MANILA - Asset sales may have propped up the first-half profits of diversifying giant San Miguel Corp. (SMC), though on a recurring basis, the conglomerate’s earnings suffered a 3% drop which analysts attributed to higher costs as well as weak consumer spending due to the global financial crisis.

Other assets, such as its stake in Manila Electric Co. (Meralco), are likely to contribute to the parent’s earnings by the third quarter at the earliest.

In a report to the Philippine Stock Exchange, SMC said first-semester profits jumped to P55.62 billion, or a 182% increase over the same period last year.

The increase was reflected in second-quarter income, which rose 500% to P52.92 billion—largely due to one-time gains including SMC’s sale of a 43.25% stake in domestic beer to Japan’s Kirin Holdings Co. for P50.7 billion.

SMC, the country’s largest food and drinks company, also saw costs in the period increase by 7% to P30.5 billion.

Maria Arlysa E. Narciso, an analyst at AB Capital Securities Inc., said the drop in recurring income was in line with expectations, as consumer patterns have changed to cope with the crisis.

“Since SMC is into food and beverage, if you consider the economy most are not spending as much as they have been spending before,” she told the BusinessMirror in a telephone interview. “Demand is slower for products. Although there was growth in terms of volume, this was slower than the previous period.”

Meanwhile, the conglomerate’s stake in Meralco will begin to impact on SMC’s balance sheet either in the present quarter or the last period of 2009, said Narciso.

SMC earlier acquired a 27% stake in Meralco from the government pension fund Government Service Insurance System for P30 billion. This is part of the firm’s diversification efforts announced two years ago in a bid to increase return on equity in high-growth assets from the current 6% for its food business.

SMC said its operating income of P8.7 billion in the first semester represents a 6% improvement over the same period in 2008. Likewise, net sales rose 7% to P84.9 billion for the period.

“The majority of SMC’s businesses showed sustained revenue growth despite a general slowdown in the economy,” said SMC in a statement.

The company’s hard liquor division—represented by Ginebra San Miguel Inc. (GSMI)—continued to post a strong double-digit volume growth of 15% resulting in an operating income of P617 million from P426-million posted last year.

The firm said distribution efforts also pushed GSMI to No. 1 in the brandy category under its “Gran Matador” brand.

The unit’s market share in the total liquor market rose 5 percentage points to 56%, from 51% as of end-2008.

Domestic beer revenues for San Miguel Brewery Inc. likewise grew by 4%, slower than last year, while operating income increased by 6% which the firm attributed to lower costs.

Meanwhile, the food and packaging groups posted slight improvement in volumes, as operating income improved by 8% and 44%, respectively, on account of lower cost of imports and managed overhead costs.

In addition, SMC’s net financing charges for the period is P232 million, compared to last year’s net financing income of P3.3 billion which included foreign exchange translation gains.

Apart from Meralco, SMC has also recently expanded into other industries outside its core businesses. These include telecommunication firms Liberty Telecoms Holdings Inc. as well as a purchase of a large chunk of Express Telecommunications Co. SMC also maintains an option to buy a majority stake in local oil refiner Petron Corp.

Last week, the firm formally entered the toll road sector by purchasing a significant stake in the consortium building the P19-billion Tarlac-Pangasinan-La Union Expressway.

SMC also said it is interested in entering the lucrative mining sector and has expressed its intention to go into bulk water supply, proposing to build the $1.3-billion Laiban Dam in Tanay, Rizal.

To finance acquisitions in these high growth industries, SMC recently announced it is planning to sell significant stakes in listed units San Miguel Pure Foods Co. and in GSMI. The firm, however, stressed it still intends to retain a controlling interest in these companies.
 

The conglomerate submitted its financial status report for the second quarter only on September 1, way after the deadline set by the stock exchange. The new deadline allowed San Miguel to dodge trading suspension.