Description

Summary: The Keepers Holdings (KEEPR) is a Philippine spirit importer and distributor trading at PHP1.73 per share, equating to 7.6x FY24E P/E and a 6% dividend yield. Over the past decade, KEEPR has organically grown its volumes at a 18% CAGR, mirrored by similar top- and bottom-line growth. Despite its success, imported spirits remain a small percentage of the overall Philippine market presenting substantial growth potential. With the exception of a required investment in inventory as it grows, KEEPR’s business model is asset light and the company currently has a 50% payout ratio which we expect to grow over time. Combining the company’s organic growth potential and capital returns, we believe KEEPR can compound book value per share plus dividends in USD at 20% per annum for an extended period. We value the shares on an absolute basis and believe a more appropriate multiple is 15x P/E, double the current valuation. 

Background: The Philippine spirits market has historically been an oligopoly, dominated by three domestic companies, each specializing in a single spirit: Ginebra San Miguel (GSMI PM) in gin, Emperador (EMI PM) in brandy, and Tanduay (LTG PM) in rum. These companies benefited from a favorable tax regime that penalized imports, and each sold a mass market product for US$3-4 per litre. However, a 2013 tax law change leveled the playing field by equalizing the tax rates between domestically produced and imported spirits creating the opportunity presented today.

Founded in the 1990s, KEEPR initially focused on importing high-end spirits, establishing a near monopoly in this niche. Following the 2013 tax law change, KEEPR began importing and distributing lower-end Spanish brandies, marketing them as “affordable premium” products priced at $5-6 per litre. Initially the company imported the Fundador brand, but in 2015 it transitioned to Alfonso, a new brand to the Philippines. Over the past nine years, Alfonso’s volumes have grown at a 21% CAGR and now account for 78% of KEEPR’s volumes and ~18% of the brandy market.

According to KEEPR’s 2021 prospectus, the Philippine spirits market in FY20 consisted of 75MM 9-litre cases, growing at 2.3% annually driven by a young and expanding population. The market was divided into 35% gin, 31% brandy, 31% rum and 2% other spirits. Imported spirits represented 5.5MM cases or 7.5% of the market. Within this segment Alfonso accounted for 2.4MM cases (3.3% of the market), Fundador for 1.5MM cases (2%) and higher priced Western brands for the remaining 1.7MM cases. By FY23, KEEPR’s imports of Alfonso had increased to 4.5MM cases, giving the company an estimated 5.5% share of the overall market.

EMI’s competitive response to KEEPR’s growth since 2013 is instructive as we think about KEEPR’s future potential. Although KEEPR had been importing Fundador since the 1990s, it ramped up distribution after the 2013 tax change. In 2015, EMI acquired the distillery producing Fundador and brought the brand in-house. In response, KEEPR partnered with another Spanish distillery William and Humbert - later purchasing a 50% stake - and began importing its brandy, Alfonso. Since 2015, opposed to competing with KEEPR, EMI has chosen to cede market share to Alfonso and maintain the profitability of its mass market brand, Emperador Light. EMI additionally positioned the Fundador brand as a higher priced premium product at $7-8 per litre. Part of this decision is likely influenced by EMI’s 2014 acquisition of scotch distillery Whyte and Mackay, which has allowed EMI to re-position itself as a scotch company, but it is also likely driven by EMI’s inability to compete with KEEPR and unwillingness to destroy a large profit pool trying.

KEEPR’s competitive advantage lies in its ownership structure. The company is 78% controlled by Cosco Capital (COSCO PM), Lucio Co’s holding company. COSCO also controls PureGold (PGOLD PM), the second-largest grocery retailer in the Philippines with ~13% market share. Importantly, PGOLD dominates the lower end segment of the market. In 2023, 26% of KEEPR’s sales were to PGOLD where Co can give his products preferable treatment (down from 34% in 2019). While we believe KEEPR has scope to continue to gain share in the brandy segment, the crux of our thesis is that the KEEPR’s relationship with PGOLD provides an irreplicable competitive advantage and there is no reason that KEEPR cannot replicate its success with Alfonso in other segments. Importantly, this competitive advantage is strengthening as PGOLD continues to grow organically and inorganically.

While EMI has proven to be a weak competitor, and it is difficult to predict GSMI and LTG’s competitive responses with certainty, given the size of the gin and rum markets, even minor share gains will have an impact on KEEPR’s bottom line. KEEPR has been actively exploring opportunities to enter these segments, though progress to date has been slow. Due to its experience with Fundador, KEEPR will likely require control over any brand it chooses to market and distribute. Longer-term KEEPR believes it can also expand into the beer market which in 2020 was twice the size of the spirit market in value and is similarly a monopoly, controlled by San Miguel Corp.

Before concluding we will touch on corporate governance and capital allocation. Co is one of the billionaires who controls the Philippines capital markets. He is viewed as a ruthless yet reclusive business man. Co’s business career began in the 1990s, with licenses to operate duty-free stores likely obtained through close government relationships. At the time, foreign brands were unable to compete with his liquor import business and there were allegations that he was using these duty-free stores to dodge import taxes, which have dogged his capital markets reputation to this day. We believe these issues have little bearing on the current investment case. Co has succeeded under multiple administrations and today, taxes on imported liquor are closely monitored, with government-issued stamps required on all imported bottles affixed at the origin. Moreover, Co has shown a regard for minority investors and shareholder value. Recently, COSCO has begun listing tracking stocks for its subsidiaries and repurchasing holdco shares to unlock value, leading to the KEEPR’s listing.  

KEEPR’s capital allocation is straightforward and helps to de-risk any governance concerns. The company currently has ~10% of its market cap in net cash and a 50% payout ratio. With an asset-light business model, only requiring additional investments in inventory as it grows, the company has guided to the payout ratio increasing over time and being a cash cow. We do not expect meaningful M&A.

Valuing KEEPR on a relative basis is challenging. Overall Philippine equity valuations are currently depressed and there is a lack of high-quality small cap names with similar cashflow, return and growth profiles. A couple of consumer small and mid-cap names in the Philippines with similar ROEs are, Sankety Pizza (13x P/E), Wilcon Depot (21x P/E) and Converge Information (11x P/E). While not direct comparables given KEEPR is primarily a distribution company, one could also look to EMI and GSMI which trade at 31x and 10x P/E. We value KEEPR on an absolute basis and believe the shares are worth 15x P/E, which is a PEG of .75x.

The primary risks to an investment include increased competition from existing players, changes in tax regulations, corporate governance, and potential challenges in expanding into new product categories

Conclusion: KEEPR is an unlevered, asset light business trading at 7.6x P/E and a 6% dividend yield, which is disrupting a large industry, providing it with a long-runway of potential growth. We expect the company to compound book value per share plus dividends in USD at 20% per annum going forward. On an absolute basis, we believe the shares are worth 15x P/E.

Catalyst

Entry into new market segments.