First Pacific Company Limited
Q4 2023 Earnings Call Transcript

Published: 27 Mar 2024

[S. K. Cheung:]

Good day, everyone. Thank you for joining this online briefing to discuss First Pacific 2023 Full Year Financial and Operating Results. The results presentation is available on First Pacific's website, www.firstpacific.com, under the Investor Relations section presentation page. Please note this result briefing is being recorded and the replay will be available on First Pacific's website in the Investor Relations section as well. For participants from the media, please note the Q&A session is open for investors and analysts only. If you would like to raise questions, please contact us when the briefing finished. Today we have with us Mr. Chris Yang, our Executive Director; Mr. Joseph Ng, Chief Financial Officer and Associate Director; Mr. John Ryan, our Associate Director and Head of Investor Relations; Mr. Stanley Yang, our Associate Director and Head of Public Development, and other senior executives from the head office of First Pacific. Over to you, John, for the presentation.

[John Ryan:]

Thank you, everyone, for joining us. We're very proud of our results today, but we'll begin with a brief reminder of who we are. On page two of this presentation, we've got some logos of some of our more well-known assets, including the core holdings of PLDT, Metro Pacific, Indofood, and PacificLight Power, which I'll refer to as PLP during this presentation. Over on the next page, we've got a year-end 2023 snapshot of our gross asset value. You can see we've got our four core holdings holding up most of that pie chart. All of them are at market prices, except for two. MPIC is there at the price we paid at its delisting on the 9th of October last year, and PLP is down at book value. That's the money we paid for our stake in that company. Now, over to the results. On the next page, I think what we've got is a third successive high in contribution from operations. It was up 18% to just over $700 million. And as the numbers cascade over to recurring profit, as you can see visualized in the column chart on the right-hand side, you can see that MPIC and PLP were the most significant contributors to the increase in our recurring profit in 2023. Looking at this page, you see there's a lot written in red and in bold font. It's an experiment we're trying. Please share your views. A lot of highest-evers and record highs. Earnings per share up 19% to US$14.24 a share. And this comes down to a final distribution to our shareholders of HK$12.5 a share and bringing the full year payout to HK$0.23 a share, up a penny from the 2022 payout. Looking ahead, management is confident of continuing earnings growth. Broadly, our core holdings, the four of them, we expect over the medium term to deliver continuing earnings growth going from strength to strength. And we'll discuss this in the course of this presentation. Now, let's move on to our investment-grade credit ratings and our interest coverage ratio, 4.4 times. At the end of the year, we're investment-grade rated by S&P and Moody's. Moody's, we've got at the top left here a maturity table, a chart rather, of our borrowings due dates. And please note that the $210 million fall due in 2024 is pretty much all taken care of. We've got committed facilities in place pushing those borrowings out to a more distant horizon. So the details in the bullet points on the right will already be a little bit out of date. The average maturity is by now going to be greater than the 3.2 years, it was at the end of 2023. Unchanged, really, are our gross debt and net debt numbers of $1.5 billion and $1.4 billion. And our blended interest costs, higher than it was a year ago at 5.4%, but extremely manageable, particularly if you look at our dividend income column chart there on the bottom left. We can see the $324 million we've received from our investee companies is a record high, featuring the maiden contribution from PLP colored in gold on that column chart. Now, let's finish this page with just a snapshot of the ratio of fixed rate to floating borrowing. It's about 50-50 of the $1.5 billion we owe. And the bulk of it is in bank loans with just one bond remaining at $350 million. Our CFO, Joseph Ng, can discuss the prospects of further potential bond issuances if you'd like to bring it up in the Q&A. Now, very, very briefly on page six. We had a smashing equity market performance in 2023. And that may be a factor behind the great number of people attending our call today. Up by a third for the full year. And so far in 2024, I think, First Pacific share price is up about 22% for the second year in a row, beating our peers and major indices globally and regionally. And even more briefly on page seven, you'll see that our head office greenhouse gas emissions have fallen quite extraordinarily in 2023. And that's because we've managed to have carbon neutral Scope 2 emissions, thanks to Hong Kong Electric selling us some carbon certificates. We'll try to continue that going forward to set an example for our investee companies and to show we have decent bonafides in the sustainability space. This is not at the top of mind when our top people are looking at potential investments going forward. But it's a factor we consider when we regard the future and what it means for us. Now, to our biggest holding, Indofood saw record high net sales, record high core profit. And its consumer branded products division on the next page also saw record high sales. You can see there are some details here in the column chart on the right hand side. The overall performance of Indofood was driven by consumer branded products. It's in the separately listed ICBP company. And if you look at the EBIT margin comparison in the blue box down there on the bottom right, you might notice that the Noodles margin in full year 2023 was the highest it has ever been. The Noodles business is going from strength to strength. Has been in the past few years and we expect it to continue doing so going forward. We are very, very pleased with Indofood. And now let's have a look at its biggest business, Indofood CBP on page nine. Again, we've got a river of record highs flowing downstream towards you. I have a particular affection for that chart on the bottom left, which shows how extraordinary its sales have grown over the past 13, 14 years or so from under IDR 20 trillion to just under IDR 70 billion over that time span. They had a terrific year as the bullet points described. And looking ahead, Indofood told their analyst briefing, I think it was yesterday, that 2024 is going to look pretty good, too, with sales up 5% to 8% and EBIT margins remaining quite strong. Now, we're going to jump forward to Metro Pacific Investments on page 12. Let me remind you that this was delisted in the second half of 2023 at a price of ₱5.2 per share. That's the holding company which owns all these assets, the major ones being Meralco in the power generation and distribution business. The toll roads business, which is expanding fast across Southeast Asia and the biggest water company in the Philippines, Maynilad, plus the biggest healthcare network. 