Spotlight: RFM Corporation (RFM)

Business Overview

RFM Corporation (the “Company”) is a major player in the food and beverage industry in the Philippines, specifically in the processing and manufacture of flour, flour-based products, milk and juice drinks, canned and processed meats, ice cream, and bottled mineral water.

The Company also operates non-food businesses, which include barging services (Rizal Lighterage Corporation) and insurance brokerage (RFM Insurance Brokers, Inc.), and leasing of commercial / office spaces (Invest Asia Corporation).

RFM meant "Republic Flour Mills",  which was the name of the company during its incorporation. From its original business of flour milling, the Company diversified into poultry and livestock production and areas of food manufacturing that includes flour-based products, margarine, milk & juices, canned and processed meat, ice cream, and bottled mineral water.

Subsidiaries

1.) Cabuyao Meat Processing Corporation - produces hotdogs, corned beef, hams, and other meat products under the Swift brand.
2.) Interbake Commissary Corporation - operates a high-speed Bun Production Line. It’s first, and continues to be the biggest customer, is McDonald’s. Interbake supplies the bun

requirements to McDonald’s over 260 stores in Luzon and now includes other clients such as KFC and Wendy's.

3.) RFM Equities, Inc and Subsidiaries - It was organized in 1996 to hold and manage RFM Corporation’s holdings in two small financial services subsidiaries – Conglomerate Securities and Financing Corporation (CSFC) and RFM Insurance Brokers, Inc. (RIBI).
4.) RFM Foods Philippines Corporation - ceased operations; former joint venture with Indofoods.
5.) Southstar Bottled Water Company, Inc.
6.) Swift Tuna Corporation
7.) Invest Asia Corporation (96%) - owns the RFM head office and land.  Leases commercial and office spaces to its affiliates and third party tenants.
8.) FWBC Holdings, Inc and subsidiary (84%) - FWBC is involved in the processing and distribution of bottled mountain spring water.
9.) Rizal Lighterage Corporation (94%) - barging company
10.) RFM Canning and Marketing Corporation (70%)
11.) WS Holdings (60%) - 40% owned by Unilever .  Incorporated to invest in, purchase and own shares of stocks, bonds and other securities of obligations including real estate and personal property of any foreign or domestic corporation, or partnership, or association.
12.) Unilever-RFM Ice Cream, Inc (50%) - It is engaged in the business of manufacturing, marketing, distributing and selling, importing and exporting of ice cream and similar food products.
13.) Selecta Wall's Land, Inc (35%) - incorporated in 1999 to acquire, own, use, develop and hold for investment all kinds of real estate.

Products

RFM Corporation operates two major business segments:

1. Institutional Segment which primarily manufactures and sells flour, pasta, bakery and other bakery

products to institutional customers (40% of total Sales)

- Brands: Republic Special, Cinderella, Altar Bread, Milenyo, Hi-Pro Majestic, Señorita

2. Consumer segment, that manufactures and sells ice cream, meat, milk and juices, pasta products,

and flour and rice based mixes. (60% of total Sales)

- Brands: Sunkist juices, Alo Green Tea, Selecta Moo, Selecta Milk, Vitwater, Swift Meat products, Fiesta Spaghetti, White King hotcakes, Fiesta Meaty sauces, etc.

