture PGOLD‟s dramatic
growth, they are well positioned to take PGOLD to new heights.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E

Industry Overview and Competitive Analysis


Grocery Consumption
Macro-economic analysis shows security of PGOLD’s sources of growth
Private Consumption
GDP Growth
Revenue cushioned by strong domestic consumption amidst uncertainty in global economy
Source: Euromonitor Driven by resilient domestic consumption, PGOLD‟s revenues are cushioned from the risk of a
double-dip recession in the global economy brought about by uncertainty in the US and EU
CFA Institute Research Challenge November 29, 2012

Figure 7: Microfinance Loan Portfolio and economies. While unhealthy peso appreciation is unfavorable for dollar-earning export
Number of Borrowers (2001-2011) industries, PGOLD is cushioned as revenues are based on growing domestic consumption.
7000 3,500 Value of OFW remittances may be impacted but this has been historically shown to grow even
6000 3,000 during the financial crisis. OFW remittances grew during the 2008 and 2009 financial crisis
5000 2,500 at13.68% and 5.61% respectively, before rising again to 8.16% in 2010. Remittances also
4000 2,000 impact disposable income which will not cause a decline in essential spending on grocery
3000 1,500 items like food (Figure 6)i. 70% of PGOLD‟s items are food products.
2000 1,000
1000 500 Private consumption in the Philippines is expected to grow by an average of 7% with about
0 0 20% dedicated on grocery spending.ii At worst, grocery consumption will grow along with
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
population growth which is stable at 2.0%iii, higher than the Asia Pacific average of 1.0%.iv

Gross Loan Portfolio (in PHP millions) Historic cuts in local interest rates to reduce cost of debt accelerating PGOLD expansion
Active borrowers (in '000 People) Puregold‟s aggressive expansion plan of opening 25 stores per year is expected to accelerate
with all-time lows in the country‟s interest rates. Driven by a credit upgrade of Philippine
Source: MixMarket.Org sovereign debt by S&P and Moody‟s to only one-notch below investment grade, interest rates
are at an all-time low of 3.5% and are expected to decrease by 2013. This reduces the cost of
Figure 8: Revenue CAGR of PGOLD vs. capital to fund expansion and Puregold has responded to this opportunity by issuing a
Industry (2006-2011) corporate note of P5 billion for expansion and acquisition.

Puregold Price Club


17.7% Industry analysis shows PGOLD’s distinct competitive advantage
Inc
Modern Grocery Strong presence of traditional retailers turned competitor to customer
7.4% Traditional retailers currently occupy the larger share of grocery retailing in the Philippines.
Retailing
Grocery Retailing 3.7% Sari-sari stores pose the biggest threat to modern retail (See Appendix 15 for complete
Porter‟s Five Forces Analysis). They are estimated to number around 1 million stores and
Retailing 3.4% account for 70% of grocery revenues overall. Through the TNAP program, PGOLD has
Source: MixMarket.org leveraged the threat of the strong presence of these sari-sari stores by becoming the top
supplier for their merchandise. PGOLD has already reached 20% of sari-sari stores nationwide
Figure 9: Revenue CAGR of PGOLD vs. while still remaining in Luzon.
Local Competitors (2006-2011)
The sari-sari store is popular in the Philippine market due to its informal credit system and
Puregold Price Club sachet size SKUs. The informal credit system allows for consumers within the CDE class to
17.7% have easy access to consumer credit which drives consumption. The sachet sizes sold in sari-
Inc
Robinsons Retail sari stores match consumption with the day-to-day wage earnings for the CDE market. 47%
16.6%
Group
of consumers buy from sari-sari stores as the main source of groceries. PGOLD is the first and
SM Retails Inc 11.9% only retailer in the industry to strategically target sari-sari stores as a customer base. They
Rustan Group of Cos 6.2% contribute 35% of PGOLD‟s revenues.

Source: Euromonitor We expect them to continue stable growth given strong support from micro-finance industry.
Sari-sari stores are a popular small enterprise that keeps many home-based women employed,
the Philippines‟ burgeoning micro-finance industry, ranked 6th in the world, (see Figure 7) has
Figure 10: Revenue Share of Modern vs.
lent financial muscle to ensure their stability for many years to come.
Traditional Retailers among Regional
Peers
100% Philippine modern retailing transitioning to opening stages of growth cycle
80% Amid the strong presence of traditional retail, modern grocery retailing in the Philippines
60% posted robust growth amidst the global financial crisis. Between 2006 and 2011, value sales of
modern grocery retailing grew by a CAGR of 7.4% with hypermarkets posting double-digit
40%
growth at 17%. With the bulk of PGOLD‟s stores in the hypermarket format, revenue grew by
20% a CAGR of 18% (see Figure 8).
0%
We identified the Philippines to be in the opening stage of global retail development using AT
Kearney‟s Global Retail Development Index (GRDI) (Appendix 16). The country meets the
four indicators of this stage: 1) middle class growing at 9% per yearv; 2) Consumers exploring
organized formats evidenced by growth in modern retailing; 3) government reducing
Modern Traditional restrictions through the liberalization of foreign ownership; and 4) minority investment by
Source: Euromonitor Trade Statistics foreign retailers in local retailers with Hong Kong-based retailer Dairy Farm Holdings
acquiring a stake in Rustan‟s SuperCenter.
Figure 11: Distribution of Households by
Economic Classes In this stage, growth potential for modern retailers will not only come from a growing market
AB
1% but by a shake-out of smaller players. PGOLD has already capitalized by acquiring Parco
chain of supermarkets and has set aside P2 billion for acquisitions for 2013.
C
E 9%
PGOLD has focused growth, differentiated against competitors
30%
While major players in grocery retailing such as SMvi, Robinsonsvii, and Rustan‟sviii have
witnessed robust growth (Figure 9), PGOLD has outperformed competitors with its broad-
based consumer play. While other retailers have diversified into non-grocery goods (See
D
Appendix 17), PGOLD has focused on essential spending, targeting low-income segments and
60% traditional re-sellers, cushioning it from vulnerability to the global economy.

Source: NSO
CFA Institute Research Challenge November 29, 2012

SM and Robinsons are focused on middle-income segments, whereas Rustan‟s is focused on


upscale consumer segments. While these segments have higher purchasing power, they only
Figure 12: Geographical Distribution of comprise 10% of the entire population and remain heavily concentrated in Metro Manila
Sari-Sari Stores (Figure 11). PGOLD‟s focus on essential spending allows it to grow even during recessionary
cycles and aggressively expand stores regardless of long-term economic outlook.
Min.
19%
Metro The acquisition of S&R represents a diversified customer base but PGOLD‟s focus remains on
Manila grocery retailing. On the other hand, SM also operates a department store which contributes
28%
42.70% of retail value (See Appendix 18). Robinsons operates a department store, hardware
Vis. store business, as well as convenience store Ministop. Rustan‟s also operates department
16%
stores and high-scale specialist stores which retail imported brands. Rustan‟s is partnering with
Luzon Ayala Land to develop department stores and convenience stores in 2013.
37%
Regional analysis supports upside of aggressive national expansion
Source: DTI, Team’s Estimates Expansion into Visayas and Mindanao is a key catalyst for revenue growth. Our in-depth
analysis into the local modern retailing sector shows a potential for 91 hypermarkets in the
Vis-Min region (See Appendix 19 for breakdown of computation based on the Index of Retail
Figure 13: Wholesale and Retail Industry Saturation formula).
Profit Margin by Geographic Area
Mindanao 8.8% Infrastructure Developments in Vis-Min Provide Opportunity for Modern Retail
We estimate the growing potential for hypermarkets to be spurred by development of major
Visayas 8.4% road infrastructure projects especially in Mindanao. By 2013, the government will have
Luzon
allocated P70B for infrastructure projects in the Mindanao over the past three years, the
6.7%
highest of any region. The World Bank has 7 road infrastructure projects in the region that are
NCR 7.4% in the process of completion.ix The Bangsamoro peace treaty between the government and the
insurgent MILF in Mindanao promises better security for the road network. The development
Source: DTI, Team’s Estimates of infrastructure allows PGOLD to replicate its operational model in Luzon to Mindanao.

Unsaturated and Fragmented Market Open Opportunities for Puregold


Figure 14: Consumer Price Index (Metro The market in Visayas and Mindanao is unsaturated with modern retail at 49% and 38%
Manila vs. Provincial) saturation of Metro Manila, respectively. The only strong competitor is the Gaisano Grand
Group with 24 outlets spread across the nation. Local retail chains operate on average 9 stores.
135 The fragmented nature makes it strategic for PGOLD to acquire local chains to expedite Vis-
130 Min expansion (see Appendix 20 for competitive landscape).
125
120 Untapped Re-seller Market to Drive Revenue Growth
115 PGOLD‟s revenues will grow as it captures an untapped market of re-sellers. 35% of
110 traditional sari-sari stores, PGOLD‟s key customer segment, is located in Visayas and
105 Mindanao (see Figure 12). We expect PGOLD‟s entry with the TNAP program to have a
100 dynamic effect on the growth of re-sellers in the regions, increasing the volume of re-sellers.

Higher Commodity Prices in Vis-Min to boost PGOLD long-term profit margins


Metro Manila Provincial Commodity prices outside Metro Manila are about 8% higher on average (See Figure 14).
Increasing commodity prices make large modern retailers who have the scale to negotiate
Source: DTI better prices with suppliers attractive. With PGOLD‟s position as the price leader in the
industry, it is well-positioned to compete against smaller local retail chains in Visayas and
Mindanao by introducing lower prices. This price-cutting strategy is possible as the retail and
Figure 15: Valuation Summary wholesale industries in Visayas and Mindanao have higher average profit margins of 8.44%
Target Price PHP 40.16 and 8.84% respectively compared to NCR at 7.41%, due to lower operational costs (see Figure
Price as of 13). Expansion will not only add revenue but also improve margins in the long-term.
PHP 32.20
11/29/2012
Upside 24.72%
Rating BUY Investment Summary
Source: Team’s Estimates Pure consumer play outpacing market on defensive growth
We recommend a BUY for PGOLD, the Philippines‟ fastest growing grocery retailer and the
only pure, direct, and broad-based domestic consumer play in the market, at a price target of
Figure 16: Broad-based Consumer Target Php 40.16, a 24.72% upside from current price of P32.20 (Figure 15). Our positive outlook is
based on growing and resilient domestic consumption that is captured by an EDLP (Every Day
Low Prices) strategy targeting lower- to middle-income consumers, bringing in traffic of 18
million each week. Through the Tindahan ni Aling Puring (TNAP) reseller program, it is the
only major retailer to focus on the widely popular traditional sari-sari store. By acquiring
membership shopping club S&R, it also captures a growing niche of high-income consumer
spending (Figure 16). With aggressive store expansion underway, we forecast sustainable
long-term growth for this defensive stock.

Focus on domestic consumption driving resilient earnings against volatile global financial
system
As the only pure direct and broad-based domestic consumer play on the local market,
PGOLD‟s stock price has outpaced the Philippine stock market by 77.2% (see Figure 1) driven
by revenue growth of 39.69% (2012E) on the back of 16% growth in domestic consumption.
Source: SWS, Company data, Team’s
Estimates
CFA Institute Research Challenge November 29, 2012

With consumption expected to continue to grow by 8% annually through 2016, we forecast


Figure 17: Consumption growth vs. SSSG same store sales growth (SSSG) to grow by a five-year CAGR of 6.44%. As a defensive stock,
PGOLD‟s earnings growth is cushioned from risk surrounding Western economies with 70%
8.0%
of product revenues from essential spending on food items and 90% of customer revenues
6.0% expected to come from low-income consumer segments and traditional re-sellers. The surge in
the local economy has benefited the S&R format, which is expected to boost consolidated net
4.0% margins to 5.58% (from 4.83% in 2011) with its high-margin product portfolio.
2.0%
2012E 2013E 2014E 2015E 2016E Steady SSSG to sustain long-term growth: PGOLD is confidently enjoying stable same-store-
sales growth (SSSG) which contributes to long-term revenue growth. Company forecasts place
SSSG Private Consumption 2013 SSSG at 4% for Puregold and 15% for S&R. Same-store sales is estimated to grow by a
CAGR of 6.41% from 2012-16 and 3.755% (equal to the terminal growth rate) for 2017
Source: Euromonitor, Company data, onwards driven by increasing domestic consumption and strong population growth.
Team’s Estimates
Aggressive national roll-out catalyzing revenue growth
Figure 18: Expansion Plans By adding 51 stores outside Metro Manila this year alone, Puregold revenues are slated to
300
260
grow by 39.69% in 2012. Four-year revenue CAGR of 23.6% is expected on the back of
250 234 aggressive expansion raising total store count to 260 by 2016 (Figure 18). A key catalyst will
208
200 182 be expansion into the unsaturated and attractive market of Visayas and Mindanao where we
156 calculate a potential of 91 hypermarkets to be added (See Appendix 19 for computations).
150
100 With a hypermarket opening in Palawan today, it has already begun operating its first store
100 62
50
41 outside of the island of Luzon.
0
PGOLD targets a roll-out of 25 new Puregold stores every year through 2016, focused on
hypermarket expansion in underpenetrated areas outside of Metro Manila. Expanding the
Puregold Price Club Puregold Jr. horizons of store operations towards Vis-Min will drive revenue growth. This area represents
Puregold Extra S&R 35% of sari-sari stores, PGOLD‟s key target market.
Parco
S&R to simultaneously drive growth and profitability: Recent acquisition S&R, the only
Source: Company Data, Team’s Estimates membership shopping club in the Philippines, is projected to expand to 10 stores by 2016,
addressing the small but highly-profitable segment of upscale consumers in the AB segment.
Figure 19: 2012-2016 DPS Forecast
While this segment only comprises 1% of the Philippine population, it is expected to
contribute to 10% of company revenues, closely matching its income contribution to the local
economy at 9%. The portfolio of high-margin products from S&R will contribute to increased
consolidated margins, forecasted to grow from 14.79% to 20% in gross margins and from
4.83% to 8.85% in net margins by 2016.