23 hospitals now and several others smaller. There's also interesting investments. So how did MPIC assets perform? Let's skip over page 13 and go to page 14 where we can see there are some more record highs, core profit record high, contribution from operation record high. Meralco, as you can see in the column chart on the bottom left, had a fantastic year. Again, record highs there. The water business, after years of tussle with MWSS, its regulator, saw the beginning of tariff increases long delayed, begin to come through in 2023. I think overall is about 16% last year. And then in January this year, they got another bump of about 17%. I may have those numbers swapped around, but they're broadly accurate. Very quickly over to Meralco. You'll see that in this investor handout on page 15, we've got expanded pages devoted to MPIC. And that's simply because as a privately held company, it's more difficult for fund managers to get a look at what exactly is going on there. So we're increasing our transparency over the MPIC assets from 2023 full year and going forward. Now, briefly about Meralco, as I said, it has the highest ever revenues, highest ever core profit and highest ever core EBITDA. The generation contribution in terms of dollars and gigawatt hours are there in two of the blue boxes. And we expect all of these numbers that show improvement in 2024. Now, let's move forward to page 17, where we've got a brief mention of the toll roads business. If you've been typing MPTC into your Google search box in recent months, you'll see that they have been rather active in expansion abroad. We can go over that more in the Q&A. Stanley Yang, our Head of Corporate Development, can discuss this if that is your great interest. Average daily vehicle entries now are well over a million vehicles a day, cars and trucks across its networks in the region. And that drove them to record high revenues, core profit and traffic. Moving over to page 19, a very brief word about Maynilad. Record high revenues, very strong rise to core profit. They had in the distant past, had higher core profit, I think back in 2013 or '14. So not a record high there. Their earnings growth is mostly due to the increase in tariffs that was mentioned just a moment ago. Now, let us move towards the largest telco in the Philippines on page 21. PLDT saw record high service revenues and record high EBITDA. How did it all work out? Again, as it has happened over the past few years, earnings growth has been driven by data, as you can see in the column chart on the bottom right hand side of this page. Wireless data and SMS fixed line data all showing strong growth. And it's the legacy businesses, that solitary black box of ₱2.3 billion being the only thing restraining the service revenue growth to just over ₱200 million. This year, they see the core profit rising in mid single digits to at least ₱35 billion for the full year. And CapEx will be coming down to the range ₱75 billion to ₱78 billion. I think it's the second year in a row of coming down for CapEx. It was as high as 50% of service revenues, and I think it's going to be somewhere around 42% for 2024. Now, let's move to a very interesting small business, which is making its first visit to our investor handout on page 23. That's Maya. That's the FinTech that PLDT owns 38% of. It is the only telco to have a digital banking license in the Philippines. And it's quite small, as you can see, but it is growing very, very fast. Bank depositor numbers doubled last year. Deposit balances went up almost threefold and the number of the cumulative loan dispersal was up almost sevenfold over the course of 2023. In a country where the two-thirds or more of all the population are unbanked, Maya's growth is something to keep an eye on. It's 38% owned by PLDT. Yes, it lost money again in 2023, but they think they are going to turn into the green by the fourth quarter of this year. We will be keeping you apprised of how that's going. Now, on to page 25, PacificLight Power, our fourth and youngest of the core holdings. Lots of record highs and highest ever is here. Revenues and EBITDA. They managed to deliver an enormous dividend to its two shareholders. At the same time, their net debt fell by more than two-thirds over the course of the year. They've really had a very, very strong 2023. And over the next few years, that will prove to probably be hard to duplicate. But the earnings will continue to be strong. Looking ahead, PacificLight Power, PLP, has got a project to put together a scheme to export solar power from Bulan Island. That's part of Indonesia by undersea cable to Singapore for feeding the data centers that are fast-growing in that little city state. It's an exciting project. And Stan, again, can speak to this if that comes up from the Q&A. Now, very briefly, our last major holding is Philex Mining on page 26. Many of you have long known that it's currently operating Padcal Mine has been scheduled for closure. I think it was originally going to be 2020 and then they keep moving it out, moving it out, moving it out. And it's now going to be operating at least until the end of 2027, because the mining people there have figured out how to get the diminishing ore grades to remain profitable. As you can see, the earnings are down in 2023, but they're still positive. And that's good news because the cash flow from Padcal is handy to have as development of the new, much richer grades mine in Silangan, down in the south of the country, works towards opening commercial operations later in 2025. That's coming really sooner than we would think. So we have had a very, very good 2023. That's just been a very rapid overview of how it has looked. And I want to wind up the introductory narrative with a glance to page 29. The left hand column, as you see, is the very familiar NAV per share description that we put in all of our financial statements. These are the end year numbers. So the share price of HK$3.11 is a little bit out of date. You can see it's towards the bottom of that column chart there. And our NAV discount at the end of the year was about 55%. With the current increase in our share price year-to-date, I think it's closer to 45% today. But what I'd like to draw your attention to on this page is the valuation of MPIC. Our US$1,371 million valuation is the price it was worth at 520 a share when it was delisted. CLSA reckons that it's worth a bit more than that when you're doing a look through valuation at what its assets are worth. Remember, there's Meralco listed, Maynilad, the toll road business, MPTC and others. So they've increased their valuation of MPIC to a bit under US$2 billion. And then in the couple of months before it was delisted, there were six analysts who were covering MPIC at the time who did their own look through valuations. And they came up with a larger number. Well, of course, I put this in our presentation. What does this all boil down to? The HK$7 per share NAV in the blue box at the bottom that we had at the end of 2023 looks to be different numbers from these differing perspectives. Over HK$8 NAV per share. These are Hong Kong dollars, according to the CLSA view. And a bit under HK$10 NAV per share, according to what those analysts were saying. This is all food for thought, but perhaps some of the more conservative among you will want to bear in mind that First Pacific Management is extremely confident about overall broad earnings growth among our core holdings filtering through the head office over the next three years. And that's it for the introduction.

