The Benpres (BPC – P1.12) Bet; What’s Brewing Sir?

Something is brewing in Benpres! For the past two weeks, the volume turnover of the stock has reached 4x its daily average. It is quite an unusual behavior considering that for the past 18 months, the stock has traded at a range of P0.90 – P1.24 with steady volume. We have not seen this surge in volume ever since the share price of Benpres broke out of the P.80 levels in the early 2005. Recall that Benpres was the darling in 2003 when its share price rose from P0.11 to P0.80.

What’s happening? At this stage, we can only speculate – however, I am willing to place my bet since money flow is “pretty good” at this stage. Again – like RCBC (RCB – P18.75), it is one of the “win-win” stocks that merits my attention. On the downside, I can easily get out at a minimal – say 10%, loss since the stock is well supported at the P1.0 levels. On the upside, the “money-flow” speaks for itself. In other words, money talks! It looks like “insiders” are voting with their checkbooks. So the odds are pretty much skewed towards a surprise development.

So, how far can the stock run? Let’s do a rough estimate of the company’s Net Asset Value (NAV). As of end Q206, this is how the assets and liabilities statement of Benpres looks like:

Listed Equities:
ABS-CBN 56% P9.7bn at market value
FPH 44% P11.3bn at market value

Unlisted
FPIDC - 49% P7.3bn at 10x 2005 Income
Sky Vision 22 P0.2bn book value
Rockwell 25 P1.5bn at NAV

Others P1.0bn 50% off carrying cost

Less
LTCP P2.0bn
USD$ Notes P7.9bn
Bayantel P15.8bn

Total P5.6bn
NAV P1.24

At current levels, the NAV of Benpres is at P1.24 per share. So, there seems to be very little room for upside if we based it on NAV play. But, as mentioned, we are speculating on a “surprise” development based on the movement of the stock. Since Metro Pacific (MPC – P0.245) already announced that they are not interested in FPIDC, my next bet is that there might be a deal brewing in Bayantel. Note that Benpres is liable for up to P15.8bn in its telco subsidiary. This is due to the unconditional guarantee that the company gave in 1997 to the creditors of Bayantel. Thus, roughly ¾ of Benpres’ net assets are effectively tied up with Bayantel’s liabilities. This translates to P3.00 per share impact on the NAV of Benpres. Any deal that will remove Bayantel from its books will be positive for Benpres.

How will the deal work out? Your guess is as good as mine? Essentially we are speculating on a possible P3.0 incremental gain in its NAV. Assuming, Benpres gets to recover “just” 1/3 or P5.0bn from its Bayantel fiasco, this should translate to P1.12 per share gain in its NAV. On a risk reward standpoint, my downside is 12% at P1.00 while the potential upside is P2.24 or equivalent to 100% return from current levels. The odds are definitely worth looking into. So what’s brewing, Sir?

Why Cost of Equity matters; RCBC - (RCB - P18.0) is a “win-win” stock

Cost of Equity - the simple logic
The expected return in putting money into the market is to earn more than the cost of equity (COE)). This is computed by adding the 365-days T-bill rate and the equity risk premium. In the case of the Philippines, its 7.8% plus 5% equity risk premium or roughly 12.8%. The logic here is that if you cannot earn more than the COE, you are better off parking your money in risk-free government securities. That's how the logic works. Investors should simplify their investment objectives by keeping this in mind.

Unfortunately, most people think that they have to hit the jackpot when they invest in the market. Even the Philippine Stock Exchange (PSE) came out with an ad telling investors that they can double their money in the market. Doubling or tripling your money in the market is incidental. In the end it is all about managing your risk. Three key points to remember:

1.) Rationalize your objective vis-à-vis other available investment alternatives
2.) Buy below the intrinsic value of the stock. This separates investors from speculators.
3.) Run your winners; cut your losers.

RCBC is a “win-win” stock
I took note of RCBC and I believe it is worth a second look.

RCBC currently trades at .9x Price to Book Value (P/BV). It is the cheapest stock in the banking sector. I find value in this since RCBC remains one of the top banks in the country. It ranks 7th and 10th respectively amongst local banks in terms of resources and capital

The banking sector trades at 1.6x P/BV. RCBC is the cheapest, while the next cheapest is Equitable PCI (EPCI - P74.50) at 1.3x P/BV. BPI (BPI - P49.0) - the proxy stock for the sector trades at 1.8x.

Both RCBC and EPCI are in the same boat. For the past 5 years, growth has stalled and asset quality has deteriorated. Both banks badly need to recapitalize. The difference is that EPCI has found a white knight in Banco de Oro (BDO). I think it's a matter of time before RCBC can find one.