Scalable asset-light model translating to strong margins and abundance of free cash
PGOLD has a scalable asset-light model that relies on property leasing and third-party logistics
from suppliers. Fixed Asset Turnover is seen to improve from 6.49 to 10.96 (2011-16E),
Source: Team’s Estimates showing potential for growth. This translates to impressive ROE and profit margin at 21.95%
Figure 20: Summary of Capex and 8.85% respectively which are both above industry average. PGOLD generates an
Projections and Estimated Returns abundance of free cash enough to meet the expected yearly annual capex of Php 3.46B
CAPEX
Payback allocated for expansion from 2013 to 2016. With issuance of additional debt, special Dividend
Year Period Payout Ratio (DPR) at 2016E is 43.82% on top of the actual DPR of 14.91%, giving a total
(in PHP mn)
(in years) DPR of 58.73%
2012E 3,185.00 0.40
2013E 3,459.74 0.46
Valuation confirms BUY rating
2014E 3,459.74 0.50
FCFE analysis indicates a price of Php 40.16 at a 24.72% upside from current price,
2015E 3,459.74 0.46
2016E 3,459.74 0.43
supporting our positive long-term outlook. PER with Asia-Pacific grocery retailers indicate
discounts of 20.75%, confirming the attractiveness of PGOLD (Figure 21).
Source: Team’s Estimates
PGOLD is the only listed grocery retailer, with other retailers listed under the holdings of their
Figure 21: Regional Peers‟ P/E and PEG conglomerates (SM and Robinsons). Comparables in the local bourse are consumer-themed
P/E (2012E) PEG stocks like URC. PGOLD‟s 2012E P/E is at 28.01, which is 16.57% above the local average of
Big C 23.94 1.26 24.03 (Figure 22). This margin is reasonable given PGOLD‟s huge growth trajectory as
Siam Makro 29.57 1.48
compared to other companies, engaged in the more mature and competitive food and beverage
Sumber Alfaria
Trijaya
35.57 - industry where growth prospects are foreign rather than domestic (See Appendix 18).
Sun Art Retail
34.96 1.94 Strong fundamentals affirm positive outlook: Indicative of profitability and efficiency,
Group
Dairy Farm 26.66 1.62 PGOLD has registered an impressive 27.43% sales revenue CAGR in 2008-11 while key
Peer Average 30.14 1.58 profit-margin ratios (gross, operating, and net) have all been steadily increasing, driven by the
Puregold 27.03 1.18 company‟s aggressive expansion and efficient cost control.
Source: Bloomberg
As for efficiency in asset management important in the retail industry, PGOLD comes second
only after regional conglomerate Dairy Farm in terms of ROA in the region and its upward
trajectory is seen to continue with dramatic increases in ROA as a result of aggressive
expansion resulting to economies of scale (Figure 23). This implies a larger growth potential
for PGOLD than for other groceries in other regional markets (Appendix 22).
CFA Institute Research Challenge November 29, 2012

Figure 22: Local Peers 2012 P/E Ratios


Investment Risks
Retail Company P/E Execution of Vis-Min expansion: PGOLD will venture into new waters in its expansion into
Jollibee Foods (JFC) 30.53 the Vis-Min region. Although this will be a key catalyst for growth, this would also serve to
Pepsi-Cola Products (PIP) 21.72 test the execution of PGOLD‟s asset-light supply chain. Disruptions in the supply chain could
RFM Corp. (RFM) 19.52 increase cost of operations, deplete margins, and limit the expansion potential of 91
Universal Robina (URC) 24.34 hypermarkets in Vis-Min. PGOLD addresses this risk in its partnership with third-party agents
and regional distributors.
AVERAGE 24.03
Puregold 28.01 Competitive risks from SM: Growing competition with its largest rival, SM Retail, is seen to
Source: Bloomberg intensify as SM undertakes expansion plans across the country, which can lead to a price war
as well as drive up leasing costs. This threat can be mitigated through PGOLD‟s stronghold on
Figure 23: ROA Trends across the Region resellers with the TNAP program which has a membership base of 220,000. An asset-light
16% model leading to healthy profit margins also equips PGOLD for a possible price war with SM.
14%
12% Adherence to corporate governance standards seen to improve
10%
Concerns on corporate governance are set to ease as the company transitions from a family
business to a public company. While PGOLD is compliant with all corporate governance
8%
guidelines of the Securities and Exchanges Commission and as of October 2012 has committed
6%
no violations of its Revised Manual on Corporate Governance, full compliance with PSE good
4%
corporate governance guidelines remains to be seen (see Appendix 23). Primary concerns
2%
raised are regarding the board composition consisting mostly of Co family members. This is
0% financially materialized over concerns of related-party transactions composed of leasing deals
2008 2009 2010 2011
Big C Siam Makro
by family-owned properties and the brand licensing rights owned by Lucio Co. The financial
exposure to these transactions is set to decline as a percent of operational expenses from 18%
Sumber Alfaria Trijaya Sun Art Retail Group
to just 11% from 2011 to 2016 (Appendix 23). The company also provides continuous
Dairy Farm Puregold
education and seminars for its board and senior management to improve governance practices.
Source: Businessweek

Figure 24: PGOLD Events Timeline


Source: Company Data, Team’s
Research

Figure 25: FCFE‟s Major Components Valuation


and Subcomponents BUY rating: Target Price of PHP 40.16 Upside of 24.72%
5-year Projected PGOLD‟s target price of PHP 40.16 is based on the DCF method of Free Cash Flow to Equity
PHP 4.50
Free Cash Flows (FCFE) which is able to capture PGOLD‟s long-term value based on strong organic growth
EBIT less tax and store expansion plans. Our strong BUY rating is further validated through PER analysis
Depreciation based on the average regional PER of 30.14x.
Less: Change in Working
Capital The Free Cash Flow to Equity (FCFE) Model
Less: CAPEX The FCFE model assumes that most of the company‟s value comes from long-term future
Terminal Value PHP 35.66 value. We consider this assumption suitable for PGOLD as its revenue growth will be
Terminal Growth Rate maximized only after the stability of its new stores in their respective areas (see Appendix 24
WACC and 25 for the tools used in the projection model).
Source: Team Estimates
FCFE’s Two Major Components: Projected Free Cash Flows & Terminal Value
The discounted five-year projected free cash flows per share is PHP 4.50 whereas the
discounted terminal value per share is PHP 35.66. (See Figure 25 for a breakdown of the FCFE
model‟s components.)

FCFE’s Assumptions
1. Php 3.0 B will be spent every year from 2013-2016 for Puregold capital expenditures.
(This is based on company historical data.)
CFA Institute Research Challenge November 29, 2012

Figure 26: Bases for Same Store Sales Growth 2. Php 0.459 B will be spent every year from 2013-2016 for S&R capital expenditures. (This
(SSSG) rate per store format is based on company historical data.)
Store Basis for Rate/ 3. All new stores' sales will be fully realized and maximized after six to eight months of full
Format Growth Rate Formula operations. If there is no data available on the finished construction, the store's sales were
assumed to be realized after one year of full operations. (This is backed by company data.)
35% Resellers, (0.35)*3% 4. Sales revenue for each store format (including S&R) is assumed to grow each year by:
Hypermar-
ket
65% CDE + 6.25% for hypermarkets, 8.00% for supermarkets, 3.00% for discounters, and 6.50% for
market (retail) (0.65)*8% S&R. (See Figure 26 for the bases for and derivation of these rates.)
5. Puregold financial statement items grow with store selling area.
Short-term 6. S&R financial statement items grow with the number of stores.
Supermar- Household 7. There will be 25 new Puregold stores--specifically, 14 hypermarkets, 9 supermarkets, and
ket
8.00%
Consumption 2 discounters--every year from 2013-2016. (This is based on company projections and
Growth retaining the proportion of new stores per store format from 2012, as seen below.)
Short-term 8. There will be 1 new S&R store every year from 2013-2016. (This is based on company
Discounter Reseller Value 3.00% projections.)
Growth 9. The terminal growth rate is 3.7550%. (See derivation in subsection below).
Short-term AB
S&R Consumption 6.50% Projected Free Cash Flows (FCF): Drivers of Growth
Growth PGOLD‟s increasing five-year FCF projections is driven by: (1) revenue growth from SSSG
Source: Euromonitor due to rising domestic consumption, (2) additional revenue from aggressive store expansion
particularly in Vis-Min, and (3) improving profitability from increasing scale of operations.

Strong Growth in Domestic Consumption Driving Strong Same Store Sales Growth
Same store sales growth (SSSG) is expected to increase at a rate of 6.41%, driven by the strong
growth in domestic consumption of 4.40% (Euromonitor). This is pushed by the country‟s
above-average population growth of 2%.

Aggressive Expansion Driving Revenue Growth


Aggressive store roll-out expected to add 104 stores by 2016, will drive revenue growth.
Venturing into the Vis-Min markets would lead to increasing profitability in the long-run since
profits and revenues would increase as PGOLD gains familiarity and stability in new areas.

Figure 27: Terminal Growth Rate Scalability and Strategic Acquisitions Driving Profitability
Computation The stable growth of operating expenses vis-à-vis rapid sales growth leads to higher margins,
Re-seller Value Growth 3.00% which contributes to PGOLD‟s increasing future value. Opposing movements of naturally
Weight 32% increasing expansion-related costs and lower operating costs in Visayas and Mindanao balance
Household Consumption each other out leading to stability.
4.00%
of Essentials
Weight 59% With its preference for lease arrangements and partnership with suppliers and third-party
AB Private Consumption 4.70% cross-docking providers, PGOLD‟s asset-light scalable model leads to higher profitability
Weight 10% because of the minimum investment required for store expansion. This is reflected in the
shorter payback period (see Appendix 26) and minimal logistical costs such as distribution
Terminal Growth Rate 3.755%
costs as these are mostly shouldered by PGOLD‟s third-party suppliers.
Source: Euromonitor
Economies of scale would result from rapid expansion via organic growth and acquisitions and
Figure 28: WACC Breakdown should lead to higher rebates and discounts from suppliers. (See Figure 18 for an illustration of
Cost of Equity (re) 6.43% the expansion plans.) The increasing number of PGOLD stores would scale the expenses
Risk-free rate 6.5% accordingly, leading to higher operating expenses especially. This, however, is cancelled out
Beta 0.81 by lower operating costs, as it is easier to source manpower and real estate at relative lower
Risk Premium 5.0% costs outside of Metro Manila.
Equity/Asset 60.99%
Cost of Debt (rd) 1.51% Projected margins show strong growth, which is crucial for PGOLD‟s position as the low-price
Weighted average leader in the modern retail sector. Strong margin growth is attainable due to PGOLD‟s
5.53% strategic acquisitions and rapid expansion plans. Strategic acquisitions, such as S&R, boost
cost of debt
Tax rate 30% consolidated margins, with its portfolio of higher margin items sold to the AB market.
Debt/Asset 39.01%
Terminal Value: Assumptions
WACC 7.95%
The weighted average cost of capital (WACC) is calculated to be 7.95%. The terminal growth
Source: Company Data, Team’s rate was estimated to be 3.7550%, factoring in S&R growth driven by consumption of AB
Estimates socio-economic segment and PGOLD‟s broad customer base of resellers and retail consumer.

Figure 29: PER Analysis Derivation: Terminal Growth Rate


Number of Shares The computation of the terminal growth rate was based on 1) reseller value growth, 2) growth
(in millions) 2,766 of household consumption of essentials, and 3) growth of AB private consumption to reflect
1.29 same-store sales growth from Puregold and S&R‟s customers. Growth rate for household
EPS
consumption is based on steady growth of grocery spending despite long-term economic
P/E 30.14
outlook while the rate for re-seller growth is based on the growth rate of traditional retailers, a
Target Price 38.88
mature industry which we expect to remain a staple in the Philippine economy. The weights
Upside 20.75% were derived from PGOLD data on revenue contribution based on customer type (35% for re-
Source: Company Data,
Team’s Estimates
CFA Institute Research Challenge November 29, 2012

sellers and 65% for retail consumers) as well as a conservative estimate of S&R contributing to
approximately 10% of sales. (See Figure 27 for the computation).

Derivation: Weighted Average Cost of Capital (WACC)


For the WACC calculation, the CAPM model was used to calculate the cost of equity (r e),
using the 20-year government bond rate for the risk-free rate of 6.5%, a 5% market risk
premium, and an adjusted beta of 0.81 based on team‟s estimates. (See Figure 28 for the
breakdown of the WACC calculation.)

Price-to-Earnings Ratio (PER) Analysis


Figure 30: PGOLD Revenue and Growth PER analysis validates PGOLD‟s strong BUY rating as it shows that PGOLD is slightly
160,000 60% undervalued compared to most local and regional industry competitors, based on an average
140,000 50%
local and regional PER of 30.14x. (See Figures 21 and 22 for the PER comparison with Asia
120,000 Pacific grocery retail and local peers.) Further computation yielded an optimistic target price
100,000 40% of PHP 38.88 with an upside of 20.75%. (See Figure 29 for the PER Analysis calculation.)
80,000 30%
60,000
40,000
20% Financial Analysis
20,000 10%
0 0% Income Statement
Robust sales growth driven by all-out national expansion
PGOLD‟s revenues are slated to grow at about 39.69% for 2012, primarily attributable to the
Revenues Growth
consolidation of earnings from newly acquired retail chains, Parco and S&R, on top of
execution of organic growth plans. For the succeeding years, sales are also expected to post a
Source: Company Data, Team’s Estimates 2012-2016 CAGR of 23.59% with the aggressive store roll-out which will grow the number of
stores to 260 by 2016, and greater sales contribution from S&R at about 10% (Figure 30).

Same store sales will continue to rise from 2012 to 2016 at a rate of 6.41% on the back of
increasing private consumption, but growth is expected to slow down to 3.755% when new
stores begin to mature and competition enters the same geographical areas. Targeting re-sellers
Figure 31: PGOLD Gross and Operating
will be a strategic driver of growth as shown in the revenue impact of expanding network of
Margins
the TNAP program (see Appendix 27).
30.00%

20.00%
Healthy margins support price leadership strategy
PGOLD will continue improvements in gross margin to 20% in 2016 due to: 1) allocation of
10.00% 20-25% (higher than the current 10-15%) of the selling area in new stores for high margin
items and 2) higher margin products of S&R. On top of the sustained relationships with
0.00%
suppliers which give them a 4% rebate, this stronger performance of the gross margin will
allow the company to competitively price its grocery products.
Gross Margin EBIT Margin
Scale economies back profitable expansion
Source: Company Data, Team’s Estimates The scalable operations of the company gives PGOLD the capability to open new stores with a
minimal investment of P120 million per store (See Appendix 26). Expanding store network
allows the company to maintain an average operating margin of 11% as a result of lower
selling and labor expenses in the Vis-Min area. This is partially offset if warehousing will be
Figure 32: PGOLD EPS Growth and
set-up in Vis-Min (Figure 31).
Profit Margins
10.0% 60% Expansion will lead to a continual increase in the bottom line of 61% for 2012 and 39% CAGR
for the years 2012-2016, equivalent to a healthy profit margin of 8.9% which remains well
50%
8.0% above the industry average of 1.5%-2% (see Appendix 21). This translates to an impressive
40% growth trend in EPS projected at 38.7% CAGR for 2012 through 2016 (Figure 32). Estimated
6.0%
payback for investments averages 5-6 months (see Appendix 26).
30%
4.0%
20% Cash Flows capable of driving expansion initiatives and high dividend payouts
2.0% 10%
Free cash is expected to grow dramatically due to healthy earnings stream, as EBIT is expected
to grow at an average rate of 44% from 2012 to 2016. Cash flows from operating activities will
0.0% 0% continue to increase at a CAGR of 36% as operations expand. The CapEx trend is seen to be
2012E 2013E 2014E 2015E 2016E
sustained, with a yearly CapEx is forecasted to increase to Php 3.46B due to aggressive store
Profit Margin EPS Growth expansion, and maintenance and renovation costs of existing stores. A double-digit times
interest earned (TIE) ratio gives room for PGOLD to fund expansion with debt. Stronger cash
Source: Company Data, Team’s Estimates flows and increase in leverage allow the company to drive further growth with acquisitions or
increase dividend payouts per share at a 15% CAGR through 2016 (see Figure 19).

Balance Sheet shows scalable operations


With higher cash flows, PGOLD retains a cash-rich position allowing the company to improve
liquidity, as seen in a higher current ratio of 1.47x and quick ratio of 1.23x by 2016E.
Moreover, maintaining stable relationships with suppliers gives PGOLD the ability to not only
keep a negative Cash Conversion Cycle which minimizes capital tied to the business, but also
rely on their third-party logistics which reduces warehousing and distribution costs. This asset-
CFA Institute Research Challenge November 29, 2012

light strategy allows PGOLD to capitalize on the scalability of its operations, which translates
to a higher ROE of 21.95% by 2016E. With the recent issuance of P5B worth of notes to fund
store roll-outs, PGOLD‟s D/E ratio average 0.69x for the years 2012E through 2016E.

The Upside Potential of Social Sustainability


PGOLD‟s approach to growing the business shows a socially sustainable model that can be
used to create a further upside. Sustainability initiatives will create long-term value that
secures growth and even attract new investors like socially-responsible investments (SRIs).

PGOLD: Regional Model for Sustainable Development of Modern Retail


Modern retailing in Asia Pacific faces sustainable development challenges as its expansion
threatens the livelihood of small traditional store owners. Strong pressure from this sector has
spurred government regulation to protect small traditional retailers. In Thailand, the Retail and
Wholesale Act introduced zoning restrictions that limit large retailers from operating in the
central zone of cities. In Indonesia, new licenses for modern retailers have been limited to
control the location of stores (See Appendix 22 for government regulation across Asia Pacific).