[S. K. Cheung:]

Thanks, John. We are now ready for questions.

[A - John Ryan:]

We have a question here. What is the NAV as of today? Can we get an update? I looked at it yesterday and it was about 45%. But look, I've got my email. I got a new number. 44.4% at today's market close. That is the NAV discount of First Pacific at today's closing price of 382. Jeff, unmute yourself and ask a question, please.

[Unidentified Analyst:]

Thanks, John. Hi, everyone. Thank you for taking my question. So basically, I have two big questions. So the first one would be about the latest dividend policy, which I see you have put some wording like progressive absolute dividends going forward. So just want to see, first of all, how do we decide the amount for the final dividend this time, and how should we think about this going forward? And zooming out a little bit, just want to get your latest thought on capital allocation at the local level. How do we strike a balance between potential investments, dividends, buybacks or debt reduction going forward? And I have one question after that.

[John Ryan:]

I'll give a brief introduction and hand it over to Joseph for more details. The dividend policy unlinks the distribution to our shareholders from the profit numbers, which, as you've seen, keep growing from record high to record high year after year. And the distribution is based on, well, funded by the dividend income that we have. So what we want to do is stop an increasingly tenuous link to the profit, linking the cash income to the profit and replace it with an assurance that over time, our aim is to show distribution increases to our shareholders. And now for more detail, I think Joseph can help.

[Joseph Ng:]

Well, I mean, maybe I answered the second part of the question, which was the capital allocation. If you go to page 31 of the presentation, you'll probably get a sense of the cash flow that we're showing. 2023, you see that, well, we have quite a bit of dividend income from the units and the record high of 324. And then taking out all these items, you are having 235, but you take out the dividend. I mean, that we pay in the course of the year, then you probably have something like 110 million, that sort of figure, 120 million, but make quite a bit of investment. So for the full year, we're in the negative zone. So we think about the capital allocation point where we get into 2024. If we could maintain that level of dividend, say 300, 300 something million, then we probably have a service case of something like 80, 90 million. Then we get into the kind of thinking about capital allocation, which we what you say, increasing a dividend or reserving some of the cash for future investment. Remember that we also want parties investing in this Singapore, Indonesia, renewable energy project, even though we're still in the process of finalizing all the necessary arrangements with the governments and the other parties. So we need to build up a little bit of cash reserve for that as well. So the investment, the return to shareholders and debt reduction, but we are talking about getting into 2024, maybe somewhere around 70, 80 million, if we could have that sort of service cash starting in 2024.

[S. K. Cheung:]

I think Patrick has a second question.

[John Ryan:]

Hang on, let's go to others before we do that. Our current voting stake is asked, Stan, can you help with that question?

[Stanley Yang:]

Sure. From an economic perspective, it's 46% after the listing and the share placement at MPIC. From a voting perspective, there are voting preference shares in Metro Pacific that MPHI has, a holding company. That brings us to a majority shareholding on a voting basis. I'm not sure if that's publicly disclosed, but it is. So it's at 58%.