Key People

1.) Jose S. Concepcion, Jr - Chairman of the Board, CEO of RFM Corporation and Swift Foods, Inc.  Founding Chairman of NAMFREL.  Member of the Board of Philtown Properties, Inc.  Former DTI Secretary, Chairman of the Board of Investments, Member of the Central Bank Monetary Board (1986-1991).
2.) Ernest Fritz Server - Vice Chairman of the Board of Directors in RFM.  Member of the Board: Philtown Properties, Inc, One Mckinley Place, RFM Equities.  President of Philam Fund, Inc.  Wharton MBA Graduate.
3.) Jose Ma. A. Concepcion III - President and CEO of the Corporation. Chairman of the Board : Cabuyao Meat Processing Corporation, Interbake Commissary Corporation, RFM Equities, RFM Insurance Brokers, Filipinas Water Bottling Company, Unilever RFM Ice Cream.  Vice Chairman of One Mckinley Place.
4.) Romeo L. Bernardo - Independent Director.  Chairman of Ayala Life Peso/Dollar/Euro Bond Funds and Philippine Stock Index Fund.  Board member of Ayala Plans, Ayala Life, Globe Telecom, Bank of Philippine Islands, PHINMA, Institute of Development and Econometrica Analysis, Aboitiz Corporation, and many more.  BS Business Econ grad (mcl) from UP and MA Development Economics (valedictorian) from Williams College (Massachussetts).

Jose S. Concepcion, Jr.  

Quick Numbers

Fundamentals

Book Value of Equity (3Q 2012): ~Php5.38B

Outstanding Shares: ~3.16B

BV/share: Php 1.70


Debt Ratio (Long term): 28%
Beta: .68
Cost of Capital: 8.2%


Net Income: 
2012 3Q:  Php 588M (projected)
2011:  Php 508M
2010: Php 625M
2009: Php 365M   

time-weighted average NI: Php 549M


A conservative assumption of long-term growth (3% yearly), would put the fair value of the company  (based on earnings - DCF analysis) at around:

Fair Value/share: Php5.04 

As of December 21, 2012, the closing price is at 4.9 which gives us room for about 3% upside towards our conservative target price.

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Technicals

I was able to buy RFM last December 11 right before it's run up.  Not yet knowing its fundamentals, I bought this stock based on the chart only, and I guess was lucky that I got in with a "barat" bid before prices went up.  You can see from the chart that the stock's price has been traded on a range since late August.  Bollinger Bands constricted until the candlesticks for 12/7 and 12/10 showed bullishness, breaking out from the band.  

Analysis

This is a good case on how Technicals + Fundamentals work hand in hand.  I was able to enter the stock basing on its charts (faster to read charts than to scan through financial statements).  Fundamental analysis can act as a confirmation for the buy and help to achieve conviction.  For stocks having good fundamentals, if ever prices go down, it's ok for me to buy more.

For RFM, the recent parabolic rise brought the stock straight to my conservative target price.  I no longer intend to add up, but will still hold to ride the momentum.  Possible sell signal for me would be when prices touch the 20 Moving Average.  HOLD.

References: Financial Statements of RFM (3Q 2012)
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Spotlight: Cirtek Holdings Philippines Corporation (CHIPS)

Business Overview

Cirtek Holdings Philippines Corporation is an independent full service solution provider for subcontract manufacturing of semiconductor devices.  The company provides turnkey solutions that include package design and development , wafer probing, wafer back grinding, assembly and packaging, final testing of semiconductor devices, and delivery and shipment to its customers' end users.  The company is currently located at the Laguna Technopark (Binan, Laguna).

The Company's 2 main subsidiaries, used to be under the majority ownership of  Carmetheus Holdings, Inc and Charmview Holdings, Inc, both of which are owned by the Liu family.  After a Deed of Absolute Sale of Shares by the 2 Holdings companies, the Cirtek Holdings became the parent company of CEC and CHI while the holding companies of the Liu family no longer forms part of the company structure, post-reorganization.

Subsidiaries

1.) Cirtek Electronics Corporation (CEC) - 100% owned by the Company, primarily to engage as an independent subcontractor for semiconductor assembly, test, and packaging services.
2.) Cirtek Electronics International Corporation (CIEC) - 100% owned by the Company.  Primary purpose is to sell integrated circuits principally in the USA and to subcontract the production of the same to CEC.