PGOLD answers the challenge of sustainable development with a business model that
approaches traditional retailers as customers rather than competitors. Through the TNAP
program, it supports sari-sari stores that provides livelihood to hundreds of thousands of
Filipino women and their families. Rather than threaten the livelihood of traditional retailers, it
has made them partners in business growth. With this, we are confident that Puregold‟s
expansion are not only free from regulatory threats but will enjoy strong support from the local
community.

Partnerships with Micro-finance Organizations Can Boost Re-seller Program


An upside to growing re-seller customers can be captured with a tie-up between PGOLD‟s
TNAP program and micro-finance organizations. Micro-finance programs offer financial
support to many small enterprises like sari-sari stores but are interested in providing business
support to ensure feasibility of loan repayments. An attractive opportunity exists for TNAP to
take over business support and training for these micro-finance programs while capturing re-
sellers under micro-finance programs as customers. A tie-up with micro-finance programs
already in Visayas and Mindanao could be a strong entry strategy for the TNAP program into
the region and complement store expansion (see Appendix 27).

Building Long-Term Value: Understanding the Cost of Private Label Expansion


PGOLD has made a conscious decision to limit selection of private label products to maintain
Figure 33: World GDP Growth Rate and strong relationships with suppliers. It is limited to fresh goods and basic commodities and
OFW Remittances Growth Rate contributes only 2% of sales. While private label may be quickly growing, there is an unseen
cost of straining relationships with suppliers. We view the decision to limit private label
20.00% expansion positively as a sustainable strategy given PGOLD‟s rapid expansion relies on
15.00% supplier commitment of getting the best prices from suppliers at uniform rates and providing
logistical support. Protecting relationships with suppliers creates long-term value for Puregold
10.00%
in terms of strong margins and a favorable cash conversion cycle.
5.00%
0.00%
-5.00%
2006 2007 2008 2009 2010 2011 Investment Risks
-10.00% Remittance Risks: Minimal on PGOLD’s Broad-Based Play
Slow-down in the global economy can affect OFW remittances which drive growth of
World GDP Growth Rate domestic consumption. 53% of remittances come from the United States while 17% come
from Europe, thus putting a significant portion of remittances at risk due the current recession
OFW Remittances Growth Rate
in countries within the same region.
Source: IndexMundi, Banko Sentral ng
Pilipinas Remittances growth rates run in correlation with global macroeconomic condition, as
expressed by the world GDP growth rate. However even during recessions, OFW remittances
Figure 34: Philippine Population and exhibit positive growth (see Figure 33). Though this resilience of OFW remittances contributes
Philippine Private Consumption to the aggressive growth of domestic consumption, it is the Philippines‟ above-average
104 12000 population growth of 2.0% that secures a steady rise of consumption. Private consumption will
102
100 10000 rise along a booming population, projected to hit P7.68B at 2012 year-end (see Figure 34).
98 8000 PGOLD is positioned to limit remittance risks because of its broad-based play. Consumption
96
94 6000
of essentials such as food, which comprises 70% PGOLD‟s SKUs, are expected to grow
92 regardless of economic fluctuations.
90 4000
88 2000
86 Competitive Risks: Local Player SM expands grocery retail business
84 0 Heightened competition with SM is expected as modern grocery retail develops. SM plans to
expand at a growth of 30 stores yearly, more than PGOLD‟s 25 store a year target, while also
keying strategic acquisitions. Backed by the deep pockets of the SM conglomerate headed by
Population (Millions)
tycoon Henry Sy, expansion targets are financially feasible. This may create a competition for
Private Consumption (PhP Billions)

Source: Euromonitor, TradingEconomic,


Team’s Estimates
CFA Institute Research Challenge November 29, 2012

prime locations, drive up leasing costs and limit organic expansion, as well as enter into a
price-cutting war which could hurt margins.

PGOLD addresses the threat of heightened competition by maintaining its Everyday Low Price
(EDLP) strategy through introducing more high-margin products and building on supplier
relationships. The company is planning to allot more space for its high-margin items (15-25%
margin) such as freshly produced goods, general merchandise, and small apparel, from 10-15%
of per-store net selling space to 20-25%. Unlike SM, PGOLD maintains strong relationships
with suppliers by limiting private label products and thus allowing the company to negotiate
low prices. Its asset-light model also improves margins equipping it for possible price wars.

PGOLD‟s strong hold on re-sellers is a distinct advantage that SM does not have. TNAP is the
Figure 35: Related Party Transactions as only existing major move by a modern retailer to capture the dominant traditional retailing
% of Operating Expenses industry seen in the ubiquitous sari-sari store. The discounter format Puregold Extra offers
competitive pricing on top-selling SKUs, thus servicing the needs of sari-sari stores.
16,000 25%
Regulatory Risks: Trade Liberalization Sees Potential for Entry of Foreign Retailers
14,000 Regulatory risks involve potential entry of foreign players in the grocery retail market. The
20%
12,000 Trade Liberalization Act implemented in 2000 lessened restrictions for foreign ownership of
10,000 15% businesses leaving the door open for international players to enter the Philippines. No
8,000 international retailer has yet entered the hypermarket and supermarket formats, but Hong
6,000 10% Kong-based retailer Dairy Farm acquired a 50% stake in Rustan‟s retail group. Dairy Farm is
4,000 the leading retailer in the Asia Pacific region operating in 10 countries.
5%
2,000
0 0% Risk is mitigated because of PGOLD strategic customer focus on low-income segments and re-
sellers that is very well adapted to the local market. It has a first-mover advantage in capturing
sari-sari stores through the 220,000 member-strong TNAP program.
Operation Expenses (PhP Thousands) Operational Risk: Expansion to the Vis-Min region
Rel. Party Transactions / Oper. Expansion to the Vis-Min region is a key catalyst to the company‟s projected growth but
Expenses (%) presents a substantial operations risk. PGOLD‟s asset-light supply chain model which has been
Source: Company Data, Team’s Research successful in Metro Manila and Luzon is yet to be tested in the Vis-Min region. Disruptions in
supply chain could increase cost of operations, deplete margins and limit the expansion
potential of 91 hypermarkets in Vis-Min.
Figure 36: Levels of Investment Risks PGOLD tries to reduce the risk by relying on regional distribution of suppliers who have
and PGOLD‟s Mitigation Efforts regional depots A store in Palawan has opened to simulate operations outside of Luzon before
Slowdown in a full store roll-out in Vis-Min. The option of setting up warehousing in VisMin Is also a
Remittances possibility. To ease the transition of learning a new market environment, senior management
6
from established stores in Metro Manila and Luzon are expected to be assigned to new store
4 locations in VisMin. Mindanao can be prioritized for expansion given it has a strong potential
Related-Party
2
Local to replicate PGOLD‟s existing operational model given similar geography with Luzon and
Transactions Competition
lower retail saturation compared to Visayas.
0

Governance Risk: Related-Party Transactions


Related-party transactions represent a governance risk. The company is currently in a 30-year
Expansion to Entry of Int'l
VisMin Competitor licensing agreement with the owner Lucio Co, stipulating annual payment of 0.02% of the
company‟s net sales for use of the trademark names by PGOLD. A huge bulk of related party
outflows is from leasing of 25 store locations to property owned by the Co family. Risk
Level of Risk Level of Mitigation primarily stems from the uncertain renewal with both the licensing and leasing agreements
leading to disputes between public shareholders and the Co Family. Furthermore PGOLD has
Source: Team’s Estimates rendered only partial compliance to the Manual of Corporate Governance of the SEC as of
2011, particularly in audit-related regulations.

To ensure policies against dubious transactions, the company has put up three new board
Figure 37: Result of Monte Carlo Simulation committees in compliance with the Manual of Corporate Governance of the SEC, namely an
Audit Committee, Nomination Committee, and Compensation Committee. A charter for the
Audit Committee has also been approved and now in effect. These, together with other policy
changes, put the company in full compliance with the Manual of Corporate Governance as of
3Q 2012, compared to a compliance average among the 30 PSE index companies of 95% of
the 75 total compliance guidelines. Furthermore, the company is currently managing its lease
transactions more strictly, thus related party transactions are estimated to decline as a percent
of operating expenses from 19% (2011) to 10% by 2016 (see Figure 35 and Appendix 23).

Valuation Risks
Given 89% of PGOLD‟s intrinsic value is in the long-term, valuation is sensitive to the
terminal growth rate. A Monte Carlo simulation on such resulted in a minimum probability of
Source: Team’s Estimates a SELL at 2% while the level of confidence to recommend BUY is at a high 61% (See Figure
37 and Appendix 28). In case perpetual growth rate falls below target, the possibility of a Hold
at 37% reflects the stability of PGOLD as a defensive stock to invest in.
CFA Institute Research Challenge November 29, 2012

i
Grocery Retailers in the Philippines, Euromonitor International, February 2012
ii
Private Final Consumption Expenditure: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF),
International Financial Statistics (IFS)
iii
Philippine Census 2010, National Statistics Office.
iv
United Nations ESCAP “Statistical Yearbook for Asia and the Pacific” http://www.unescap.org/stat/data/syb2011/I-People/Population.asp
v
CLSA Asia-Pacific Study
vi
SM Retail is a subsidiary of SM Holdings listed in the Philippine Stock Exchange (PSE)
vii
Robinsons Retail Group is a subsidiary of JG Summit Holdings listed in the PSE
viii
Rustans through minority stakeholder Dairy Farms Holdings is listed in the Hong Kong Stock Exchange
ix
“Mindanao to get biggest infra budget in 2013”, Philippine Daily Inquirer. September 2012
Appendix
Appendix 1 Income Statements ............................................................................................................ 1
Appendix 2 Balance Sheets .................................................................................................................. 3
Appendix 3 Statements of Cash Flows ................................................................................................. 6
Appendix 4 Key Financial Ratios (Consolidated) .............................................................................. 10
Appendix 5 Income Statements (Common-Size) ............................................................................... 11
Appendix 6 Balance Sheet (Common-Size) ....................................................................................... 13
Appendix 7 S&R Financial Statements .............................................................................................. 16
Appendix 8 Puregold Store Formats ................................................................................................... 19
Appendix 9 Current Locations of Puregold Stores ............................................................................. 20
Appendix 10 Puregold Customer Base ............................................................................................. 21
Appendix 11 Tindahan Ni Aling Puring (TNAP) Program .............................................................. 22
Appendix 12 Puregold Ownership Structure .................................................................................... 23
Appendix 13 Puregold Board of Directors and Management ........................................................... 24
Appendix 14 Puregold Store Roll-Out Plans .................................................................................... 25
Appendix 15 Porter’s Five Forces Analysis ..................................................................................... 26
Appendix 16 Global Retail Development Index ............................................................................... 27
Appendix 17 Profiles of Major Grocery Retailers ............................................................................ 28
Appendix 18 Revenue Breakdown of Local Company Stocks ......................................................... 29
Appendix 19 Store Growth Potential ................................................................................................ 30
Appendix 20 List of Local and Provincial Competitors ................................................................... 32
Appendix 21 Retail Performance Benchmarks ................................................................................. 33
Appendix 22 Modern Grocery Retail in Southeast Asia................................................................... 34
Appendix 23 Corporate Governance ................................................................................................ 35
Appendix 24 M&A And FCFE Method ........................................................................................... 36
Appendix 25 Regression Analysis .................................................................................................... 37
Appendix 26 Investment Costs and Returns ..................................................................................... 39
Appendix 27 Sensitivity Analysis..................................................................................................... 41
Appendix 28 Monte Carlo Simulation .............................................................................................. 42
Appendix 29 SWOT Matrix of Current and Potential Strategies ..................................................... 43
Appendix 30 Investment Ratings Definition .................................................................................... 43
Appendix 1 INCOME STATEMENTS

Appendix 1.1: PGOLD (Consolidated)


Income Statement
2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
Net Sales 18,842 24,112 29,108 38,988 59,541 81,273 100,718 122,258 148,707
Hypermarkets 18,842 24,112 27,584 33,557 47,310 60,466 75,081 91,288 111,848
Supermarkets - - 1,481 4,695 7,062 9,387 12,039 15,055 18,477
Discounter - - 43 737 966 1,137 1,317 1,508 1,708
S&R - - - - 8,407 10,283 12,280 14,408 16,674
Cost of Sales 17,451 21,893 25,577 33,453 49,847 67,148 82,343 98,885 118,965
Gross Profit 1,391 2,219 3,531 5,535 9,695 14,125 18,375 23,373 29,741
Other Operating Income 892 785 781 1,052 1,330 2,030 2,536 3,102 3,806
Selling Expenses 1,711 2,082 2,696 3,568 5,061 6,456 7,937 9,552 11,535
General and Administrative
131 183 261 382 662 937 1,148 1,378 1,655
Expenses
Other Operating Expenses 144 282 370 421 620 778 927 1,080 1,260
Operating Expenses 1,986 2,546 3,326 4,371 6,343 8,170 10,012 12,010 14,450
Operating Income 297 458 985 2,216 4,682 7,985 10,899 14,465 19,097
Other Expense (Income) 119 (21) 12 (57) 10 18 18 18 21
Interest Expense - 290 230 68 68 325 328 332 355
Earnings Before Taxes 178 189 743 2,205 4,604 7,642 10,553 14,115 18,722
Tax Expense 48 58 233 660 1,448 2,293 3,166 4,234 5,616
Net Income 129 132 510 1,545 3,156 5,384 7,423 9,919 13,160

Appendix 1.2: Consolidated: Puregold Price Club, Inc.; Puregold Jr.; Puregold Extra
Income Statement
2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
Net Sales 18,842 24,112 29,108 38,988 55,338 70,990 88,438 107,850 132,033
Hypermarkets 18,842 24,112 27,584 33,557 47,310 60,466 75,081 91,288 111,848
Supermarkets - - 1,481 4,695 7,062 9,387 12,039 15,055 18,477
Discounter - - 43 737 966 1,137 1,317 1,508 1,708
Cost of Sales 17,451 21,893 25,577 33,453 46,484 58,922 72,519 87,359 105,626
Gross Profit 1,391 2,219 3,531 5,535 8,854 12,068 15,919 20,492 26,407
Other Operating Income 892 785 781 1,052 1,284 1,938 2,428 2,979 3,667
Selling Expenses 1,711 2,082 2,696 3,568 5,004 6,342 7,805 9,401 11,365
General and Administrative
131 183 261 382 541 695 865 1,055 1,292
Expenses
Other Operating Expenses 144 282 370 421 601 740 883 1,030 1,203
Operating Expenses 1,986 2,546 3,326 4,371 6,146 7,776 9,553 11,485 13,860
Operating Income 297 458 985 2,216 3,992 6,230 8,794 11,985 16,215
Other Expense/Income 119 (21) 12 (57) 10 18 18 18 21
Interest Expense - 290 230 68 46 277 277 277 277
Earnings Before Taxes 178 189 743 2,205 3,936 5,935 8,500 11,690 15,917
Tax Expense 48 58 233 660 1,181 1,781 2,550 3,507 4,775
Net Income 129 132 510 1,545 2,755 4,155 5,950 8,183 11,142

1
Appendix 1.3: S&R
Income Statement
2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
Net Sales 4,204 10,283 12,280 14,408 16,674
Cost of Sales 3,363 8,226 9,824 11,526 13,339
Gross Profit 841 2,057 2,456 2,882 3,335
Other Operating Income 46 92 108 123 138
Selling Expenses 57 114 133 151 170
General and Administrative Expenses 121 242 282 323 363
Other Operating Expenses 19 38 44 51 57
Operating Expenses 197 394 459 525 590
Operating Income 690 1,755 2,105 2,480 2,883
Other Expense (Income) - - - - -
Interest Expense 22 49 51 55 78
Earnings Before Taxes 668 1,707 2,053 2,425 2,804
Tax Expense 268 512 616 727 841
Net Income 401 1,229 1,473 1,736 2,018

Source: Company Data, Team’s Estimates

2
Appendix 2 BALANCE SHEETS

Appendix 2.1: PGOLD (Consolidated)