[John Ryan:]

Okay. Thank you, Stan. Joseph, can you briefly explain, I mentioned the potential for issuing dollar bonds. Can you give more color on that? I don't want to have misled anyone.

[Joseph Ng:]

Yeah. If we go back to the debt maturity profile set up on page five, and that's how the maturity of the bonds and the bank loans, as mentioned by John earlier, we already line up committed facilities to fully repay the $210 million due in second quarter 2024. Actually, we have very strong responses from the market to the extent that we may be able to raise a bit more compared to the $400 million due in 2026. Chipper borrowing rate and then also term out a significant portion of the $400 million. Now, the next question coming up is what are we going to do with the remaining loan balance due in 2026 and also the 2027 bond? Now, we have then, after we repaying the loans in 2024, we have a year, kind of 18 months or so at least for us to observe the market, the interest rate environment, the market and decide what we want to do. And clearly our preference, if we want to balance the source of credit from the bond market and the bank market, then preference will be going for a bond, which gives a seven years, if not 10 years, so we term it up. But I mean, we have time to observe the market and see whether the market behave and the interest rate environment evolve. So we are quite conservative, but we have time and then if the market is good and the rate is good, then clearly we'll go for some new bond issuance in the next 18 months or so.

[John Ryan:]

Thank you very much, Joseph. We've been joined by our Managing Director and Chief Executive, Manny Pangilinan.

[Manuel Pangilinan:]

Thank you.

[John Ryan:]

Manny, there's a question about toll road developments going forward, but perhaps you might use that as a lever to discuss what sort of thinking we've got about our corporate developments going forward.

[Manuel Pangilinan:]

Well, in terms of toll roads, I think for quite recently we've gotten fresh adjustments on our tariff, so we're looking forward to a graded profit picture for our tollways in the Philippines particularly. And that is shown in the first two months profit results of the tollways which are higher, quite significantly where what it was last year. And there are several of the tollways projects in the Philippines that are nearing completion within the year. Part of it is the Candaba Viaduct, the third phase of it, which is a two-lane highway in the middle of the Viaduct, such that we will now have six lanes. It will become a six-lane highway, toll roads connecting one particular province in the north and Metro Manila. The other, the Calamba Laguna Expressway, the two legs to it, in the province of Laguna, which has been completed, but the Cavite province has just been started because of rights of way issue last, yesterday.

[John Ryan:]

27 March, Wednesday.

[Manuel Pangilinan:]

Yes, Monday I had dinner with the -- hosted dinner for the Governor of Cavite province, and he has promised to sort out the rights of way issue. So we anticipate that by early next -- assuming we can do that next two months, I believe we can finish the Cavite leg by the middle of next year, which is probably what can be done as quickly as can be. The CALAs project should be finished. Segments of it can be finished within the year, the Cavite leg, and the final segments will be completed by the middle of next year. In Indonesia, we are the highest bidder for 35% stake in the Trans-Java tollways, 35%. 65% will be retained by Jasamarga, which is the Indonesian government's tollways company that builds most of these tollways in that country. So, we actually, the board of Jasamarga has approved the bid of Metro Pacific tollways for the 35%. And I think that goes through several government formalities before the award is given to us, but we should anticipate getting the formal award from the Indonesian government within a month from today. Can I talk about the San Miguel merger? Maybe why the benefits?

[John Ryan:]

Okay. Yes, Manny, I think.

[Manuel Pangilinan:]

Well, there are ongoing discussions between Metro Pacific Investments and San Miguel Corporation itself about combining the two tollways into one significant consequential tollways company. And in principle, we have shook hands with San Miguel about this particular merger on the basis that it will be a 50-50 joint venture between ourselves and San Miguel combining their Philippine operations. They're only in the Philippines. And in the case of Metro Pacific tollways, both the Philippine operations and the Indonesian operations, especially after the inclusion of Trans-Java in the portfolio of Metro Pacific Corporation. Now, from the looks of it, on an EBITDA basis, the combined EBITDA of the Philippine and Indonesian operations would be slightly larger than the EBITDA of the tollways of San Miguel, which are confined to the Philippines. But the deal with San Miguel, the agreement with them, it will be a 50-50. So, any differential will be settled by way of cash and/or assets acceptable to the receiving party. We're in the process of engaging financial advisors to sort out the numbers and the exchange ratio between the two. I would guess that the transaction is subject to the Philippine Competition Commission. So, this will take a bit of time, maybe the next four to six months before we're able to complete. Of course, you could sign an agreement subject to conditions and we should be able to do that after the gas plants have probably been finished. So, I think this is the joint EBITDA of the two, in total about 52 billion attributable to both MPTC, Metro Pacific tollways, and to the San Miguel tollways group. So, that will be a significant. The intention is to float it. If you're able to complete the merger this year, perhaps as early as 2025.