So on the downside - or in this case, at the minimum, I think RCBC should trade closer to its book value of P20.50. This should give me a comfortable 13.8% return. With the sytemic risk in the banking sector almost at zero, it is a matter of time before the stock trade close to its book value. Thus, this satisfies my first premise of earning more than my Cost of Equity (COE).

On the upside, RCBC is ripe for a mergers and acquisition (M&A) play either as an acquisition target or a recapitalization exercise. In any case, the value will have to go higher compared to where it is right now. Say, we use EPCI as the benchmark; RCBC should then be trading at P26.50 equivalent to 1.3 P/BV. Note that when Union Bank bought iBank, it paid roughly 2.2x P/BV on its acquisition. So, in the long run, there is a chance for RCBC to trade between P26.50 - P40.0 depending on how the M&A scenario plays out.

So, on both ends, RCBC is in a “win-win” situation.

Questions from my readers; MWC (P7.60) and ELI (P0.45)

I would like to take this chance to answer some questions from my readers.

What do I do with Manila Water (MWC)? Its share price has rallied to P7.90. Should I buy, sell or hold? What is the impact of the Maynilad bidding to the stock? The_black_magic

I remain bullish on MWC. I believe the stock will continue to outperform the market. At current levels, MWC is trading 7% off its high of P8.20. Considering that the Phisix has corrected 16% from its peak, there is really nothing to be worried about. There is a basic rule in investing that says: sell the losers; hold on to the winners. Obviously, MWC is a winner and there is no reason selling the stock.

Aside from being a winner, I also like MWC since the stock is still trading below its intrinsic value. Please check http://bigbigtrade.blogspot.com/2006/05/why-i-will-buy-manila-water-mwc-p650.html . Utility stocks, like MWC, are considered as “boring plays” since earnings are supposed to be steady and predictable. Thus upside will be limited. However, I will not think twice if I can find a utility counter – like MWC, trading at 7.7x PER and growing at 24% per year. The market is simply paying too little for its growth prospects. At current valuation, MWC is trading at .32x Price/Growth (PEG). A more logical valuation should put the stock at .80x PEG or equivalent to 20x PER. That’s a lot of upside for a steady earner like MWC.

On the other hand, it is still quite early to speculate on the possible impact of the Maynilad bid. However, initial reports says that MWC is in the best position to win concession based on its track record in successfully running the east zone water franchise. Should MWC win the bid; that will be a new story to watch out. Stay tuned.

Can you please write something about Empire East (ELI) in your blog? Slick

I have nothing good to say about ELI. In fact, I am quite suspicious about it’s P1.0bn stock buyback program that was announced last April.

Please note that we saw a spike in the share price of ELI after they announced the buyback. The share price reached a high of P0.70 in 3 days. However, after the initial euphoria, the stock underperformed the market. What is even suspicious is that during the huge market rally that we saw last May when the PSEi reached record highs, the share price of ELI did not even budge. Worst, when the market tanked, the share price even outperformed the market on the downside.

Looking at the disclosure of the company, it seems that the last buyback that the company did was on May 26. That was almost 2 months ago. Besides, if you add up all the buybacks that the company disclosed since the announcement, it hardly adds up to P50m – or roughly 5% of the committed amount.

So is the company really serious in its buyback program? Do they have funds to do the buyback? Is the announcement just a grand plan to favor a few market players? An honest to goodness buyback program should see ELI buying their shares over time regardless of the market condition. That’s the essence of a buyback program! In my opinion, there seems to be no program at all.

Universal Robina (URC – P18.50) buys Robinson Land (RLC – P10.75) shares; JG Summit (JGS – P6.10) has some explaining to do!

Universal Robina disclosed that it will acquire 293m Robinson Land shares from Express Holdings. The deal is valued at P3.5bn based on the P10.75 closing price of RLC today. Express Holdings is a fully owned subsidiary of JG Summit. Express Holdings is primarily a vehicle used by JGS to provide liquidity for its listed units. There is nothing wrong with this except that it has to disclose why it sold its holdings in RLC to URC. It simply transferred the holdings from one pocket to another. The transaction looks odd.

URC recently raised P4.7bn from an international offering. I don’t think the work program calls for URC to invest in RLC. Investors will be critical of this transaction. I guess this is the reason why shares in JGS related companies have been underperforming the market.

I have recently turned positive on JGS related stocks. Please check http://bigbigtrade.blogspot.com/2006/05/emerging-plays-why-jg-summit-jgs-p780.html
However, the conglomerate has to come clean with its recent actions. Why is JGS in a rush to cash out its holdings in RLC. What is the financial objective of URC in investing in RLC. It is totally unrelated to its food business. It seems that JGS is going back to its old habit of moving funds from one related company to another without properly explaining the actions. As a publicly traded company, JGS cannot just move funds as if it is still a family-owned private entity. Until these issues are cleared, I will be staying out of JGS related stocks.