Balance Sheet
2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
ASSETS
Cash and Cash Equivalents 1,225 1,136 1,838 1,955 4,855 9,949 16,621 25,269 36,467
Receivables 809 645 242 410 613 877 1,018 1,160 1,319
Merchandise Inventory 1,901 1,904 2,934 4,523 6,273 8,730 10,442 12,225 14,276
Other Current Assets 4,034 6,230 402 560 805 1,105 1,379 1,785 3,003
Current Assets 7,969 9,916 5,416 7,449 12,546 20,661 29,461 40,440 55,065
NET PPE 1,592 2,166 4,146 6,006 8,115 10,450 11,933 13,129 13,998
Deferred Tax Assets 67 101 165 220 295 356 417 477 549
Other Noncurrent Assets 235 285 397 3,005 8,330 8,349 11,081 13,955 17,574
Goodwill - - - - 16,054 16,054 16,054 16,054 16,054
Total Noncurrent Assets 1,894 2,552 4,708 9,231 32,794 35,209 39,485 43,616 48,175
Total Assets 9,863 12,468 10,124 16,680 45,340 55,871 68,946 84,055 103,240
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 4,241 6,114 2,092 - 569 1,381 2,570 2,984 3,614
Accounts Payable 3,252 3,793 5,109 6,421 9,662 13,089 16,321 19,948 24,495
Other Current Liabilities 1,015 960 328 208 1,048 2,181 4,145 6,547 9,336
Total Current Liabilities 8,508 10,867 7,529 6,629 11,280 16,651 23,036 29,479 37,445
Noncurrent Accrued Rent 218 318 508 663 663 663 663 663 663
5-year bonds (5.4881% p.a.) - - - - 4,000 4,000 4,000 4,000 4,000
7-year bonds (5.8673% p.a.) - - - - 1,000 1,000 1,000 1,000 1,000
Retirement Benefits Liability 3 17 39 76 89 110 129 147 169
Total Noncurrent Liabilities 221 335 547 739 5,752 5,773 5,792 5,810 5,832
Total Liabilities 8,729 11,202 8,076 7,368 17,031 22,424 28,828 35,289 43,276
Capital Stock 796 796 1,450 7,169 23,233 23,243 23,243 23,243 23,243
Retained Earnings 338 470 598 2,143 5,076 10,203 16,875 25,523 36,721
Total Equity 1,134 1,266 2,048 9,312 28,309 33,446 40,118 48,766 59,964
Total Liabilities and Equity 9,863 12,468 10,124 16,680 45,340 55,871 68,946 84,055 103,240

3
Appendix 2.2: Consolidated: Puregold Price Club, Inc.; Puregold Jr.; Puregold Extra
Balance Sheet
2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
ASSETS
Cash and Cash Equivalents 1,225 1,136 1,838 1,955 4,157 7,324 12,523 19,435 28,615
Receivables 809 645 242 410 491 591 692 793 912
Merchandise Inventory 1,901 1,904 2,934 4,523 5,456 6,577 7,699 8,820 10,139
Other Current Assets 4,034 6,230 402 560 719 877 1,035 1,194 1,352
Current Assets 7,969 9,916 5,416 7,449 10,823 15,370 21,949 30,242 41,017
NET PPE 1,592 2,166 4,146 6,006 7,557 9,071 10,330 11,337 12,045
Deferred Tax Assets 67 101 165 220 295 356 417 477 549
Other Noncurrent Assets 235 285 397 3,005 8,320 8,325 11,054 13,925 17,541
Goodwill - - - - 16,054 16,054 16,054 16,054 16,054
Total Noncurrent Assets 1,894 2,552 4,708 9,231 32,226 33,806 37,855 41,793 46,189
Total Assets 9,863 12,468 10,124 16,680 43,049 49,176 59,804 72,035 87,206
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 4,241 6,114 2,092 - - 100 1,221 1,527 1,552
Accounts Payable 3,252 3,793 5,109 6,421 9,144 11,879 14,938 18,392 22,766
Other Current Liabilities 1,015 960 328 208 588 696 1,927 3,468 5,039
Total Current Liabilities 8,508 10,867 7,529 6,629 9,732 12,674 18,086 23,387 29,357
Noncurrent Accrued Rent 218 318 508 663 663 663 663 663 663
5-year bonds - - - - 4,000 4,000 4,000 4,000 4,000
7-year bonds - - - - 1,000 1,000 1,000 1,000 1,000
Retirement Benefits Liability 3 17 39 76 86 104 122 139 160
Total Noncurrent Liabilities 221 335 547 739 5,749 5,767 5,785 5,802 5,823
Total Liabilities 8,729 11,202 8,076 7,368 15,481 18,441 23,871 29,189 35,180
Capital Stock 796 796 1,450 7,169 23,223 23,223 23,223 23,223 23,223
Retained Earnings 338 470 598 2,143 4,345 7,512 12,710 19,623 28,802
Total Equity 1,134 1,266 2,048 9,312 27,568 30,735 35,933 42,846 52,025
Total Liabilities and Equity 9,863 12,468 10,124 16,680 43,049 49,176 59,804 72,035 87,206

4
Appendix 2.3: S&R
Balance Sheet
2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
ASSETS
Cash and Cash Equivalents 698 2,625 4,098 5,834 7,852
Receivables 122 285 326 367 408
Merchandise Inventory 817 2,153 2,744 3,405 4,137
Other Current Assets 87 228 344 592 1,651
Current Assets 1,724 5,291 7,512 10,198 14,048
NET PPE 558 1,380 1,603 1,792 1,953
Deferred Tax Assets - - - - -
Other Noncurrent Assets 10 23 27 30 33
Goodwill - - - - -
Total Noncurrent Assets 568 1,403 1,630 1,822 1,987
Total Assets 2,291 6,695 9,142 12,020 16,035
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 569 1,281 1,350 1,457 2,063
Accounts Payable 519 1,210 1,383 1,556 1,729
Other Current Liabilities 460 1,486 2,218 3,079 4,296
Total Current Liabilities 1,547 3,977 4,950 6,092 8,087
Noncurrent Accrued Rent - - - - -
5-year bonds (5.4881% p.a.) - - - - -
7-year bonds (5.8673% p.a.) - - - - -
Retirement Benefits Liability 3 6 7 8 9
Total Noncurrent Liabilities 3 6 7 8 9
Total Liabilities 1,550 3,983 4,957 6,100 8,096
Capital Stock 10 20 20 20 20
Retained Earnings 731 2,691 4,165 5,900 7,918
Total Equity 741 2,712 4,185 5,921 7,939
Total Liabilities and Equity 2,291 6,695 9,142 12,020 16,035

Source: Company Data, Team’s Estimates

5
Appendix 3 STATEMENTS OF CASH FLOWS

Appendix 3.1: PGOLD (Consolidated)


Statement of Cash Flows
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before Income Tax
189 743 2,205 4,604 7,642 10,553 14,115 18,722
Adjustments for:
Depreciation and amortization 297 279 457 1,305 1,682 1,977 2,264 2,590
Interest Expense 290 220 65 68 325 328 332 355
Accrued rent 100 190 155 - - - - -
Retirement benefits cost 15 22 37 10 19 19 19 22
Loss on pretermination of lease contract - - 9 - - - - -
Impairment losses on receivables (5) (11) (0) - - - - -
Unrealized valuation gain in trading
0 2 1 - - - - -
securities
Loss (gain) on disposal of property and
(13) 3 (0) - - - - -
equipment
Dividend Income (1) (1) (1) - - - - -
Interest Income (2) (2) (25) (46) (92) (108) (123) (138)
Loss on sale of investments in trading
1 - - - - - - -
securities
Gain on insurance claim - - (27) - - - - -
Loss on goodwill written-off - 33 - - - - - -
Operating Income before changes in
870 1,478 2,876 5,941 9,576 16,606 21,550
working capital 12,769
(Increase)decrease in:
Investments in trading securities (8) (0) (0) (2) (3) (3) (3) (3)
Receivables 164 285 (200) (101) (142) (142) (142) (159)
(3) (1,589) (1,158) (1,583) (1,851)
Merchandise invetory
(1,030) (1,641) (1,512)
- - - - - - -
Due from related parties (2,10
5)
Prepaid expenses and other current (133) (238) (154) (224) (213) (274) (406) (1,217)
assets
Increase (decrease) in:
Accounts payable and accrued expenses 537 1,225 1,218 2,911 3,051 3,300 3,734 5,153
Trust receipts payable - - 9 - - - - -
Other current liabilities - 31 (10) 380 107 1,232 1,541 1,571
Due to a related party (284) (258) (119) (776) (253) (253) (253) (298)
Cash generated from operations 1,493 2,032 1,031 906 2,347 2,888 3,195
1,143
Interest received 2 2 25 - - - - -
Interest paid (290) (230) (68) (46) (277) (277) (277) (277)
Income taxes paid (46) (163) (631) (1,268) (3,641) (5,151)
(1,835) (2,666)
Net cash provided by (used in) operating
(334) (391) (674) 5,658 8,370 15,576 19,318
activities 12,173
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (870) (2,266) (2,325) (2,239) (3,206) (3,206) (3,206) (3,162)
Decrease (increase) in other noncurrent
(45) (130) (2,617) (21,444) (66) (2,789) (2,932) (3,687)
assets
Decrease (increase) in due from related (2,105
6,004 - - - - - -
parties )
Decrease (increase) in due to related
229 - - - - - - -
parties
Investment in subsidiary - - - - - - - -
Dividends received 1 1 1 46 92 108 123 138
Proceeds from sale of investments in 7 - - - - - - -

6
Statement of Cash Flows
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
trading securities
Proceeds from insurance claim 9 - 57 - - - - -
Proceeds from disposal of property and
4 7 17 - - - - -
equipment
Net cash provided by (used in) investing (2,770
3,617 (4,867) (23,636) (3,180) (5,888) (6,015) (6,710)
activities )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments of ) loans
(4,022) (2,092) 4,978 51 1,070 251 (54)
payable 1,873
Cash Dividend Paid - (383) - (452) (845) (683) (1,164) (1,356)
Proceeds from issuance and subscriptions
- 388 5,719 16,054 - - - -
of capital stock
Net cash provided by (used in) financing
(4,017) 3,626 20,580 (794) 387 (913) (1,410)
activities 1,873
NET INCREASE (DECREASE) IN
(89) 702 117 2,603 4,396 6,672 8,648 11,198
CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
1,136 1,838 2,253 5,554 9,949 16,621 25,269
AT BEGINNING OF YEAR 1,225
CASH AND CASH EQUIVALENTS
1,838 1,955 4,855 9,949 25,269 36,467
AT END OF YEAR 1,136 16,621

Appendix 3.2: Consolidated: Puregold Price Club, Inc.; Puregold Jr.; Puregold Extra
Statement of Cash Flows
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before Income Tax 189 743 2,205 3,936 5,935 8,500 11,690 15,917
Adjustments for:
Depreciation and amortization 297 279 457 1,233 1,487 1,740 1,994 2,292
Interest Expense 290 220 65 46 277 277 277 277
Accrued rent 100 190 155 - - - - -
Retirement benefits cost 15 22 37 10 18 18 18 21
Loss on pretermination of lease contract - - 9 - - - - -
Impairment losses on receivables (5) (11) (0) - - - - -
Unrealized valuation gain in trading securities 0 2 1 - - - - -
Loss (gain) on disposal of property and equipment (13) 3 (0) - - - - -
Dividend Income (1) (1) (1) - - - - -
Interest Income (2) (2) (25) - - - - -
Loss on sale of investments in trading securities 1 - - - - - - -
Gain on insurance claim - - (27) - - - - -
Loss on goodwill written-off - 33 - - - - - -
Operating Income before changes in working capital 870 1,478 2,876 5,225 7,717 10,534 13,978 18,506
(Increase)decrease in:
Investments in trading securities (8) (0) (0) - - - - -
Receivables 164 285 (200) (80) (101) (101) (101) (119)
Merchandise invetory (3) (1,030) (1,589) (933) (1,121) (1,121) (1,121) (1,319)
Due from related parties (2,105) - - - - - - -
Prepaid expenses and other current assets (133) (238) (154) (158) (158) (158) (158) (158)
Increase (decrease) in:
Accounts payable and accrued expenses 537 1,225 1,218 2,723 2,736 3,059 3,454 4,374
Trust receipts payable - - 9 - - - - -
Other current liabilities - 31 (10) 380 107 1,232 1,541 1,571
Due to a related party (284) (258) (119) (776) (253) (253) (253) (298)
Cash generated from operations 1,143 1,493 2,032 6,380 8,926 13,191 17,339 22,558
Interest received 2 2 25 - - - - -
Interest paid (290) (230) (68) (46) (277) (277) (277) (277)
Income taxes paid (46) (163) (631) (1,181) (1,781) (2,550) (3,507) (4,775)

7
Statement of Cash Flows
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
Net cash provided by (used in) operating activities 809 1,102 1,358 5,153 6,868 10,365 13,556 17,506
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (870) (2,266) (2,325) (2,009) (2,747) (2,747) (2,747) (2,702)
Decrease (increase) in other noncurrent assets (45) (130) (2,617) (21,444) (66) (2,789) (2,932) (3,687)
Decrease (increase) in due from related parties (2,105) 6,004 - - - - - -
Decrease (increase) in due to related parties 229 - - - - - - -
Investment in subsidiary - - - - - - - -
Dividends received 1 1 1 - - - - -
Proceeds from sale of investments in trading securities 7 - - - - - - -
Proceeds from insurance claim 9 - 57 - - - - -
Proceeds from disposal of property and equipment 4 7 17 - - - - -
Net cash provided by (used in) investing activities (2,770) 3,617 (4,867) (23,452) (2,813) (5,536) (5,678) (6,389)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments of ) loans payable 1,873 (4,022) (2,092) 5,000 100 1,121 306 25
Cash Dividend Paid - (383) - (553) (988) (751) (1,271) (1,962)
Proceeds from issuance and subscriptions of capital stock - 388 5,719 16,054 - - - -
Net cash provided by (used in) financing activities 1,873 (4,017) 3,626 20,501 (888) 370 (965) (1,937)
NET INCREASE (DECREASE) IN CASH AND
(89) 702 117 2,202 3,167 5,199 6,912 9,180
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT
1,225 1,136 1,838 1,955 4,157 7,324 12,523 19,435
BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF
1,136 1,838 1,955 4,157 7,324 12,523 19,435 28,615
YEAR

8
Appendix 3.3: S&R
Statement of Cash Flows
2012E 2013E 2014E 2015E 2016E
(in Php 000,000)
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 668 1,707 2,053 2,425 2,804
Adjustments for:
Depreciation 72 195 237 271 299
Finance Cost 22 49 51 55 78
Finance Income (46) (92) (108) (123) (138)
Retirement benefit expense - 1 1 1 1
Operating cash flows before changes in working capital 716 1,859 2,234 2,628 3,044
Decrease (increase) in operating assets:
Trade and other receivables (20) (41) (41) (41) (41)
Inventories (225) (520) (391) (461) (532)
Prepayments and other current assets (65) (54) (116) (248) (1,059)
Security deposits (2) (3) (3) (3) (3)
Increase (decrease) in trade and other payables 187 316 241 280 779
Cash generated from (used in) operations 592 1,556 1,924 2,155 2,187
Income taxes paid (87) (54) (116) (134) (376)
Net cash provided by (used in) operating activities 505 1,502 1,808 2,021 1,812
CASH FLOWS FROM INVESTING ACTIVITIES
Finance income received 46 92 108 123 138
Additions to property and equipment (230) (460) (460) (460) (460)
Net cash provided by (used in) investing activities (184) (367) (352) (337) (321)
CASH FLOWS FROM FINANCING ACTIVITIES
Finance costs paid (22) (49) (51) (55) (78)
Proceeds from borrowings 101 143 68 107 606
Net cash provided by (used in) financing activities 79 94 17 52 528
NET INCREASE (DECREASE) IN CASH AND CASH 401 1,229 1,473 1,736 2,018
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 298 1,397 2,625 4,098 5,834
CASH AND CASH EQUIVALENTS AT END OF YEAR 698 2,625 4,098 5,834 7,852