[John Ryan:]

Thank you very much, Manny. Let me briefly mention a question here at the bottom about the dividends we received, 324 million. But the payout was only 5% up after the 324 was up 43% from a year earlier. I think the answer begins on page four, the bottom right hand chart, where you've got opening cash of $97 million and closing cash of $71 million. Our cash was used up in this way. The single biggest expenditure was net investments and that was the delisting of MPIC, and that was followed by the distributions we paid. But more broadly speaking, I think Joseph Ng, CFO, can speak to policy towards dividends going forward.

[Joseph Ng:]

Yeah. I think John has pointed out basically that the increase that we pointed out, I mean, the increase to 43% of $98 million from the last year's $226 million to $324 million. And in terms of increase in recurring earnings, it's about 18%. But I mean, John has pointed out correctly that what about of that increase of $98 million is used in capital investment, unlocking the value of MPIC through the delisting and subsequent kind of subscription of shares, so as to maintain our 46% in the delisted MPIC and that unlock value to First Pacific and flow up to First Pacific shareholders. I think that's the kind of basis of setting an increase in our dividend and still giving the shareholders kind of a decent return of 6%-plus, even based on the latest increase in share price. Because based on the earlier, the year-end share price, I think clearly even higher. So, I think when we get into 2024, it's a function of whether we have any significant capital investment. As I mentioned, we need to think about future and we are involved in the renewable energy project in Singapore and Indonesia. Probably we need to be a little bit more cash to cater for the capital investments there, but nothing is finalized yet. So, we tend to be a bit on conservative side, but we're still giving 5% increase in the dividend per share. And then I think the yield is 6%-plus I think that's in line with the other market players out there.

[John Ryan:]

Okay. Thank you, Joseph. There's a question here about closing the gap to NAV, mentioning especially Indofood and CBP. Well, up at the Hong Kong level, the focus more is on First Pacific's own NAV discount. You can see that it has narrowed by about 10 percentage points so far this year. And as we move deeper into 2024, one of the most significant things we can do to narrow that discount as it's described here is the transparency, the oxygen of sunshine. We've got expanded presentation materials. We've got expanded ambitions to see non-shareholders and our current shareholders, of course, in April and May. We're making our first ever visit to Mainland China to see Mainland fund managers in the middle of that month. All of you who are on the call, you want to see us when we hit the road. Please drop me a note. And I think as we continue to report our companies, their quarterly numbers beginning in May, and then our half year numbers that we report in August, we will bed down the sentiment that First Pacific is strong and getting stronger, and the NAV discount is increasingly unwarranted. With that closing rate of 10 percentage points over the course of less than three months, we're feeling pretty good about it. But we will be unstinting in our effort to ensure that our shareholders see the full value of the asset they own in 142 HK. There's a question about consumer branded products about the 2024 EBIT margin being a bit lower than 2023. While they do forecast fair stability in commodity prices for 2024, and think here wheat and palm oil, the folks over at Indofood, they tend to be conservative with their forecasts so that they can feel comfortable that they'll hit them. I think that's probably the main reason that they're suggesting the EBIT margin might be a bit lower than 2023. They're giving themselves a little bit of buffer. Now about the Indo-Agri ISPO compliance for their palm oil production. That's a quality and environmental standard made by the Indonesian government. It's very related, closely similar to the RSPO international standard. It would take 20 minutes to give a full answer to this question. I will believe I will see the questioner later in April and we can get into more detail there. ISPO is very highly regarded, and I think they'll hit that 2025 target of 100% certification. And to note, they're not out of regulation by not being there yet. There's a question asking about non-recurring losses. May I please ask our Financial Controller, Richard Chan, to break down those non-recurring numbers?

[Richard Chan:]

Sure, John. A non-recurring item of about 120 million mainly comprised of an impairment provision for ICBP investment in Deauville [ph]. And the impairment is principally arising from the significant depreciation of Nigerian currency, Naira, during 2023. I guess the extent of depreciation is about 50%. And the other major significant item included in our non-recurring losses is the write-off of the capitalized subscriber acquisition costs at PLDT level in respect of its stranded home subscribers.

[John Ryan:]

Okay. Thank you very much. Stan, there are some questions here about the solar project of PLP. Noel, can you show Stan these questions? Please.

[Stanley Yang:]

Sure. I'll take that one. So, there's a consortium which consists of the shareholders of PacificLight and two other groups, Medco Energi out of Indonesia and Gallant Venture, which together formed the project consortium. And for the PLP shareholding side, it's a 37% interest in this project. I can't share the total CapEx. We haven't disclosed that. And it is a process where there are other bids involved in the EMA process. But we are going through it. There is a conditional approval on the EMA side. And a MOU was recently signed on the Indonesia side. And there's an element that we're trying to progress ahead in terms of these discussions. But it's still early in the process. But in terms of the capital requirement, though, of the 37%, then there's also a joint venture between MGen, Morocco's power generation unit and First Pacific on a 58% to MGen and 42% to First Pacific. So, the attributable interest and therefore the share of any equity requirement would be approximately 15% to 16%. That's the level.

