Ionics (ION - P2.16) Looks To Turnaround

I saw a report on Ionics written by Abacus Securities published in Finance Manila - http://www.financemanila.net/forum/viewtopic.php?t=356&postdays=0&postorder=asc&start=30

Abacus Securities expects Ionics to earn P161m (EPS – P0.38) in 2006 and P332m (EPS – P0.76). After 3 years of losses, Ionics looks to turnaround its operations this year. The crucial signal is for Ionics to report positive 2Q06 numbers to prove that 2006 will indeed be a turnaround year. In fact, Ionics reported a small profit in March.

I love turnaround stories! This gives investors considerable upside potential.

Based on the numbers presented by Abacus Securities, I believe Ionics should be trading at P4.20 per share. Here is how I arrived at my price target:

1.) Value of Core manufacturing business is P2.66. This is based on 7x 2006 earnings.
2.) Value of other assets, which includes cash and marketable securities amounts to P676m or roughly P1.60 per share.
3.) Adding both values equals to P4.20.

At these levels, investors are paying only for the value of its other assets (P1.60) and effectively paying 1.5x PE on its manufacturing business. I guess the stock looks too cheap to ignore.

Skyped-Out For Telcos

Skype (www.skype.com) is a service that allows users to do voice call over the internet. The service is fairly simple to use. Just download the application from their website, invite your friends to your call list and viola – u can now talk seamless – and free online! What is amazing is that Skype allows you to call any number worldwide – be it landline or mobile. They call this service Skype-Out. Currently, you can use Skype-Out to call any US or Canada number for free.

Skype was bought by eBay in 2005 for US$2.5bn. Currently, the company generates close to US$100.0m in revenues per year. It has 100m users to date. The company expects to hit US$500.0m in revenues by 2007. For a company that started in 2003, this is another “Google-like” phenomenon in the making.

Skype symbolizes the new era in voice communication. This is similar to the launch of Netscape browser in 1995 that heralded the internet era. We have been talking about voice over internet protocols (VOIP) and I guess the era has arrived. This is bad news for the telcos as users will switch to VOIP service. Note that telcos generate close to 1/3 of its revenue from inbound call traffic.

The worst dilemma for telcos is that they have to grow their internet business but at the same time, they have to cede the high value business to the likes of Skype, Yahoo!, Google etc.

I am "long-term" bearish on telco stocks. They are entering a very difficult operating environment. Here are my arguments:

1.) Telcos are no different from utility companies. Its growth model is scalable only to a certain extent. I guess at 45% mobile phone penetration in the country, it will be very difficult for telcos to grow the market.

2.) There is a finite demand for phone calls. You can only consume as much phone calls no matter how much the price drops. This is no different from water and electricity consumption.

3.) Revenue environment is becoming more competitive. Recently, Globe and Smart announced series of price cuts. This means that revenue per unit will continue to drop.

So I guess we have seen the high of telco stocks. At most PLDT and Globe will only trade within the 8x-11x PER range unless there is an overall PER expansion for the market. I hate to see analysts say that PLDT/Globe is cheap at single digit PERs. I guess, these stocks ought to trade at those levels since their growth era is gone. PLDT rose from P250 to P2,300 on the back of de-leveraging and earnings growth story. With these elements gone, it will be hard sell for the telco stocks.

Money (Off) the table and some random toughts

Ouch!!
The past weeks have been painful to investors - ouch!!! Money were made and lost in a matter of weeks. I guess the writings are on the wall - at best the market will consolidate within the 2,100 - 2,400 range. At worst, we might trade lower and hit 1,800. So far, I am still bias towards the market consolidating and this should give investors an opportunity to reposition their portfolio. My only worry is that liquidity might dry up. The P900m traded last Friday is quite worrisome. Liquidity, more than anything else is the key driver of the market. I have essentially kept my portfolio intact except that I have reduced my holdings by 25% equally across all my holdings. I have taken money off the table in order to realize some of the gains I made this year.

Gold.... gold ... gold
So will gold still trade higher? I am not an expert on this but I have been following the commentary of Paul Van Eeden. Let me share with you some of his comments.

Please check http://www.paulvaneeden.com/displayArticle.php?articleId=157 and http://www.paulvaneeden.com/displayArticle.php?articleId=158. What Paul is saying is that gold will go up since he does not believe that the recent rise in US$ is sustainable. Gold trades "contra" US$. The recent drop in gold price is driven by the rally in the US$. The slowing US economy will negatively impact the dollar in the long run. However, he is not bullish on other metals such a copper, silver since a slowing global economy will crimp demand for these metals.

RCM
The market ignored the 1Q06 earnings release of RCM. The good news was buried deep in the bear pen. RCM reported that earnings in 1Q06 rose 88% to P294.0m. If we annualize this figure, full year earnings can reach P1.4bn. So at current levels, the counter is trading at 6.4x PER. However, what is more important is to see the cash flow of the company. In 2005, the company reduced its debt by P1.5bn. In 1Q06, total debt repayments reached P558m. So for the past 5 quarters, the company was able to retire P2.0bn in debt. In terms of valuation, debt reduction should translate to incremental equity value. On a per share basis, the P2.0bn should translate to roughly P.30 incremental value. Looks like the market has not factored this in.

Beyond these good numbers. the management of RCM should look into ways to improve the liquidity of the stock. The most obvious thing to do is to distribute the RCM shares held by South East Asian Cement Holdings (CMT) to its shareholders. This should free up some 300m RCM shares to the market. I wonder why management has not thought about this. It does not make sense to have two listed companies for one operating asset.