Products

1. Protection Products - designed to protect electronic devices from damaging voltage or current spikes.
2. Light sensors - optical device that is used on the automatic switching on/off of headlights and the automatic adjustment of airconditioning settings in cars.
3. Real time clock - precision time keeping devices with features like calendars, trickle charger, memory functions, etc.
4. Voltage control oscillators (VCO) - designed to be controlled in oscillation frequency by a DC voltage input.
5. Electronic relays - opto relays that are used in controlling high voltage and high power equipment.
6. Power management devices - used in a wide range of power management applications (telecommunications, portable devices, industrial equipment, etc).

Key People

1.) Jerry Liu - Company Chairman and President.  He is concurrently President/CEO of CEC, Director of Cirtek Land and Cayon Holdings, Inc. and Chairman of Silicon Link, Inc.  Mr. Liu's citizenship is in Taiwan.
2.) Nelia Liu - Director.  She is also the Corporate Secretary of CEC, President of Cirtek Land and Cayon Holdings,Inc and treasurer of Camerton, Inc. and Carmetheus.  She is also Dept. Chairman of the Dept. of Pathology and Laboratory of the Lung Center of the Philippines, Cardinal Santos Medical Center and Perpetual Help Medical Center, and an associate professor of the UP College of Medicine - Philippine General Hospital.  UP College of Medicine batch 1975.
3.) Nicanor Lizares - He is also a director of Pancake House, Inc.  Has MS in Industrial Economics and MA International Relations from Boston University.
4.) Anthony Buyawe - Company's Treasurer and CFO.  He is concurrently the CFO of CEC, CEIC and the Figaro Coffee Company.  A former Sr. Director of Ernst and Young.  He obtained his BA degree from UP and his MBA at AIM.
5.) Martin Lorenzo - Independent Director of the Company.  He is currently the Chairman and President of Pancake House, Inc.
6.) Ernest Fritz Server - Independent Director.  President of Multimedia Telephony, Inc., Vice Chairman of RFM Corporation and a director of Philippine Township, Inc. Former Vice Chairman of Commercial Bank of Manila and Cosmos Bottling Company, and President of Philippin Home Cable Holdings, Inc and Philam Fund.

(L-R: PSE President Hans Sicat, Nicanor Lizares, Jerry Liu, VP Binay,  PSE Chairman Jose Pardo, CVCLaw Senior Partner Avelino Cruz)

Quick Numbers

Fundamentals

Book Value of Equity (3Q 2012): ~Php1.08B

Outstanding Shares: ~162.163M

BV/share: Php 6.64


Debt Ratio (Long term): 28%
Beta: 1
Cost of Capital: 10.4%


Net Income: 
2012 3Q:  Php 157M
2011:  Php 163M
2010: Php 148M
2009: Php 40M   

time-weighted average NI: Php 145M


A conservative assumption of long-term growth (3% yearly), would put the fair value of the company  (based on earnings - DCF analysis) at around:

Fair Value/share: Php20.48 

As of the end of November 28, 2012, the closing price is at 15.28 which gives us room for about 34% upside towards our conservative target price.

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Technicals

This post came in a bit too late as CHIPS prices have started to move up again.  After settling at around 12, there came a sudden buying demand pushing the price up to its latest at 15.28.  I expect prices would be a bit more volatile this time around since a lot of sellers would start to take profit on higher prices.  The latest candle is an inverted hammer, which may signal prices to close lower than the last 2 days.

Analysis

Cirtek Holdings maintain to have stable earnings over the past few years as they were able to acquire service contracts and also attract new investors via its recent IPO and debt offers.  Risks associated with the company would be more on industry risk (semiconductor) and on foreign exchange, since profits are based in USD.  Market outlook for developed countries (main clients) isn't good; thus, there may be a slowdown of growth in the future.

I find the prices at around 12 as very attractive; unfortunately, prices already went up beyond that level just recently. As prices are expected to be more volatile this time, it would be best to wait until the stock price stabilizes or reaches low levels again.  I would recommend a BUY ON DIPS.

References: Financial Statements of CHIPS (3Q 2012)
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