[John Ryan:]

Okay. Thank you, Stan. And there's a question about the retail contracts and what they look like now, the ones that have been renewed last year.

[Stanley Yang:]

Sure. In the past, retail contracts were typically on a one-year basis. I think as the market has changed and also given some of the fluctuations in the price in the last couple of years, then there's been a move and a shift into longer dated contracts. And so, in this case, you're seeing two-year, three-year, and sometimes even well above that. And so, that's definitely a change in terms of the portfolio. I would say that PLP has signed up a number that are three years or more. It's a significant component now of the retail contracts. The market, I think, as we mentioned earlier, the performance of last year is not -- the fact that margins were in excess of $100 per megawatt hour is not a long-term level that we would expect. It's well below the vesting levels, which historically have been at the $50 per megawatt hour level. That's a long-term benchmark for the long-run marginal cost. And so, on that basis, I think the market, though, still remains quite robust. And in terms of the margins, that would be still in this market, though. It's not quite the $100, but it's in a $70 to $80 level in terms of the non-fuel margins.

[John Ryan:]

Okay. Thank you very much, Stan. Now, PLP has been in profit for three years in a row after many years of losses. So, your commentary here, what does it suggest for the next few years for PLP?

[Stanley Yang:]

Well, one thing to remember is one of the problems of PLP was in the past a very unfavorable LNG contract. It was a generator that had the highest cost base and was in a very bad position relative to other generators. And since the 2020 debt restructuring, and that also -- there was a fuel restructuring that took place as well that year, then PLP has reversed. And it's now actually in a quite favorable position on the gas procurement side. So that's one element that helps the business. And these are long-term. And so, this is a benefit that will be with PLP for at least the next five years. Now, the market is changing. The government is looking at a centralized procurement system. That's something that EMA is evaluating. But for at least the next five years, there's definitely a good position on the gas supply for PLP. And so, I think when we think about the market dynamics, then I think given that there is continued demand growth, there is strong support in terms of the technology sector and electronic sector for capacity, I think that from our perspective, that will be beneficial in terms of keeping levels, certainly in excess of the vesting levels for the next few years. I think longer term, that will be a function of how much more new capacity comes into the market. And for Singapore, it's the balance of the players as well in the market, including ours. So, I think what helps also with PLP is that when we started on the debt restructuring, the debt at that time was around S$700 million. With the cash flows and the benefit of the group, that debt level end of last year was S$230 million. And so, it's significantly improved and will continue to improve from the leverage side of the business. And so, from a debt to EBITDA level, for example, it's well below one times at the moment. And so, that's putting the business in much more secure hands, not just to benefit the profit, even as margins decline, but also to continue to pay up attractive dividends.

[John Ryan:]

Okay. Thank you, Stan. Tony Watson, your hand is raised. Please unmute and ask your question.

[Unidentified Analyst:]

Hi, guys. Thanks for the call. I've got a couple of questions on different areas. So, I'll ask one and then jump back into queue. Can you just talk to us a little bit about your debt strategy, whether you're looking to deleverage further, extend your maturity profile given falling interest rates, what your thoughts are around local currency bonds, fixed versus floating? If you just walk us through your thinking around that whole topic, it would be great. Obviously, we're debt investors, so that's very helpful.

[Joseph Ng:]

Well, I mean, should I answer that first or you have other questions? Maybe I just address that quickly. There's no immediate plan for us to increase any debt. We are quite comfortable with the existing 1.4 billion or roughly 1.5 billion debt. And, of course, if there's the opportunity for us to pay it under debt, but then there's a question of tying up where do we get the funds to do that for bearing down the debt in a meaningful manner. And basically, now we are having a 50-50 fixed and floating. I mean, it's a very broad interest rate environment, and there are signs that well, the interest rate may go down a little bit starting in the second half of 2024. That would help us because 75% of our debt is actually bank loans, 50% floating. So that would help us. So I think currently we are comfortable with the 50-50 fixed and floating. But tying to the earlier point that I made about looking into a bond, I think that's basically helped us diversify the credit resources going forward, because we only have one bond outstanding in the portfolio, 350 million, which is 25% of what we have. So another bond may help us to turn it out and also help to balance the credit resources between bank loan and bond investors. So, we're more into the market. We got a credit rating in early 2022. So some bond people would like to use it, but we are patient. And then, as I mentioned earlier, debt maturity profile, we are quite comfortable because we have everything lined up. There's nothing due until 2026 after paying down the -- or fully repay the bank loan still in second half, so the second quarter of 2024. And you make a good point about local currency bonds. It's basically the Philippine market or the Indonesian market. I think we look into that. But at the end, I think in terms of liquidity, raising the money, then I think the clearly the US dollar, as market is more liquidity, more investors there. And also, I mean, you need to pay premium above and beyond the US dollar. So it's kind of a balancing issue as to where we take the bond investor. And on the other hand, I mean, you take the bond market, the Philippine bond market, you need to think about whether, I mean, you can advise the kind of the credit resources for local units there, because a lot of our operation are also located in the Philippines. The infrastructure projects, the water project, the toll road project and others. So, there are a number of things that we need to take into consideration about raising local currency bonds, say, in the Philippine market or Indonesian market. So, overall, I think we have been in the bond market for quite a number of years. Actually, our first bond was issued back in 2010. So we are quite experienced and we're not a new issuer to that market. So, I think we will make use of that market when the timing is right.

