Money On the Table - My Portolio Summary 05/19/06

JG Summit (JGS) - 18.0
Republic Cement (RCM) -13.4
Kuok Philippine Prop. (KPP) - 8.3
Manila Water (MWC) - 24.3
Manila Mining (MA) - 13.2
Digitel (DGTL) - 12.3
Global Equities (GEI) - 4.0
Lepanto B (LCB) - 6.6

Added Manila Mining and Digitel

Emerging Plays – Why JG Summit (JGS – P7.80) Deserves a Better Valuation

Two weeks ago, I wrote about how Manila Water (MWC – P7.70) is emerging as the utility play vice MERALCO (MERB – P22.00). Please check http://bigbigtrade.blogspot.com/2006/05/why-i-will-buy-manila-water-mwc-p650.html . This week, lets see why JGS has emerged as the conglomerate play sans Benpres (BPC – P1.26).

In an ironic twist, we are seeing a switch to “Gokongwei” premium vis-à-vis a “Lopez” discount. Recently, both conglomerates offered their shares to the public. First Generation (FGEN - P50.50) traded down on opening day whilst Universal Robina (URC – P24.0) traded up during its listing.

Obviously, the market voted with their dollars. JGS is trading at a 10-year high whilst Benpres is trading at 88% off its peak. How the fortunes of these two conglomerates have moved in opposite directions is one for the books. In 1998, both companies were riding high when their stake in PCI Bank was sold for US$800.0m.

A quick look at JGS shows that the stock is trading at 22% below its book value of P10.0. I do believe that this valuation discrepancy cannot continue since the company has proven its ability to grow shareholder wealth. Here are some examples:

1.) It bought back close to 350m URC shares when the stock was trading below P6.0. Recently, it placed out the block for P6.0bn generating close to P4.0bn in investment gains.

2.) In 1999, JGS bought a 23% stake in UIC – a Singapore based real estate company for S$310.0m. The stake is now worth S$452.0m. However, what is more important is that JGS was able to reallocate its assets overseas when the local currency was trading at P40 to US$1.0. This allows the company to ride out the depreciation of the Peso.

Recently, investors snapped up US$300m worth of JGS bonds. The offering was 5x oversubscribed. On the other hand, URC and RLC continue to outperform the market. Shares of both companies are up 10-folds since 2003 and is now trading at a premium to the market. URC trades at 17x whilst RLC is priced at 25x versus the 15x PER of the market.

I guess, all these point to the fact that the market is willing to pay a premium on Gokongwei companies. I guess it is a matter of time before they start paying a premium on JGS and thus zero out the valuation discrepancy. At the least, JG should be trading at par with its book or about P10.0 per share. Longer term, I do believe that it should be trading near its Net Asset of Value (NAV) of P12.0 per share.

Money On the Table - My Portolio Summary 05/13/06

Stocks (Code) - % / Total

JG Summit (JGS) - 25.6
Republic Cement (RCM) -22.1
Kuok Philippine Prop. (KPP) - 10.5
Manila Water (MWC) - 26.6
Global Equities (GEI) - 5.5
Lepanto B (LCB) - 9.8



Big movers - RCM, LCB + GEI
Slowpokes - KPP

Sold out CHI

Money On the Table - My Portolio Summary 05/08/06

Stocks (Code) - % / Total

Cebu Holdings (CHI) - 15.8
JG Summit (JGS) - 26.3
Republic Cement (RCM) -16.6
Kuok Philippine Prop. (KPP) - 9.9
Manila Water (MWC) - 21.6
Global Equities (GEI) - 3.3
Lepanto B (LCB) - 7.3



Big movers - CHI, JGS, RCM, MWC
Slowpokes - KPP.

Added MWC, LCB and GEI
Sold out OM
Reduced holdings in JGS, CHI

Why I Bought Republic Cement (RCM - P1.24)

I got several emails asking why I bought Republic Cement. I have 16% of my portfolio invested in the stock.

I started accumulating RCM in 4Q04 when it was trading at P0.50. It is not easy buying RCM since it is thinly traded. You can hardly get 100,000 shares without disrupting the price. It requires a lot of patience. However, with the potentials of the stock, I am willing to play the waiting game. I think RCM is a potential “5-bagger”

To begin, let us do a comparison between Holcim (HLCM – P5.20) and RCM based on 2005 audited results.

HLCM - PER – 27.0x, Price to Sales – 2.3x, EV/EBITDA – 14.0x. 2005 Revenue – P14.0bn; 05 NIAT – P1.3bn

RCM - PER – 6.8x, Price to Sales - .5x, EV/EBITDA – 8.0x. 2005 Revenue – P12.0bn; NIAT P1.0bn

RCM trades at a 75% discount to HLCM. Obviously, there is a huge disparity in valuation. I do not think that with only two cement companies operating in the country right now, there should be any valuation discrepancy. Both companies are well managed and owned by major multinationals. HLCM is majority owned by CEMEX of Mexico while La Farge of France owns RCM. Both companies practically have the Philippine market between them.

Assuming RCM approximates the valuation of HLCM, the stock should be trading at P3.33 per share.

It is a matter of time before the market realizes the value of RCM. Here are my arguments:

1.) There is a strong liquidity flow into the market. Value turnover for the past 2 weeks have reached P3.5bn per day versus the P1.3bn average in 2005. Obviously, liquidity will also flow into inactive but fundamentally sound stocks.

2.) We have seen strong appetite for low PER stocks. Counters like Petro Energy (PERC-P11.25), Roxas Holdings (ROX – P3.35) surged 3 folds in the past 3 weeks. I don’t think good stocks will continue trading at single PER multiples. More funds will surely chase up these “low PER” stocks.

3.) Overall PER expansion for the market will make RCM “relatively” cheaper. Currently the market trades at 15x PER based on 06 estimates. Most likely, we will see the market trade at 17-20x PER.

P.S. Last week, cement prices surged by P50.0 to P220.0/bag. I guess this will be another angle for the market to play up the stock.

Why I will buy Manila Water (MWC - P6.50)

I have short listed Manila Water in my buy-list this week. The stock looks interesting at current levels. Here are my arguments:

1.) Manila Water is a utility company with a growth stock like earnings performance. Earnings for the company is expected to grow 20% this year to P2.4bn. In 2005, the company reported a net income of P2.0bn.

2.) Earnings growth for Manila Water will be driven mainly by 2 factors: improvement in systems loss ratio and growth in user base. Since 1997, management was able to decrease non-revenue water from 65% to current 35%. The target is to bring non-revenue water to below 30%. On the other hand, total connections (number of users) are expected to grow by 10% this year to 500,000.0 users.

3.) The current situation of Manila Water is reminiscent of MERALCO (MERB – P18.5) in early 90s. MERALCO, was able to deliver double-digit growth rates and thus became one of the market darlings during those times.

4.) Manila Water is an emerging utility play vice MERALCO. The electric company has several issues to resolve before investors will start looking into it. This leaves the market with only Manila Water as a “pure play” utility counter. Besides, being an Ayala subsidiary is an added bonus. Ayala companies are well managed and almost always trade at a premium to market.

5.) Manila Water trades at 5.4x PER and 4.1x Cash Flow. The Philippine market trades at 15x PER. Considering that Manila Water has both stability and growth in its earnings picture, the stock should be trading at a much higher valuation.