Source: Company Data, Team’s Estimates

9
Appendix 4 KEY FINANCIAL RATIOS (CONSOLIDATED)
Key Financial Ratios 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
LIQUIDITY RATIOS
Current Ratio (x) 0.93 0.76 1.10 1.11 1.24 1.28 1.37 1.47
Quick Ratio (x) 0.80 0.50 0.42 0.59 0.79 0.96 1.12 1.23
EFFICIENCY RATIOS
Total Asset Turnover (x) 1.71 2.68 2.34 1.34 1.45 1.46 1.45 1.44
Fixed Asset Turnover (x) 12.01 7.29 6.71 7.35 7.78 8.44 9.31 10.62
Accounts Receivable Turnover (x) 14.50 107.09 74.30 86.70 92.69 98.90 105.40 112.71
Inventory Turnover (x) 10.52 8.89 8.00 8.99 9.31 9.65 10.00 10.42
Payables Turnover (x) 3.66 4.69 5.34 5.23 5.13 5.05 4.96 4.86
Receivable Collection Period (days) 25.17 3.41 4.91 4.21 3.94 3.69 3.46 3.24
Days in Inventory (days) 34.70 41.06 45.65 40.59 39.21 37.84 36.50 35.04
Payables Period (days) 99.73 77.77 68.38 69.84 71.15 72.35 73.63 75.15
Cash Conversion Cycle (days) -39.86 -33.31 -17.83 -25.04 -28.01 -30.81 -33.67 -36.87
PROFITABILITY RATIOS
Gross Margin (%) 8.64% 11.51% 14.79% 16.53% 17.38% 18.24% 19.12% 20.00%
Operating Margin (%) 1.83% 3.59% 6.99% 8.43% 9.83% 10.82% 11.83% 12.84%
Net Profit Margin (%) 0.56% 1.97% 4.83% 5.58% 6.62% 7.37% 8.11% 8.85%
Return on Assets (%) 0.96% 5.28% 11.29% 7.47% 9.64% 10.77% 11.80% 12.75%
Return on Equity (%) 11.28% 29.48% 21.74% 12.24% 16.10% 18.50% 20.34% 21.95%
EPS (x) N/A N/A 1.10 1.29 1.95 2.68 3.59 4.76
EPS growth (%) N/A N/A N/A 16.60% 51.37% 37.89% 33.62% 32.67%
SOLVENCY RATIOS
Debt Ratio (%) 91.49% 82.09% 48.05% 39.01% 40.14% 41.81% 41.98% 41.92%
Debt to Equity Ratio (x) 10.76 4.58 0.93 0.64 0.67 0.72 0.72 0.72
Long Term Debt Ratio (%) 2.206% 4.413% 3.809% 12.081% 10.333% 8.400% 6.912% 5.649%

Source: Company Data, Team’s Estimates

10
Appendix 5 INCOME STATEMENTS (COMMON-SIZE)

Appendix 5.1: PGOLD (Consolidated)


Income Statement 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Net Sales 100% 100% 100% 100% 100% 100% 100% 100% 100%
Hypermarkets 100% 100% 94.76% 86.07% 79.46% 74.40% 74.55% 74.67% 75.21%
Supermarkets 0.00% 0.00% 5.09% 12.04% 11.86% 11.55% 11.95% 12.31% 12.43%
Discounter 0.00% 0.00% 0.15% 1.89% 1.62% 1.40% 1.31% 1.23% 1.15%
S&R 0.00% 0.00% 0.00% 0.00% 14.12% 12.65% 12.19% 11.78% 11.21%
Cost of Sales 92.62% 90.80% 87.87% 85.80% 83.72% 82.62% 81.76% 80.88% 80.00%
Gross Profit 7.38% 9.20% 12.13% 14.20% 16.28% 17.38% 18.24% 19.12% 20.00%
Other Operating Income 4.73% 3.26% 2.68% 2.70% 2.23% 2.50% 2.52% 2.54% 2.56%
Selling Expenses 9.08% 8.64% 9.26% 9.15% 8.50% 7.94% 7.88% 7.81% 7.76%
General and Administrative
0.70% 0.76% 0.90% 0.98% 1.11% 1.15% 1.14% 1.13% 1.11%
Expenses
Other Operating Expenses 0.76% 1.17% 1.27% 1.08% 1.04% 0.96% 0.92% 0.88% 0.85%
Operating Expenses 10.54% 10.56% 11.43% 11.21% 10.65% 10.05% 9.94% 9.82% 9.72%
Operating Income 1.58% 1.90% 3.39% 5.68% 7.86% 9.83% 10.82% 11.83% 12.84%
Other Expense (Income) 0.63% -0.09% 0.04% -0.15% 0.02% 0.02% 0.02% 0.01% 0.01%
Interest Expense 0.00% 1.20% 0.79% 0.18% 0.11% 0.40% 0.33% 0.27% 0.24%
Earnings Before Taxes 0.94% 0.78% 2.55% 5.65% 7.73% 9.40% 10.48% 11.55% 12.59%
Tax Expense 0.26% 0.24% 0.80% 1.69% 2.43% 2.82% 3.14% 3.46% 3.78%
Net Income 0.69% 0.55% 1.75% 3.96% 5.30% 6.62% 7.37% 8.11% 8.85%

Appendix 5.2: Consolidated: Puregold Price Club, Inc.; Puregold Jr.; Puregold Extra
Income Statement 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Net Sales 100% 100% 100% 100% 100% 100% 100% 100% 100%
Hypermarkets 100% 100% 94.76% 86.07% 85.49% 85.18% 84.90% 84.64% 84.71%
Supermarkets 0.00% 0.00% 5.09% 12.04% 12.76% 13.22% 13.61% 13.96% 13.99%
Discounter 0.00% 0.00% 0.15% 1.89% 1.75% 1.60% 1.49% 1.40% 1.29%
Cost of Sales 92.62% 90.80% 87.87% 85.80% 84.00% 83.00% 82.00% 81.00% 80.00%
Gross Profit 7.38% 9.20% 12.13% 14.20% 16.00% 17.00% 18.00% 19.00% 20.00%
Other Operating Income 4.73% 3.26% 2.68% 2.70% 2.32% 2.73% 2.75% 2.76% 2.78%
Selling Expenses 9.08% 8.64% 9.26% 9.15% 9.04% 8.93% 8.83% 8.72% 8.61%
General and Administrative
0.70% 0.76% 0.90% 0.98% 0.98% 0.98% 0.98% 0.98% 0.98%
Expenses
Other Operating Expenses 0.76% 1.17% 1.27% 1.08% 1.09% 1.04% 1.00% 0.95% 0.91%
Operating Expenses 10.54% 10.56% 11.43% 11.21% 11.11% 10.95% 10.80% 10.65% 10.50%
Operating Income 1.58% 1.90% 3.39% 5.68% 7.21% 8.78% 9.94% 11.11% 12.28%
Other Expense/Income 0.63% -0.09% 0.04% -0.15% 0.02% 0.02% 0.02% 0.02% 0.02%
Interest Expense 0.00% 1.20% 0.79% 0.18% 0.08% 0.39% 0.31% 0.26% 0.21%
Earnings Before Taxes 0.94% 0.78% 2.55% 5.65% 7.11% 8.36% 9.61% 10.84% 12.06%
Tax Expense 0.26% 0.24% 0.80% 1.69% 2.13% 2.51% 2.88% 3.25% 3.62%
Net Income 0.69% 0.55% 1.75% 3.96% 4.98% 5.85% 6.73% 7.59% 8.44%

11
Appendix 5.3: S&R
Income Statement 2012E 2013E 2014E 2015E 2016E
Net Sales 100% 100% 100% 100% 100%
Cost of Sales 80.00% 80.00% 80.00% 80.00% 80.00%
Gross Profit 20.00% 20.00% 20.00% 20.00% 20.00%
Other Operating Income 1.10% 0.90% 0.88% 0.85% 0.83%
Selling Expenses 1.35% 1.10% 1.08% 1.05% 1.02%
General and Administrative
2.88% 2.35% 2.30% 2.24% 2.18%
Expenses
Other Operating Expenses 0.45% 0.37% 0.36% 0.35% 0.34%
Operating Expenses 4.68% 3.83% 3.74% 3.64% 3.54%
Operating Income 16.42% 17.07% 17.14% 17.21% 17.29%
Other Expense (Income) 0.00% 0.00% 0.00% 0.00% 0.00%
Interest Expense 0.51% 0.47% 0.42% 0.38% 0.47%
Earnings Before Taxes 15.90% 16.60% 16.72% 16.83% 16.82%
Tax Expense 6.37% 4.98% 5.02% 5.05% 5.05%
Net Income 9.53% 11.95% 12.00% 12.05% 12.10%

Source: Company Data, Team’s Estimates

12
Appendix 6 BALANCE SHEET (COMMON-SIZE)
Appendix 6.1: PGOLD (Consolidated)
Balance Sheet 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
ASSETS
Cash and Cash Equivalents 12.42% 9.11% 18.15% 11.72% 10.71% 17.81% 24.11% 30.06% 35.32%
Receivables 8.20% 5.18% 2.39% 2.46% 1.35% 1.57% 1.48% 1.38% 1.28%
Merchandise Inventory 19.28% 15.27% 28.98% 27.12% 13.83% 15.63% 15.15% 14.54% 13.83%
Other Current Assets 40.90% 49.97% 3.97% 3.36% 1.78% 1.98% 2.00% 2.12% 2.91%
Current Assets 80.80% 79.53% 53.50% 44.66% 27.67% 36.98% 42.73% 48.11% 53.34%
NET PPE 16.14% 17.37% 40.95% 36.01% 17.90% 18.70% 17.31% 15.62% 13.56%
Deferred Tax Assets 0.68% 0.81% 1.63% 1.32% 0.65% 0.64% 0.60% 0.57% 0.53%
Other Noncurrent Assets 2.38% 2.29% 3.92% 18.02% 18.37% 14.94% 16.07% 16.60% 17.02%
Goodwill 0.00% 0.00% 0.00% 0.00% 35.41% 28.73% 23.29% 19.10% 15.55%
Total Noncurrent Assets 19.20% 20.47% 46.50% 55.34% 72.33% 63.02% 57.27% 51.89% 46.66%
Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100%
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 43.00% 49.04% 20.67% 0.00% 1.26% 2.47% 3.73% 3.55% 3.50%
Accounts Payable 32.97% 30.42% 50.47% 38.49% 21.31% 23.43% 23.67% 23.73% 23.73%
Other Current Liabilities 10.29% 7.70% 3.23% 1.25% 2.31% 3.90% 6.01% 7.79% 9.04%
Total Current Liabilities 86.27% 87.16% 74.37% 39.74% 24.88% 29.80% 33.41% 35.07% 36.27%
Noncurrent Accrued Rent 2.21% 2.55% 5.01% 3.97% 1.46% 1.19% 0.96% 0.79% 0.64%
5-year bonds (5.4881% p.a.) 0.00% 0.00% 0.00% 0.00% 8.82% 7.16% 5.80% 4.76% 3.87%
7-year bonds (5.8673% p.a.) 0.00% 0.00% 0.00% 0.00% 2.21% 1.79% 1.45% 1.19% 0.97%
Retirement Benefits
0.03% 0.14% 0.39% 0.46% 0.20% 0.20% 0.19% 0.18% 0.16%
Liability
Total Noncurrent Liabilities 2.24% 2.69% 5.40% 4.43% 12.69% 10.33% 8.40% 6.91% 5.65%
Total Liabilities 88.50% 89.85% 79.77% 44.17% 37.56% 40.14% 41.81% 41.98% 41.92%
Capital Stock 8.07% 6.39% 14.32% 42.98% 51.24% 41.60% 33.71% 27.65% 22.51%
Retained Earnings 3.43% 3.77% 5.90% 12.85% 11.20% 18.26% 24.48% 30.36% 35.57%
Total Equity 11.50% 10.15% 20.23% 55.83% 62.44% 59.86% 58.19% 58.02% 58.08%
Total Liabilities and
100% 100% 100% 100% 100% 100% 100% 100% 100%
Equity

13
Appendix 6.2: Consolidated: Puregold Price Club, Inc.; Puregold Jr.; Puregold Extra
Balance Sheet 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
ASSETS
Cash and Cash
12.42% 9.11% 18.15% 11.72% 9.66% 14.89% 20.94% 26.98% 32.81%
Equivalents
Receivables 8.20% 5.18% 2.39% 2.46% 1.14% 1.20% 1.16% 1.10% 1.05%
Merchandise Inventory 19.28% 15.27% 28.98% 27.12% 12.67% 13.38% 12.87% 12.24% 11.63%
Other Current Assets 40.90% 49.97% 3.97% 3.36% 1.67% 1.78% 1.73% 1.66% 1.55%
Current Assets 80.80% 79.53% 53.50% 44.66% 25.14% 31.26% 36.70% 41.98% 47.03%
NET PPE 16.14% 17.37% 40.95% 36.01% 17.56% 18.45% 17.27% 15.74% 13.81%
Deferred Tax Assets 0.68% 0.81% 1.63% 1.32% 0.69% 0.72% 0.70% 0.66% 0.63%
Other Noncurrent Assets 2.38% 2.29% 3.92% 18.02% 19.33% 16.93% 18.48% 19.33% 20.11%
Goodwill 0.00% 0.00% 0.00% 0.00% 37.29% 32.65% 26.84% 22.29% 18.41%
Total Noncurrent Assets 19.20% 20.47% 46.50% 55.34% 74.86% 68.74% 63.30% 58.02% 52.97%
Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100%
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 43.00% 49.04% 20.67% 0.00% 0.00% 0.20% 2.04% 2.12% 1.78%
Accounts Payable 32.97% 30.42% 50.47% 38.49% 21.24% 24.16% 24.98% 25.53% 26.11%
Other Current Liabilities 10.29% 7.70% 3.23% 1.25% 1.37% 1.41% 3.22% 4.81% 5.78%
Total Current Liabilities 86.27% 87.16% 74.37% 39.74% 22.61% 25.77% 30.24% 32.47% 33.66%
Noncurrent Accrued Rent 2.21% 2.55% 5.01% 3.97% 1.54% 1.35% 1.11% 0.92% 0.76%
5-year bonds 0.00% 0.00% 0.00% 0.00% 9.29% 8.13% 6.69% 5.55% 4.59%
7-year bonds 0.00% 0.00% 0.00% 0.00% 2.32% 2.03% 1.67% 1.39% 1.15%
Retirement Benefits
0.03% 0.14% 0.39% 0.46% 0.20% 0.21% 0.20% 0.19% 0.18%
Liability
Total Noncurrent
2.24% 2.69% 5.40% 4.43% 13.35% 11.73% 9.67% 8.05% 6.68%
Liabilities
Total Liabilities 88.50% 89.85% 79.77% 44.17% 35.96% 37.50% 39.91% 40.52% 40.34%
Capital Stock 8.07% 6.39% 14.32% 42.98% 53.95% 47.22% 38.83% 32.24% 26.63%
Retained Earnings 3.43% 3.77% 5.90% 12.85% 10.09% 15.28% 21.25% 27.24% 33.03%
Total Equity 11.50% 10.15% 20.23% 55.83% 64.04% 62.50% 60.09% 59.48% 59.66%
Total Liabilities and
100% 100% 100% 100% 100% 100% 100% 100% 100%
Equity