[Unidentified Analyst:]

Okay. That's great. And just sort of related to that, and you did touch a little bit, but if you could just walk us through your capital management policies, particularly as they relate to debt. So, do you have debt to capital, EBITDA to interest, maturity profile targets that you like to manage your debt exposure around?

[Joseph Ng:]

Yes. I think in terms of the so-called debt to value of the asset, I think we have something like 5 billion simply based on the market value of the asset that we hold. We have over 5 billion worth of assets. And if you think about that, our net debt is something like 1.3, 1.4. So it's roughly 25% of that figure. But we don't have any carbon in that. Because the value of the asset is a function of many things, right? The bond exchange rate, rupiah and peso exchange rate, as well as share price of the underlying assets. So, we don't tie ourselves to a single ratio that we should not be having any debt more than 20%, 25% or 30%, because not something we can now control. But we do pay a lot of attention. And that's why it's highlighted in one of John's slides about interest coverage ratio, because that's real cash. Real deficit, interest servicing capability. So, we focus on that a lot. And then we have a recorded kind of historical high at 4.4 times interest coverage ratio. We have certain loan covenants tied to that, but it's much, much lower than that. So, it's actually below 2 in some of the loan covenant. And, of course, there are certain brussels [ph] set by the credit agencies that we should meet. But it's well below the 4.4. So I think we are quite comfortable with the 4.4. Now, with the interest rates going to decline starting second half 2024, at least that's the market view at least. So the interest expenses will come down. And at the same time, it's a function of what kind of dividend that we could receive from the unit. So, it's something that we are monitoring closely. And for us, I think that's the key kind of debt measurement ratio, if you like, at the First Specific headquarters level.

[John Ryan:]

Thank you, Joseph. If we turn to page 16 of this investor handout, there's a question about the potential CapEx in the SPNEC project. And Stanley Yang, our Head of Corporate Development, has some thoughts on that.

[Stanley Yang:]

Sure. SPNEC, just for those who aren't familiar, is a project that is a Terra Solar project. It's a very ambitious 3,500 megawatt peak solar build up. This is one that MGen invested into at the end of last year. It is one that once completed will be the largest single site in terms of solar projects globally. And it's a scale that takes advantage of the land that has been accumulated, which in total, once it's completed, will require 3,500 hectares. Now, on this project, Terra Solar itself has been benefited by having a 20-year power supply agreement that has been awarded with Meralco. And so with the tariff that was secured through that PSA, that will help underpin the long-term returns and the attractiveness of this project in terms of the economics. And given the size, 3,500 megawatts, it's a very large 200 billion. It's the rough CapEx on a 100% total basis, which equates to about US$3.6 billion. Now, there's a lot of interest from financing banks because it's renewables and it's backed by the 20-year PSA. And so discussions are underway on the project financing element of it. And when it comes to the equity component, we are also in discussions with some interested parties who would look at a minority investment into this project. I think this is a discussion that have been taking place in the recent weeks. And so, we will look at that option as well in terms of how to partner together on this particular project going forward. But given the scale, given the importance of renewables into the fuel energy mix in the Philippines, we think this is a great one, especially given the benefit of the PSA.

[John Ryan:]

There are a couple of questions here about the toll roads business and the power business under MPIC. So I've just asked Manny to say a few words about his thinking for these, for MPIC, going forward over the next few years.

[Manuel Pangilinan:]

