UPEC Earnings: Operating Profit Disappoints but Improvement Is Likely; Shares Not Cheap

No-moat Uni-President Enterprises’ 1216, or UPEC’s, first-quarter performance was mixed, with revenue seeing strength but operating margin disappointing, as weakness in the mainland China packaged food business more than offset growth in 7-Eleven across the Philippines and Taiwan. So, while the top line is tracking higher, the bottom line is not presently benefiting. But we expect sequentially improving operating profit for Uni-President China, with selling, general and administrative expenses to be concentrated in the earlier part of the year. As a result, we retain our fair value estimate at TWD 68 per share, which implies 17 times 2023 P/E and is broadly in line with the three-year average of 18 times. We think UPEC’s share price is moderately overvalued at the moment.

We tweak our 2023 revenue and net profit estimates as we think upward revision in the convenience store, or CVS, and retail segments should more than offset the weaker first quarter for the mainland China packaged food business. We think UPEC’s operating profit trend should improve in the coming quarters on seasonal strength in beverage sales. Also, we still expect the mainland China business to be a key margin expansion driver for UPEC this year, cycling a low base. The retail and CVS franchises in Taiwan and the Philippines should fuel top-line growth, given normalizing foot traffic.

We project net margin to rebound to 4.1% in 2023 (from 3.3% last year), though still below levels before 2021, as operating costs stay at a more elevated level for CVS in Taiwan. Over the longer term, we think UPEC has diversified profit and revenue streams, from raw material to packaged food and retail outlets, to navigate through business challenges it faces in any particular region or business segment.