14
Appendix 6.3: S&R
Balance Sheet 2012E 2013E 2014E 2015E 2016E
ASSETS
Cash and Cash Equivalents 30.47% 39.21% 44.83% 48.54% 48.97%
Receivables 5.34% 4.26% 3.57% 3.05% 2.54%
Merchandise Inventory 35.63% 32.16% 30.01% 28.33% 25.80%
Other Current Assets 3.79% 3.40% 3.76% 4.92% 10.30%
Current Assets 75.23% 79.04% 82.17% 84.84% 87.61%
NET PPE 24.33% 20.61% 17.53% 14.91% 12.18%
Deferred Tax Assets 0.00% 0.00% 0.00% 0.00% 0.00%
Other Noncurrent Assets 0.44% 0.35% 0.29% 0.25% 0.21%
Goodwill 0.00% 0.00% 0.00% 0.00% 0.00%
Total Noncurrent Assets 24.77% 20.96% 17.83% 15.16% 12.39%
Total Assets 100% 100% 100% 100% 100%
LIABILITIES AND SHAREHOLDER EQUITY
Short-Term Borrowing 24.84% 19.14% 14.76% 12.12% 12.86%
Accounts Payable 22.63% 18.07% 15.13% 12.94% 10.78%
Other Current Liabilities 20.06% 22.19% 24.26% 25.62% 26.79%
Total Current Liabilities 67.53% 59.40% 54.15% 50.68% 50.44%
Noncurrent Accrued Rent 0.00% 0.00% 0.00% 0.00% 0.00%
5-year bonds (5.4881% p.a.) 0.00% 0.00% 0.00% 0.00% 0.00%
7-year bonds (5.8673% p.a.) 0.00% 0.00% 0.00% 0.00% 0.00%
Retirement Benefits Liability 0.11% 0.09% 0.08% 0.07% 0.05%
Total Noncurrent Liabilities 0.11% 0.09% 0.08% 0.07% 0.05%
Total Liabilities 67.64% 59.49% 54.22% 50.74% 50.49%
Capital Stock 0.44% 0.30% 0.22% 0.17% 0.13%
Retained Earnings 31.91% 40.20% 45.55% 49.09% 49.38%
Total Equity 32.36% 40.51% 45.78% 49.26% 49.51%
Total Liabilities and Equity 100% 100% 100% 100% 100%

Source: Company Data and Team’s Estimates

15
Appendix 7 S&R FINANCIAL STATEMENTS

Appendix 7.1: Income Statement


Income Statement
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
Net Sales 1,921 4,138 6,646 8,407 10,283 12,280 14,408 16,674
Cost of Sales 1,890 3,841 5,431 6,726 8,226 9,824 11,526 13,339
Gross Profit 31 297 1,215 1,681 2,057 2,456 2,882 3,335
Other Operating Income 43 37 73 92 92 108 123 138
Selling Expenses 40 53 79 114 114 133 151 170
General and Administrative
8 66 202 242 242 282 323 363
Expenses
Other Operating Expenses 9 6 32 38 38 44 51 57
Operating Expenses 57 124 313 394 394 459 525 590
Operating Income 17 209 976 1,380 1,755 2,105 2,480 2,883
Finance Cost - 8 36 43 49 51 55 78
Earnings Before Taxes 17 201 940 1,337 1,707 2,053 2,425 2,804
Tax Expense 3 58 280 535 512 616 727 841
Net Income 14 144 660 801 1,229 1,473 1,736 2,018

Appendix 7.2: Balance Sheet


Balance Sheet
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
ASSETS
Cash and Cash Equivalents 195 546 595 1,397 2,625 4,098 5,834 7,852
Receivables 1,150 69 204 245 285 326 367 408
Merchandise Inventory 571 806 1,184 1,633 2,153 2,744 3,405 4,137
Other Current Assets 813 433 43 174 228 344 592 1,651
Current Assets 2,729 1,853 2,026 3,448 5,291 7,512 10,198 14,048
NET PPE 1 412 799 1,115 1,380 1,603 1,792 1,953
Deferred Tax Assets 3 - 5 - - - - -
Security Deposits - 1 17 20 23 27 30 33
Total Noncurrent Assets 4 413 821 1,135 1,403 1,630 1,822 1,987
Total Assets 2,733 2,267 2,847 4,583 6,695 9,142 12,020 16,035
LIABILITIES AND SHAREHOLDER EQUITY
Trade and Other Payables 2,706 1,159 864 1,037 1,210 1,383 1,556 1,729
Income Tax Payable - - 210 919 1,486 2,218 3,079 4,296
Loan Payable - 936 936 1,138 1,281 1,350 1,457 2,063
Total Current Liabilities 2,706 2,096 2,011 3,095 3,977 4,950 6,092 8,087
Retirement Benefit Obligation - - 4 5 6 7 8 9
Total Liabilities 2,706 2,096 2,015 3,100 3,983 4,957 6,100 8,096
Capital Stock 2 20 20 20 20 20 20 20
Stock Dividends Distributable - - 150 - - - - -
Retained Earnings 26 151 661 1,463 2,691 4,165 5,900 7,918
Total Equity 27 171 831 1,483 2,712 4,185 5,921 7,939
Total Liabilities and Equity 2,733 2,267 2,847 4,583 6,695 9,142 12,020 16,035

16
Appendix 7.3: Statement of Cash Flows
Balance Sheet
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax 17 201 940 1,337 1,707 2,053 2,425 2,804
Adjustments for:
Depreciation 0 21 72 144 195 237 271 299
Finance Cost - 8 36 43 49 51 55 78
Finance Income (15) (16) (12) (92) (92) (108) (123) (138)
Retirement benefit expense - - 4 1 1 1 1 1
Operating cash flows before
3 214 1,040 1,433 1,859 2,234 2,628 3,044
changes in working capital
Decrease (increase) in operating assets:
Trade and other receivables 188 1,080 (135) (41) (41) (41) (41) (41)
Inventories 44 (235) (378) (449) (520) (391) (461) (532)
Prepayments and other
(778) 328 390 (131) (54) (116) (248) (1,059)
current assets
Security deposits - (1) (15) (3) (3) (3) (3) (3)
Increase (decrease) in trade and
49 (1,548) (293) 375 316 241 280 779
other payables
Cash generated from (used in)
(494) (162) 608 1,184 1,556 1,924 2,155 2,187
operations
Income taxes paid (1) (1) (77) (174) (54) (116) (134) (376)
Net cash from (used in) operating
(495) (162) 531 1,010 1,502 1,808 2,021 1,812
activities
CASH FLOWS FROM INVESTING ACTIVITIES
Finance income received 15 17 13 92 92 108 123 138
Additions to property and
(1) (432) (460) (460) (460) (460) (460) (460)
equipment
Net cash flow (used in) investing
14 (415) (447) (367) (367) (352) (337) (321)
activities
CASH FLOWS FROM FINANCING ACTIVITIES
Finance costs paid - (8) (36) (43) (49) (51) (55) (78)
Proceeds from borrowings - 936 - 202 143 68 107 606
Net cash from financing activities - 929 (36) 159 94 17 52 528
NET INCREASE (DECREASE)
IN CASH AND CASH (481) 351 49 802 1,229 1,473 1,736 2,018
EQUIVALENTS
CASH AND CASH
677 195 546 595 1,397 2,625 4,098 5,834
EQUIVALENTS, BEG.
CASH AND CASH
195 546 595 1,397 2,625 4,098 5,834 7,852
EQUIVALENTS, END

17
Appendix 7.4: Income Statement (Common-size)
Income Statement
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
Net Sales 100% 100% 100% 100% 100% 100% 100% 100%
Cost of Sales 98.40% 92.83% 81.71% 80.00% 80.00% 80.00% 80.00% 80.00%
Gross Profit 1.60% 7.17% 18.29% 20.00% 20.00% 20.00% 20.00% 20.00%
Other Operating Income 2.24% 0.89% 1.10% 1.10% 0.90% 0.88% 0.85% 0.83%
Selling Expenses 2.08% 1.28% 1.19% 1.35% 1.10% 1.08% 1.05% 1.02%
General and Administrative
0.39% 1.59% 3.03% 2.88% 2.35% 2.30% 2.24% 2.18%
Expenses
Other Operating Expenses 0.49% 0.15% 0.48% 0.45% 0.37% 0.36% 0.35% 0.34%
Operating Expenses 2.96% 3.01% 4.71% 4.68% 3.83% 3.74% 3.64% 3.54%
Operating Income 0.89% 5.05% 14.68% 16.42% 17.07% 17.14% 17.21% 17.29%
Finance Cost 0.00% 0.18% 0.54% 0.51% 0.47% 0.42% 0.38% 0.47%
Earnings Before Taxes 0.89% 4.87% 14.14% 15.90% 16.60% 16.72% 16.83% 16.82%
Tax Expense 0.14% 1.39% 4.21% 6.37% 4.98% 5.02% 5.05% 5.05%
Net Income 0.75% 3.48% 9.93% 9.53% 11.95% 12.00% 12.05% 12.10%

Appendix 7.5: Balance Sheet (Common-size)


Balance Sheet
2009 2010 2011 2012E 2013E 2014E 2015E 2016E
(in PHP 000,000)
ASSETS
Cash and Cash Equivalents 7.15% 24.10% 20.90% 30.47% 39.21% 44.83% 48.54% 48.97%
Receivables 42.06% 3.04% 7.16% 5.34% 4.26% 3.57% 3.05% 2.54%
Merchandise Inventory 20.89% 35.54% 41.59% 35.63% 32.16% 30.01% 28.33% 25.80%
Other Current Assets 29.76% 19.09% 1.50% 3.79% 3.40% 3.76% 4.92% 10.30%
Current Assets 99.86% 81.76% 71.15% 75.23% 79.04% 82.17% 84.84% 87.61%
NET PPE 0.04% 18.18% 28.08% 24.33% 20.61% 17.53% 14.91% 12.18%
Deferred Tax Assets 0.09% 0.00% 0.18% 0.00% 0.00% 0.00% 0.00% 0.00%
Security Deposits 0.00% 0.06% 0.59% 0.44% 0.35% 0.29% 0.25% 0.21%
Total Noncurrent Assets 0.14% 18.24% 28.85% 24.77% 20.96% 17.83% 15.16% 12.39%
Total Assets 100% 100% 100% 100% 100% 100% 100% 100%
LIABILITIES AND SHAREHOLDER EQUITY
Trade and Other Payables 99.00% 51.14% 30.36% 22.63% 18.07% 15.13% 12.94% 10.78%
Income Tax Payable 0.00% 0.00% 7.39% 20.06% 22.19% 24.26% 25.62% 26.79%
Loan Payable 0.00% 41.31% 32.89% 24.84% 19.14% 14.76% 12.12% 12.86%
Total Current Liabilities 99.00% 92.45% 70.64% 67.53% 59.40% 54.15% 50.68% 50.44%
Retirement Benefit
0.00% 0.00% 0.15% 0.11% 0.09% 0.08% 0.07% 0.05%
Obligation
Total Liabilities 99.00% 92.45% 70.79% 67.64% 59.49% 54.22% 50.74% 50.49%
Capital Stock 0.06% 0.90% 0.71% 0.44% 0.30% 0.22% 0.17% 0.13%
Stock Dividends
0.00% 0.00% 5.27% 0.00% 0.00% 0.00% 0.00% 0.00%
Distributable
Retained Earnings 0.94% 6.66% 23.22% 31.91% 40.20% 45.55% 49.09% 49.38%
Total Equity 1.00% 7.55% 29.21% 32.36% 40.51% 45.78% 49.26% 49.51%
Total Liabilities and Equity 100% 100% 100% 100% 100% 100% 100% 100%

Source: Company Data and Team’s Estimates

18
Appendix 8 PUREGOLD STORE FORMATS

As of 1H 2012
No. of Stores 120 6 19
Net Selling Area (sqm) 243,457 24,803 20,723
No. of Stock-Keeping Units 1,500 - 50,000 5,000 max 8,000 max
Target Market (economic class) C, D, E A, B D, E
Food | Non-food distribution 74% | 26% 50% | 50% 75% | 25%
Gross profit (PhP million) 3,467.20 158.4 50.3
Gross profit margin 15.50% 25.30% 18.30%
Total traffic (million) 41 1.3 5.2
Average net ticket (PhP) 546 3,382 364
Traffic growth 31.90% 27.40% 7.10%
Same Store Sales Growth (SSSG)
Sales 4% 23% -7%
Traffic -1% 12% -5%
Average net ticket 5% 10% -2%

2012 Year-End Projections


No. of Stores 78 39 14
Net Selling Area (sqm) 240,000 35,100 5,600
No. of Stock-Keeping Units 30,000-50,000 8,000-10,000 1,500-2,000
Net Sales (millions) 39912.10 6539.05 937.62

Source: Company Data and Team’s Estimates

19
Appendix 9 CURRENT LOCATIONS OF PUREGOLD STORES

As of Metro North South


Visayas TOTAL
November 29, 2012 Manila Luzon Luzon
Hypermarkets 34 17 22 73
Supermarkets 23 5 9 37
Discounters 5 2 9 16
S&R 4 1 1 6
Parco 12 3 4 19
TOTAL 78 28 44 1 151

Source: Company Data

20
Appendix 10 PUREGOLD CUSTOMER BASE

RETAIL CONSUMERS

 Comprises mass-market household consumers


(socio-economic classes C to D)
 Target demographic represents over 2 million
households
 Average monthly income ranges from Php 8,000
to Php 50,000
 Average basket size per shopping trip: Php 700 to
Php 5,000
 Frequency of visit: 2x to 4x per month

RE-SELLERS

 Comprises wholesales, small-to-medium sari-sari


stores, canteens, restaurants, convenience stores
and drug stores
 About 220,000 business owners registered with
the Aling Puring loyalty data
 Average basket size per shopping trip: Php 3,000
to Php 50,000
 Frequency of visit: 1x to 3x per week

PHILIPPINE GROCERY RETAIL SALES BREAKDOWN (2011)

Modern
22%
With a unique business model and multiple retail
formats, Puregold is able to serve customers in both the
modern and traditional segments of the Philippine retail
Traditional industry.
78%

Source: Company Data, Euromonitor

21
Appendix 11 TINDAHAN NI ALING PURING (TNAP) PROGRAM

Since 2004
Member base (as of 1H 2012) 220,000

Target market Sari-sari stores and other traditional re-sellers


3% rebate through point accumulation in Aling
Puring Card
Ka-Asenso Welcome Kit
Free Delivery*
Benefits Call-Order-Pick-up Service
Wireless and COD Transactions
Kitang-kita Packs and Case for added savings and
points
Special Ka-Asenso Events
Must own a: sari-sari store, karinderya, mini-
grocery, catering, canteen, food stall, drug store, and
other equivalents
Membership Requirements Accomplished application form
Photocopy of business or barangay permit
Photocopy of one valid ID and one 1x1 or 2x2 photo

Source: Company Data

22
Appendix 12 PUREGOLD OWNERSHIP STRUCTURE

Source: Company Disclosures

23
Appendix 13 PUREGOLD BOARD OF DIRECTORS AND MANAGEMENT

With PGOLD
Name Position
since
Board of Directors
Lucio L. Co Chairman 1998
Susan P. Co Vice Chair and Treasurer 1998
Leonardo B. Dayao Director and President 1998
Ferdinand Vincent P. Co Director 2003
Pamela Justine Co Director 2003
Marilyn V. Pardo Independent Director 2010
Edgardo G. Lacson Independent Director 2010
Executive Officers
Iraida B. de Guzman Senior Vice-President 1999
Denise Maria Carolino Vice President for Administration 1999
Erlinda Orro Financial Comptroller 2005
Andres S. Santos Legal Counsel 2005
Baby Gerlie I. Sacro Corporate Secretary 2000
Candy H. Dacanay-Datuon Compliance Officer and Investor Relations Officer 2011
Store and Department Managers
Joseph U. Sy Senior Store Manager 2010
James Balingit Senior Store Manager 1995
Sherwin C. Hau Senior Store Manager 1999
Renato T. Bechayda Senior Store Manager 1999
Robert Kelvin Y. Kuan Senior Store Manager 2010
Edison T. Anggala Senior Store Manager 2001
Marissa delos Reyes Senior Manager, Accounting 2011
Elbert I. Balcos Senior Manager, Information Services 2011
Aileen T. Bayona Department Manager, Inventory Control 2005
Emelda T. Bechayda Department Manager, Cash Management 1994
Lilia D.R. Gonzales Department Management, Warehouse 2008
Elvira D. Gutierrez Senior Manager, Human Resources 2003
Anabelle S. Kahiwat Senior Manager, Audit 2001
Grace E. Sy Department Manager, Treasury 1995
Myrna M. Tan Department Manager, Payables 2007
Kenneth Ng Tiu Department Manager, Financial Control 2005
Eugene C. Hidalgo Department Manager, Facilities 2001
Bernardito C. Florido, Jr. Department Manager, Safety & Security 2001
Annaliza B. Barrozo Advertising and Communications Manager 2005
Jenny L. Jacintos Merchandising and Marketing Services Manager 2009
Lalette Alea Site Identification and Acquisition Manager 2009
Marybeth Estrella Real Estate Manager 2011
Maria Guvenneth F. Rodriguez Creative Manager 2009
Marlene A. Varquez Group Merchandising Manager 2004
Nelia C. De Jesus Group Merchandising Manager 2004
Adela B. Cancino Senior Merchandising Manager 2009

24
Appendix 14 PUREGOLD STORE ROLL-OUT PLANS

Leveraging on the success of its business model, Puregold continues to roll out new stores and strategically
acquire retail chains in order to establish itself as a leader in the industry. Beating company targets, PGOLD is
set to open 31 stores for 2012, 24% greater than its original guidance of 25. Recent acquisitions of Parco and
S&R have also boosted the store network by 25, pushing growth further to 56% for the year. The Company
plans 25 new store roll-outs annually until 2015 under the Puregold brand and 1 store opening per year until
2016 under the S&R brand.