Well, the biggest investment of MPIC is Meralco. And I think in many ways, I think Stan has alluded to the solar project, which is the biggest single site project in the world that we're building. Not a simple project it's turning out. It will be built on 3,500 hectares or approximately 10,000 acres. But our people, we've organized a group to execute the project and they have been going around China to take a look at the supply chain of both the PVs and the batteries, talking to potential EPC contractors. They visited other countries in the process. And we're on our way in terms of detailed engineering, transmission, issues related to the connection with National Grid and, of course, the plant itself. So -- but that is a $4 billion project approximately. And we will need to have investors to invest in the Terra Solar or in the project itself. But that could be transformative for Meralco and for the country moving forward. The next big project in power generation is the interest that we have acquired from San Miguel in their gas plants. Basically, there are four components to the gas plants of San Miguel. Number one is the regas facility. Initially at about 3 million tons to supply the existing two plants. The second is the RD 2 plants, an operating plant in Ilijan, which is about 1,260 megawatts. And a second plant, a gas plant being built about 1,300 nearby adjacent to the existing plant. And no problem with the grid connection because it's already there. The third component is the property company, the [indiscernible]. It will be owned by the same shareholders. It is leased to both the regas and the gas plants. So the partners are Aboitiz, ourselves and Meralco and San Miguel. San Miguel will retain a 33% interest in the solar project. And we have formed a special purpose vehicle at the top, 67% that will own the gas plants, the regas and the land. And the 67% is split into 60-40 in favor of Meralco. So our effective interest is about 40.2%. So we will be the second largest shareholder of this particular gas plant. With respect to the distribution unit, I think it is -- as you can see, in last year's profit results of Meralco, as steady as you go, about 8% increase in their profitability. But the first two or three months of this year, build volume on the distribution side has grown by about 8% to 11%. And so we're quite optimistic about the economy in general and about the prospects for Meralco itself because of the significant increase in generation capability and profits and continuing stable earnings on the distribution side. In tollways, we spoke about our expansion in the Philippines and in Indonesia, principally Trans-Java, and the potential merger with Meralco. And we think it will be income attractive for both MPIC and First Pacific. On the water side, profits were up significantly last year on account of a modest increase in tariff, which flowed through and some increase in volume, in build volume at the water side. This year, we will get a significant increase in tariffs starting January of 2024. That's about 18%?

[Joseph Ng:]

20%.

[Manuel Pangilinan:]

About 20% increase in tariffs. So that should flow through in the account of Manila, I think last year their profits was about ₱9.8 billion. And this year certainly exceed ₱12 billion for income for Manila. So, what else have we got today? That's just about it. That's the bulk of it. There are a few small ones. We ran out of milk for Carmen's Best. And we are now acquiring one or two new dairy farms. But existing dairy farms with significant amounts of milk to provide the input for Carmen's Best. Our greenhouse project in north of the Philippines should be operational by the end of the year. Actually, it's recovering from its disastrous three-year last year. We managed to bring down the price, and they seem to be doing much, much better this year.

[John Ryan:]

Thank you very much, Manny. Tony Watson, you've got another question.

[Unidentified Analyst:]

Yes, thanks. More of a high-level strategic question. So, your portfolio looks like it's -- portfolio companies it’s looks like already pretty well bedded down. Are you looking just to work those assets going forward or grow the portfolio by M&A to expand those existing businesses? And/or are you looking to widen out the portfolio breadth a bit to include new businesses? I know that you guys are dipping your toe into the FinTech area. So, if you just talk to me -- talk to us around that a little bit, that would be great.

[John Ryan:]

Chris, do you want to start and Manny will finish?

[Christopher Young:]

I think most of the M&A activity would actually happen at the operating company level. I think in particular, that's where the expertise resides. Manny outlined quite a number of investments and other corporate finance initiatives which are underway at MPIC. And I think Stan went into detail about PacificLight Power. So, I think you can expect that activity to be at the operating company rather than First Pacific itself. In terms of FinTech, again, I think that would be concentrated at the operating company level. That's where the resources are to utilize digital initiatives most efficiently. So, PayMaya is probably the most visible -- sorry, Maya is probably the most visible of these initiatives. But if you look at PLDT, Meralco, MPIC, they are working on quite a number of digital initiatives themselves, which we think will create value for the group going forward. Similarly, Indofood and ICBP have quite a number of digital initiatives which they are working on, which should create value for the group as we move forward. So, I think that's the broad picture.

[John Ryan:]

Thank you very much, Chris. I'm sorry, folks.

[Unidentified Analyst:]

I look forward to seeing you when I'm in Manila in the next month.

[John Ryan:]

Are you in Manila?

[Unidentified Analyst:]

Yeah. We'll be in Manila end of next month. I think we were talking to somebody on your side about setting up a meeting.

[John Ryan:]

Yeah. All right. That's being taken care of, Tony. Okay, thank you for your questions. I'm sorry, Manny has left for his 6 o'clock meeting. I'll just remind you all that First Pacific Management are visiting investors in Europe and North America beginning after the Easter holiday. Let us know, drop us a line if you'd like us to come visit you, and we will make every effort that we can. I think there are no more questions, so, Chris, may I ask you please to just sum up where we stand today and where we're going to go?

[End of Q&A:]

[Christopher Young:]

Okay. Thank you, John. I think what you will have heard from the presentation that 2023 was an excellent year for First Pacific. However, this is not a one-off. This was really built on strong operating and profit performances in 2022 and 2021. So, given that strong base that we've seen over the last three years and the strong start to 2024, I think we see a continuation of these encouraging trends going into this year, 2025/2026. I think that's the broad picture. It just remains for me to thank you for joining us today. We look forward to you joining us again for the first half results of 2024, which I think will be held towards the end of August this year. So, thanks again to everyone for joining us.

[S. K. Cheung:]

Thanks, Chris. Thanks again for joining today's online briefing.

[John Ryan:]

Thank you.

[S. K. Cheung:]

Goodbye.

[John Ryan:]

Thanks everybody.