Is Pepsi Philippines in Peril after New Tax Law?

Reassessing post-TRAIN law affectation


A recently passed law by the Duterte administration has effectively placed a 6 pesos per liter tax on beverages using caloric and non-caloric sweeteners, and a 12 pesos per liter tax on beverages using high fructose corn syrup. This is near punishment as prior tax law did not implement any taxation of any sweetened beverage products.

One thing to keep in mind though is that the new Tax (TRAIN) law has excluded beverages such a milk, coffee (ground, 3-in-1), 100% natural fruit and vegetable juices, meal replacement and medically indicated drinks, and beverages that used coco sugar and stevia (Philippine Star).

Pepsi Philippines, an 8 billion peso soft-drinks and food products manufacturer and retailer, can imaginably be taking quite a hit post-effect of this tax law.

In review, the 28-year-old Muntinlupa-based bottler reported 16.5 billion pesos in sales generated by its carbonated soft drink business in its recent nine months of operations that just ended on September 30, 2017. With this revenue, the company was able to milk 23% or 3.8 billion pesos after segment expenses.

Unallocated expenses take a bunch out of Pepsi’s generated revenue, and will not be discussed here.

More importantly, carbonated soft drink, which included brands Pepsi-Cola, 7Up, Mountain Dew, Mirinda, and Mug, represented 73% of Pepsi’s net sales.

According to Pepsi Company (ticker PEP) website, Pepsi itself has high fructose corn syrup.

To further increase panic to Pepsi Philippines’ shareholders, the company provided a statement as of December 23:

“Let it be known that PCPPI has not issued any official statement on the company’s tax planning measures as a reaction to the impending implementation of the new tax reform law.” (Inquirer)

Certainly, Pepsi Philippines would take a hit if it foolishly keeps on producing its products with high fructose corn syrup rather than halve the effective tax rate if it reformulates its sodas with pure 100% sugar.

As of September, the company had a book value of 9.6 billion pesos indicating a current price-book value ratio of 0.84x.

So far, Pepsi has provided me a total loss of 20% since I recommended it back in October 2017 with a target price of 3.86 pesos a share.

Pepsi’s undecidedness and inability to address immediately this ongoing tax application concern have resulted in further capital losses to its shareholders, and there are only limited (if any) gains that shareholders may reap from its attractive over 6% dividend yield.

Right now, post-application of tremendous business revenue challenges I consider Pepsi’s current price as near fairly valued and would recommend for shareholders to wait for a further dip (~20-30% down) from its 2.2 pesos price per share (at the time of writing) to average down and hold for long-term.

Needless to say, Pepsi Philippines is not for the weak-hearted and least stubborn investor.

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