Source: Company Data

25
Appendix 15 PORTER’S FIVE FORCES ANALYSIS

PHILIPPINE GROCERY RETAIL INDUSTRY

Threat of New Entrants


Low: There is difficulty for new entrants to enter the market because of presence of established brands like
SM, Puregold, Robinsons’s and Rustan’s. Scale is needed to be able to access good terms with suppliers.
High fixed costs associated with leasing of land and building in prime locations also make it hard for to
enter. This requires high capital investments. The threat of entry of foreign retail chains is yet to be seen.

Rivalry from Competitors


Moderate to High: Competitors like SM and Robinson’s Retail Group are funded by large conglomerates
which are positioned for aggressive expansion. Smaller chains are being absorbed with a notable example
being PGOLD’s acquisition of Parco. The modern penetration of retail chain is far from any saturation
point at 22% which decreases the impact of competition.

Threat of Substitute Services


High: Grocery retail formats are threatened by traditional retailers like the wet market and the sari-sari
store. This is an attractive alternative for the mass market because of the informal credit system and sachet-
size serving which makes it an affordable alternative for consumers who earn wages by the day. While the
threat is high, PGOLD does not face this threat by making sari-sari stores their customers instead.

Bargaining Power of Buyers


Moderate to High: Grocery goods are commodities with inelastic demand. With price as the main point of
differentiation for retailers, buyers are have a strong demand. Sari-sari stores as customers of PGOLD are
also increasing in buying power with stronger financial muscle provided by micro-finance programs

Bargaining Power of Suppliers


Low to Moderate: Key suppliers consist of large fast-moving consumer good companies (P&G, Unilever,
URC, etc). Because of intense competition among these suppliers, bargaining power is limited as they try to
compete for key accounts of retail chains like Puregold. Suppliers can be moderately powerful when
expanding outside of Metro Manila because of their national distribution networks.

Summary of Five Forces Analysis


Threat of New
Entrants
5
4
3
Bargaining Power 2 Rivalry from
of Buyers 1 Competitors
0

Threat of
Bargaining Power
Substitute
of Suppliers
Services

Source: Team’s Analysis

26
Appendix 16 GLOBAL RETAIL DEVELOPMENT INDEX

The GRDI measures the attractiveness for international retailers to enter new markets. The Philippines is at the
opening stage which means that direct competition from international retailers is estimated to be in around 5-10
years.

Source: AT-Kearney (2012)

27
Appendix 17 PROFILES OF MAJOR GROCERY RETAILERS

Puregold Price Club SM Retail Robinsons Retail Rustan’s

Market Share
14% 24% 8% 5%
(as of 2011)

 Puregold Priceclub
Puregold Jr  SM Hypermarket  Rustan’s Supermarket
Grocery Store  Robinson
 Puregold Extra  SM Supermarket  Shopwise
Retail Brands Supermarket
 S&R  SaveMore Hypermarkets
 Parco

No. of Grocery
Store Outlets 151 133 66 32
(as of Q3 2012)

 Ministop
 Robinsons
Department
 Rustan’s Department
Store
 SM Department Stores
 Robinsons
Store  Store Specialists
Non-Grocery Appliances
None  SM Appliance  Marks and Spencer
Retail Brands  Robinsons
 Our Home  Starbucks
Specialty Stores
 Ace Hardware
Inc.
 Toys R U
 Handyman
 TruValue

 AB socio-economic
 CDE socio-economic class
 CD socio-  ABC socio-
class  Families in up-scale
Key Market economic class economic class
 AB (through S&R) neighborhoods
Segments Served  Mall-goers  Health-conscious
 SMEs and Sari-sari  CD socio-economic
consumers
Stores (35%) class (through
Shopwise)

Source: Company Disclosures, Team’s Research

28
Appendix 18 REVENUE BREAKDOWN OF LOCAL COMPANY STOCKS

Appendix 18.1: Local Retail Company Stock

SM Investments Corporation
Breakdown of Revenue Breakdown of Net Income
Breakdown of Retail Sales
by Business by Business
Bank
3% Malls
11% Malls Retail
Real 24% 30% Non-
Estate food
10% 43%
Bank Real Food
Retail Estate
31% 57%
76% 15%

Appendix 18.2: Local Consumer-Themed Stocks: URC, JFC and RFM

Percent of Sales from Foreign Markets: URC and JFC


Growth of consumer-themed peers is driven by foreign rather than domestic consumption.

Universal Rubina Corp. Jollibee Food Corp.

20.80%
40%
34% 19.50%
29.60%

18.30%

2009 2010 2011 2009 2010 2011

Percent of Sales by Customer: RFM


Institutional business consists of selling flour and buns to McDonalds. While consumer-themed, it is not a direct
play on consumers. (B2C: Business-to-Consumer; B2B: Business-to-Business)

Breakdown of Revenue by Business Segment Net Income per Business Segment


Others
0.3%

B2B B2B 13%


41%
B2C
58.7% B2C -1%

Source: Company Disclosures

29
Appendix 19 STORE GROWTH POTENTIAL

This section details the computation for the total number of potential stores based on PGOLD’s store selection
criteria of a minimum concentration of 150,000 people, 2,000 sari-sari stores, existing banking activity and
introduction of modern retailing (existence of Mercury Drug). We expect supermarkets and discounters to be
introduced after three to five years of the introduction of hypermarkets. The table below lists the areas in the
Visayas-Mindanao region which qualified the aforementioned selection criteria.

he following table shows the maximum number of potential hypermarkets that Puregold can open, taking into
consideration only the population and number of sari-sari stores it can serve.

Number of Potential
Total Number of Hypermarkets
Area (Region) Population Sari-Sari Potential
(2016E) Stores (2016E) Sari-Sari
Population
Stores
VISAYAS 21,017,783 191,105 140 96 96
Region 6 8,681,595 76,571 58 38 38
Region 7 7,607,574 83,520 51 42 42
Region 8 4,728,614 31,014 32 16 16
MINDANAO 23,430,497 230,284 156 115 115
Northern Mindanao 13,710,280 125,320 91 63 63
Southern Mindanao 9,720,218 104,965 65 52 52
Total Potential Stores for Vis-Min (Absolute) 211

Number of potential hypermarkets given the population criteria is obtained by dividing total population by
150,000, assuming that all hypermarkets to be opened will serve the entire population. Meanwhile, the number
of stores that need to be open in order to capture all traditional retailers in the area is computed by dividing the
total number of sari-sari stores by 2,000. Thus, the maximum number of potential hypermarkets for Vis-Min is
211.

However, the saturation of the market in the area needs to be taken into consideration. Thus, the Index of Retail
Saturation was used in order to project the adjusted number of potential hypermarkets.

The Index of Retail Saturation (IRS) can be computed by dividing the demand for a particular product by
available supply:

where H is the number of households in the area, RE is the annual expenditures for a particular line of trade per
household in the area, and RF is the square footage of retail facilities for a particular line of trade in the area.

In this case, food expenditure inside home was used to calculate total demand while number of hypermarkets
represented supply, assuming all hypermarkets have similar net selling areas. This will serve as a good estimate
of potential hypermarket stores given that food items account for 74% of stock-keeping units (SKUs) of
Puregold. The weighted number of hypermarkets was used in order to account for supermarkets and smaller
grocery retailers in the area. The IRS score for each area was then compared against Metro Manila, which was
used as the benchmark and assumed to have 100% saturation. This can provide a conservative estimate of the
number of potential hypermarkets for Puregold in the Vis-Min area.

30
Average
Weighted
Number of Household Retail
Area (Region) Number of Potential2
Households Consumption Saturation1
Hypermarkets
for Food
VISAYAS 1,585,975 66,275 35.86 49% 37
Region 6 671,584 63,471 12.88 44% 17
Region 7 672,368 69,372 19.11 59% 13
Region 8 242,022 65,450 3.87 35% 7
MINDANAO 2,190,143 57,820 33.78 38% 54
Northern Mindanao 985,100 53,773 15.94 43% 21
Southern Mindanao 1,205,043 61,129 17.84 35% 33
NCR 2,310,420 92,802 148.76 100% -
Total Potential Stores for Vis-Min (Relative to Competition) 91
1
(IRS of NCR)/(IRS of Area)
2
(Weighted Number of Hypermarkets)/(Retail Saturation)

Using the IRS, the estimate for the number of potential stores was reduced to a total of 91 in the Vis-Min region.
To support the feasibility of this number, the succeeding table lists possible locations for Puregold’s expansion
to Visayas and Mindanao. Market potential for hypermarkets was computed based on the original selection
criteria. The group identified 8 locations in Visayas while 9 in Mindanao.

Total Population Est. Number of Market Potential


Areas
(2015E) Sari-Sari Stores for Hypermarkets
Visayas
Cebu City 933,241 9,844 6
Bacolod City 593,960 5,033 4
Iloilo City 494,101 4,187 3
Passi 466,867 3,956 3
Mandaue City 387,120 4,083 3
Lapu-Lapu City 369,543 3,898 2
City Of Kabankalan 302,807 2,566 2
Tagbilaran City 196,212 2,070 1
Mindanao
Davao City 1,639,834 14,275 11
Zamboanga City 959,811 9,252 6
Cagayan De Oro City 666,891 8,858 4
General Santos City 623,602 5,429 4
Iligan City 355,119 5,097 2
Butuan City 348,692 2,426 2
Tagum City 260,296 2,266 2
Malaybalay 171,360 2,276 1
Concepcion, Misamis Occidental 163,396 2,170 1

Source: NSO, Team’s Estimates

31
Appendix 20 LIST OF LOCAL AND PROVINCIAL COMPETITORS

Competitor # of Outlets NCR LUZ VIS MIN


A. Alfonso Supermarket 1 1
Anson Supermarket 2 2
Cherry Foodarama 3 2 1
Citimart Supermarket 7 7
CVC Supermarket 8 3 5
Davao Central Warehouse Club, Inc. 15 15
Eastmart Supermarket 2 2
Essel Supermarket 1 1
Eunilaine Foodmart 11 5 6
Everlight Mart 1 1
Gaisano Capital 20 17 3
Gaisano City Malls 8 8
Gaisano Grand Malls 24 16 8
Gaisano Inc 16 4 12
Garcia's Supermarket 1 1
Grocers Foodarama 1 1
Hi Top Supermarket 2 2
Hilton Mart 1 1
Iloilo Supermart 7 7
Johnny's Supermarket 2 2
JS Gaisano 4 4
Lipa Sampaguita Mart 1 1
Lopue's Supermarket 9 9
Luisa's Philam 1 1
Makati Supermarket 3 3
Metro Gaisano 13 4 3 6
Mightee Mart 22 20 2
N.E. Supermarket 9 9
New City Commercial Center (NCCC) 4 1 3
One Stop Mart 1 1
Pioneer Centre Supermarket 1 1
Plaza Fair 5 2 2 1
Prince Warehouse Club 7 7
Robinsons Supermarket 66 22 30 9 5
Rustan's Supermarket 13 11 2
Savemore Market 65 31 22 9 3
Shoppersville Supermarket 1 1
SM Hypermarket 35 20 12 3
SM Supermarket 33 12 15 4 2
South Supermarket 8 4 4
Super 8 Grocery Warehouse 21 11 10
Tita Gwapa Metro Super Tinda 6 6
Tropical Hut Foodmart 6 4 2
Ultra Mega Multi Sales 7 3 4
Unimart Supermarket 1 1
Walter Mart 19 4 15
Whitegold Club Inc. 1 1

Sources: Philippine Association of Supermarkets Inc., Team’s Research

32
Appendix 21 RETAIL PERFORMANCE BENCHMARKS

PGOLD’s key financial ratios for FY 2011 were compared against regional peers, national players, and Vis-Min
groceries. Companies used for the analysis are:
1) Regional modern retailers – Big C (Thailand), Siam Makro (Thailand), Sumber Alfaria Trijaya
(Indonesia), Sun Art Retail Group (China), Dairy Farm International Holdings
2) National modern players – SM Retail, Robinsons Supermarket, Rustan Supercenters, Waltermart
Supermarket
3) Vis-Min operators – Iloilo Supermart, Davao Central Warehouse Club, LTS Supermarkets (operator of
NCCC Supermarkets), Gaisano Capital

These were chosen according to comparability with Puregold and availability of data.

Retailers
Financial Ratio Puregold Price Vis-Min National Modern Regional (SEA)
Club, Inc. Operators Retailers Modern Retailers
Income Statement Ratios
3.12% - 13.07% 13.18% - 21.10% 10% - 29%
Gross Profit Ratio 14.79%
Average: 7.44% Average: 17.51% Average: 19.69%
0.41% - 1.06% 0.78% - 5.20% 1.98% - 5.30%
Profit Margin 4.83%
Average: 0.59% Average: 2.34% Average: 3.37%
2.92x – 23.60x 9.12x – 12.44x 6x - 14x
Inventory Turnover 8.00x
Average: 8.59x Average: 10.89x Average: 10.15x
Balance Sheet Ratios
0.70% - 6.24% 1.65% - 32.03% 4-14%
Return on Assets 11.29%
Average: 2.41% Average: 11.10% Average: 8.28%
4.02% - 39.07% 6.88% - 40.67% 18-57%
Return on Equity 21.74%
Average: 13.81% Average: 18.73% Average: 37.31%
0.64 – 1.20 0.93 – 1.49 0.33-0.84
Current Ratio 1.10
Average: 0.98 Average: 1.21 Average: 0.71
0.10 – 0.48 0.44 – 0.93 0.19-0.44
Quick Ratio 0.44
Average: 0.24 Average: 0.69 Average: 0.36
2.34 – 5.26 1.24 – 1.97 1.66 – 2.86
Debt-to-Equity Ratio 0.93
Average: 4.20 Average: 1.66 Average: 2.38

Sources: Company data, SEC disclosures, Businessweek

33
Appendix 22 MODERN GROCERY RETAIL IN SOUTHEAST ASIA

Modern Grocery Retail Penetration Rates

70%

51%
43% 41%

22%
15%

Singapore Malaysia Taiwan Thailand Philippines Indonesia

The Philippines has one of the lowest penetration rates of modern grocery in Southeast Asia, next to Indonesia.
With a penetration rate of 22%, the country poses huge growth opportunities for the industry.

Regulations on Modern Retailing

Country Government Regulation Impact

Limits expansion of
Retail and Wholesale Business Act 2005
Thailand space of 300-4000 square metres to be located at
(Revised 2012)
least 15 kilometres away from central city zones

Presidential Regulation No.112 2007


regarding Management of Traditional Establishes minimum distance between modern
Indonesia Market, Shopping Center, and Modern grocery stores and traditional pre-existing
Shop; Regulation of the Minister of Trade markets
(Permendag) No.53 Year 2008

Law on Enterprises – Decree 102, Chapter Subjects establishment of retail unit according to
Vietnam
IV (2010) retail master plan of local authority

Small Retailer Transformation Program Provides loans for traditional stores to upgrade
Malaysia
(Tukar) 2010 and renovate shops

34
Appendix 23 CORPORATE GOVERNANCE
Corporate Governance across Local Company Stocks

PSE requires publicly-listed companies to accomplish its Corporate Governance Disclosure Survey annually.
The survey encompasses 10 good corporate governance guidelines and comprises a total of 75 statements where
companies are to indicate compliance or non-compliance, providing an explanation in cases of non-compliance.
Although PGOLD has been fully compliant with SEC requirements since its IPO in October 2011, it scored only
82.7% compliance with PSE guidelines in 2011, reporting noncompliance in 13 out of 75 statements.

Corporate governance disclosure reports were compared across local consumer-themed companies: Jollibee
Foods Corporation (JFC), Pepsi-Cola Products Philippines (PIP), Universal Robina Corporation (URC), and San
Miguel Brewery (SMB). The table below summarizes the each company’s compliance with PSE good corporate
governance guidelines by tallying its cases of non-compliance. 100% compliance would then mean obtaining a
total score of 0.

PGOLD tied for the lowest score with JFC but prospects for the company remain positive as the survey was
conducted three months after listing. As explained in its disclosure report, PGOLD is already in the process of
addressing most of its cases of non-compliance (10 out of the 13). The team is optimistic that after these are
resolved, the company would achieve 96% compliance, higher than most of its more mature peer companies.

Guidelines
PGOLD JFC PIP URC SMB PSEi Average
(Non-Compliance - 2011)
Sound business strategy 0 1 0 0 0 1.00
Well-structured board 3 2 4 2 2 1.67
Robust internal audit 2 0 0 1 0 2.20
Manages enterprise risk 4 1 0 0 0 1.38
Integrity of financial reports 1 0 2 0 0 1.17
Rights of shareholders esp minority 1 2 2 0 2 1.31
Disclosure and transparency 0 1 0 0 0 1.00
Rights of other stakeholders 0 2 0 0 0 1.40
Related party transactions and insider trading 0 3 1 0 1 1.56
Ethics, compliance and enforcement 2 1 1 0 0 1.00
Total 13 13 10 3 5
Highlighted in Yellow – PGOLD has a higher number of non-compliance in the category than the index
average.

As of 3Q 2012, PGOLD is in full compliance of guidelines prescribed in the SEC Manual of Corporate
Governance.

Exposure to Related Party Transactions

2009 2010 2011 2012E 2013E 2014E 2015E 2016E


# of stores 41 62 100 156 181 206 231 256
Related-Party Rent1 519 702 793 945 1,020 1,103 1,193 1,291
Net Sales 24,112 29,108 38,988 59,541 81,273 100,718 122,258 148,707
Licensing2 12 15 19 30 41 50 61 74
Total Rel. Party 532 716 813 975 1,061 1,153 1,254 1,365
OpEx 2,546 3,326 4,371 6,146 7,776 9,553 11,485 13,860
Rel. Party / OpEx 21% 22% 19% 16% 14% 12% 11% 10%
1
Refers to rent paid as part of leasing agreements with related parties to the Co Family
2
Licensing is 1% of 1/20 of net sales

Source: PSE Disclosures, Company Data, Team’s Estimates

35
Appendix 24 M&A AND FCFE METHOD

Synergy, pre-acquisition projections and consolidation

PGOLD’s recent acquisition of Parco and S&R necessitates a valuation that goes beyond the classical or regular
FCFE method. Although an analysis of post-acquisition data would have yielded more reliable results,
availability of such data is very limited as of yet. For this reason, estimating the post-acquisition yearly growth
rates of PGOLD for the expansionary, declining, and sustainable years becomes a major difficulty. Thus, the
team employs another tool in projection, namely regression, rather than working with poorly supported growth
rates. As will be seen throughout the rest of the section, using regression with the necessary adjustments
provided meaningful results.

According to Corporate Finance (Ross, Westerfield, & Jaffe 2002), acquisitions can be valued through pooling
of interests, wherein assets of the acquired firms are added to the financial books of the acquiring firms at their
book values.

This valuation approach is used by the team to conduct pre-acquisition projections of PGOLD, S&R, and Parco
individually, and combine the financial books of the three firms. For the most part, pre-acquisition projections
are made primarily through ratios and regression on pre-acquisition data from 2009-2011. By adding them up,
the treatment seems to be as if S&R and Parco have been acquired even before.

The team believes that the approach taken sufficiently captures the value of PGOLD, considering its recent
aggressive investment ventures.

36
Appendix 25 REGRESSION ANALYSIS

Grocery Consumption Growth Rate vs. GDP Growth Rate

r² 0.006 n 12
r 0.079 k 1
Std. Error 2.481

ANOVA table
Source SS df MS F p-value
Regression 0.3875 1 0.3875 0.06 .8070
Residual 61.5392 10 6.1539
Total 61.9267 11

The team conducted a regression analysis on the data on grocery consumption growth and GDP growth for the
years 2001 through 2011 to measure the correlation between the two variables. The ANOVA table generated, as
seen above, shows a p-value of 0.8070, which means that there is no significant relationship between the two
data sets. This is also evident in the value of R which is 0.079 and R2 of 0.006. Among the economic variables,
GDP is the closest representation of income within the country. Given the findings of the regression model, it
can be said that consumption of grocery items (which are the products of Puregold) is not affected by
fluctuations in disposable income.

Projection Model

The two major tools used in projecting our values are growth rates and regression analysis.

For projecting revenues per store format, we used growth rates to forecast future sales per store per store format.
Our bases for the same-store sales growth (SSSG) rates per store format can be seen below:

SSSG per
Store Format Market Basis for Growth Rate Rate/Derivation
Store Format
35% Short-term Reseller Value
35% Resellers & 65% (0.35)*3.00% +
Hypermarket 6.25% Growth, 65% CDE market
CDE market1 (0.65)*4.40%
(retail)
Short-term Household
Supermarket 8.00% CDE market 8.00%
Consumption Growth
Short-term Reseller Value
Discounter 3.00% Resellers 3.00%
Growth
Short-term AB Consumption
S&R 6.50% AB market 6.50%
Growth

For most of the items, we use regression—either on financial items per store selling space (for Puregold
formats) or on financial items per number of stores (for S&R) to forecast the same-store financial item growth—
because (1) it is more reliable in dealing with projection based on historical data and (2) it adds room for
growth.

1
This follows the revenue contribution for PGOLD of 35% from resellers and 65% from retail consumers (CDE
market). Since hypermarket is the largest component of revenue for the consolidated PGOLD sales, we can
approximate its growth rate on the same proportionate basis for the growth rates for the reseller and retail CDE
market, respectively.

37
The chosen revenue driver for the projection of Puregold’s financial items is net selling space, which is assumed
to be invariant across same retail formats. Thus, the correlation between the number of stores per retail format
and total sales generated by the respective retail format was verified, and the results are given below.

Variables Correlation Coefficient

Number of Hypermarkets Total Hypermarket Sales 0.937

Number of Supermarkets Total Supermarket Sales 0.992

It is evident that there is high correlation between the number of stores per retail format (which reflects net
selling space, since selling space varies among retail format) and the total sales per retail format. Thus, net
selling space would be an accurate driver in the projection of Puregold financial items for the succeeding years.

38
Appendix 26 INVESTMENT COSTS AND RETURNS

Assumptions
1. PGOLD's CAPEX for 2013 to 2016 is Php3.0 billion.
2. S&R's CAPEX from 2012 to 2016 is stable at Php 0.459 billion each year.
3. S&R will roll out one new store each year from 2013 to 2016.
4. According to PGOLD, its new stores take 6-8 months before reaching maximum revenue. This is reflected
in the payback period calculations by removing the first 6 months' worth of revenue from each new store.
5. The annual investment costs and the net cash flows for the Puregold Price Club, Inc., Puregold Jr., and
Puregold Extra, are proportional to the number of estimated additional stores to be put up for each year.

Notes
1. The Net Revenue from Investments row in each table refers to the net revenue from the initial year’s
investments only for the initial year, i.e., accounting for 6 months' worth of the investment's revenue only.
2. Each table contains the summary of six separate payback period computations (per year).
3. The estimated additional stores to be put up for each year are in proportion to the new stores put up in
2012, as seen below:

Computation for new stores Multiplier 2012 2013 to 2016


Puregold Price Club, Inc. 54.84% 17 14
Puregold Jr. 35.48% 11 9
Puregold Extra 9.68% 3 2
TOTAL 100.00% 31 25

Appendix 26.1: PGOLD (Consolidated)


2012E 2013E 2014E 2015E 2016E
Investment Costs (CAPEX) per year 2,785.00 3,000.00 3,459.74 3,459.74 3,459.74
Net Revenue from Investments 6,927.44 6,508.38 6,976.28 7,471.82 7,996.76
Cumulative Net Cash Flow 4,142.44 3,508.38 3,516.53 4,012.08 4,537.01
Payback Period (in years) 0.40 0.46 0.50 0.46 0.43

Appendix 26.2: Puregold Price Club, Inc.


2012E 2013E 2014E 2015E 2016E
Investment Costs (CAPEX) per year 1,527.26 1,645.16 1,645.16 1,645.16 1,645.16
Net Revenue from Investments 5,828.02 4,993.77 5,305.88 5,637.50 5,989.84
Cumulative Net Cash Flow 4,300.76 3,348.61 3,660.72 3,992.34 4,344.68
Payback Period (in years) 0.26 0.33 0.31 0.29 0.27

Appendix 26.3: Puregold Jr.


2012E 2013E 2014E 2015E 2016E
Investment Costs (CAPEX) per year 988.23 1,064.52 1,064.52 1,064.52 1,064.52
Net Revenue from Investments 995.95 867.44 936.83 1,011.78 1,092.72
Cumulative Net Cash Flow 7.72 (197.08) (127.68) (52.74) 28.21
Payback Period (in years) 0.99 1.23 1.14 1.05 0.97

39
Appendix 26.4: Puregold Extra
2012E 2013E 2014E 2015E 2016E
Investment Costs (CAPEX) per year 269.52 290.32 290.32 290.32 290.32
Net Revenue from Investments 103.47 85.95 88.53 91.18 93.92
Cumulative Net Cash Flow (166.04) (204.37) (201.79) (199.14) (196.40)
Payback Period (in years) 1.97 2.15 2.10 2.09 2.05

Appendix 26.5: S&R


2012E 2013E 2014E 2015E 2016E
Investment Costs (CAPEX) per year 459.74 459.74 459.74 459.74 459.74
Net Revenue from Investments 4,203.60 5,141.43 6,140.22 7,203.94 8,336.79
Cumulative Net Cash Flow 3,743.85 4,681.68 5,680.48 6,744.19 7,877.05
Payback Period (in years) 0.11 0.09 0.07 0.06 0.06

Source: Company Data and Team’s Estimates

40
Appendix 27 SENSITIVITY ANALYSIS

Impact of an Increase in PGOLD’s No. of Resellers Customer Base

% of revenues from resellers 35%


Total sales of PGOLD hypermarket, supermarket and discounters (in Php mil) – 2012E 55,338
Sales contribution of resellers segment (in Php mil) – 2012E 19,368
No. of members in PGOLD’s TNAP program 220,000
Sales contribution per reseller (in Php) – annual 88,036
% increase in TNAP members
5% 10% 15%
No. of TNAP members 231,000 242,000 253,000
Net sales from resellers (in Php mil) 20,336 21,305 22,273
Incremental increase in net sales (in Php mil) 683 1,937 2,905
% of total PGOLD sales from 3 formats 1.2% 3.5% 5.2%
% of revenues from resellers 36.3% 37.2% 38.2%

Source: Company Data, Team’s Research

41
Appendix 28 MONTE CARLO SIMULATION

SELL HOLD BUY

2% 37% 61%
10000

8000

6000

4000

2000

0
26 30 34 38 42 46 50 54 58 62 66 70 74 78 82 86 90 94
Price (PHP)

Assumptions and analysis:

The terminal value constitutes about 89% of our target price and is significantly affected by the perpetual
growth rate, g. To evaluate the sensitivity of the stock, we performed a Monte Carlo simulation, modeling g
using a triangular distribution with the following parameters:

Parameter Value Basis


Minimum 1.000% Average population growth in Asia-Pacific
Calculated terminal growth based on projected
Mode 3.755%
economic variables
Long-term inflation rate in the Philippines (average
Maximum 6.300%
inflation rate from 1991 to 2012)

We believe that PGOLD’s strategy effectively mitigates these investment risks. Thus, these have no significant
impact on our target price. The company’s focus on food and essential items keeps us cushioned from
fluctuations in long-term economic prospects.

The results of our simulation show minimal probability of a SELL on the stock at 2%, while the level of
confidence to recommend a BUY remains at a high 61%. In case of terminal growth rates falling below target,
the possibility of a hold at 37% reflects the stability of the stock making GOLD a safe investment.

Source: Team’s Research and Estimates

42
Appendix 29 SWOT MATRIX OF CURRENT AND POTENTIAL STRATEGIES

PGOLD has successfully responded to external opportunities and threats by exploiting strengths and managing
weaknesses. The SWOT Matrix matches strengths and weaknesses with opportunities and threats. The
numerical pairings in parenthesis indicate which strengths and weaknesses can address which opportunities and
threats. For example, a (5-1) ST strategy – fifth listed strength with the first listed opportunity.

Strengths Weaknesses
1. Price and cost leadership 1. Limited portfolio of high-
2. Knowledge of local market margin items
3. Scalable operations 2. Limited geographic presence
4. Strong relationships with 3. Scrutiny on corporate
suppliers governance issues due to
5. Free cash related-party transactions
Opportunities S-O Strategies W-O Strategies
1. Development of Current Current
infrastructure in Visayas (5-1) Development of organic (2-2) Planned expansion in Visayas
and Mindanao expansion plans into Visayas and and Mindanao
2. Limited presence of Mindanao (2-3) Acquisition of Parco using IPO
national retail chains in Potential earnings to complement organic
Visayas and Mindanao (3-1) Replication of Luzon model of expansion
3. Decrease in cost of capital store network warehousing to (1-3) Merger with S&R using shares
through attractive equity Visayas and Mindanao swap to increase portfolio of goods
market and lowering (4-2) Use of supplier distribution (2-3) Issuance of corporate notes to
interest rates for debt networks to expand aggressively fund expansion plans
4. Market growth of private (5-3) Use free-cash for dividend pay- (3-3) Compliance with governance
label products outs to attract equity investments requirements
5. Strong micro-finance (2-5) Use TNAP program to partner Potential
support for sari-sari stores with micro-finance programs to (1-3) Selective expansion of private
capture more sari-sari stores label products which has higher
(1-4) Offer private label products at margins while maintaining supplier
the lowest prices relationships
(3-5) Tie-ups with micro-finance and
other sustainable development
programs to help corporate image
with investors
Threats S-T Strategies W-T Strategies
1. High penetration of Current Current
Traditional Retail (Sari- (1-1) Development of TNAP program (1-4) Focused expansion into grocery
Sari stores) to turn sari-sari stores to customers retail store formats ―Puregold
2. Expansion of competitors (3-2) Addition of PGOLD Jr. Extra‖ and ―Puregold Jr.‖
into multiple formats supermarket to prevent expansion Potential
(hypermarket, of competitors (1-3) Acquisition of local operators
supermarkets and (3-2) Addition of PGOLD Extra, the in Vis-Min
convenience stores) first discounter format in the (3-3) Report on sustainability of
3. Presence of local country environmental and social issues to
operators in Vis-Min Potential attract investors while at the same
4. Possible entry of foreign (5-3) Acquisition of local operators in time managing corporate
chains Vis-Min governance issues
(4-2) Add convenience store format to
be competitive in all modern
grocery formats

Source: Team’s Analysis


Appendix 30 INVESTMENT RATINGS DEFINITION

43
44