Interesting Comparables; Finding Value In A Bull Market

As the market roars past the 2,400-resistance level, I have been receiving emails from my readers asking where to find value in a surging market. My advice is to keep the search simple and stick to comparative valuation in deciding where to find value.

Here are some interesting comparables worth pondering:

1.) Banco de Oro (BDO – P38.5) vs. Bank of P.I. (BPI – P58.0). BDO trades at 1.6x Price to Book (P/BV) whilst BPI trades at 2.7x PBV. I do think the valuation disparity between the 2 banks is unwarranted. The debt issues of both BDO and BPI are rated at parity by S&P Ratings, thus there should not be much valuation disparity in its equity stock. My view is that BDO should trade at P50.0, equivalent to 2.2x P/BV. At these levels, BDO will approximate the valuation of BPI. The 20% valuation premium of BPI – 2.7x P/BV over BDO – 2.2x P/BV; is more defensible.

2.) Manila Water (MWC – P9.2) vs. Meralco – (MERB – P29.50). I have been a believer in MWC since I recommended the stock last May. Please check - http://bigbigtrade.blogspot.com/2006/05/why-i-will-buy-manila-water-mwc-p650.html . MWC currently trades at 9.7x Price to Earnings (PER) ratio whilst MERALCO is valued at 18x PER. My view is that MWC should trade at a premium vis-à-vis MERALCO. MWC is in a unique position to grow its revenue by increasing its customer base and decreasing its non-revenue water (NRW). This means that MWC can grow organically without relying on rate increases. Other utility companies like MERALCO, need to petition for a rate hike to see an improvement in it bottom-line. The growth of MWC is predictable based on its track record, while a play on a possible rate hike for MERALCO is speculative.

Given these scenarios, I would be paying more for a predictable growth story. At the least, MWC should be trading at par with the market equivalent to 13x PER or P13.0 per share.

3.) Petron (PCOR – P3.95) vs. Philippine Market (PSEi – 2,512.0). Petron is one stock that has been battered by the negative press from the Guimaras oil spill. My view is that beyond the negative PR, the financial impact is minimal. Petron generates P200bn in revenues and roughly P12.0bn in pre-tax income. Thus, even a P1.0bn clean-up bill should not be an issue. Besides, this will take years to resolve.

Also, refiners and fuel distributors enjoy positive impact in margins against a backdrop of a declining oil price. Crude oil just broke down of the US$63.0/barrel level signifying further downside. This should bode well for the company moving forward. My view is that at 6.0x PER, Petron is way too cheap for an established blue-chip counter in the market. The PSEi currently trades at 13x PER

The Big Move – Why The PSEi Is Poised To Scale New Heights

We should see a big move in the PSEi in the coming days. It seems that the market will attempt to break the 2,400 resistance level. My medium term target is for the PSEi to reach 2,750 – 2,800 levels.

Why am I bullish? Here are my arguments:

1.) Earnings – 1H06 corporate earnings came in better than expected. In the coming months, we would see an upward revision in earnings. Based on my estimate, earnings for 2006 should grow by at least 15-17% versus the earlier target of 10-12%.

2.) Peso at P48.0 – The Peso has appreciated by almost P3.0 since end July. I do think it will continue to appreciate towards P48.0. Please check my past post: http://bigbigtrade.blogspot.com/2006/03/peso-at-p480-here-we-come.html . The movement of the Peso is a leading indicator for the stock market. As it is, we should see some shifting of funds from US Dollar assets to the equities market.

3.) Positive funds flow – For the past one and half months, money has slowly creep back to the market. We have seen average daily value turnover reach P2.0bn. What is interesting is that for the past two weeks, average volume turnover rose to P2.5bn. This should signal that more money is waiting to be invested in the market.

Nice Read - A Reason or Excuse To Be Optimistic

Today, I am going to tell you mostly good news....

The Philippine economy is growing at its fastest rate today in the last
quarter century. It has grown by an average of 4.7 percent per quarter
consecutively over the last 22 quarters. This is the highest growth ever
over the longest period since the post-war. This means that economic
production has increased by 25 percent, in real terms, in the last five
years.

During the same five-year period, the population grew by 13 percent or
by ten million Filipinos. In other words, economic growth now outpaces
population growth at a ratio of two to one.

This means that in due time, the economy will be able to feed, educate
and clothe the population that has been born and the population still
to be born. Families can actually multiply without fear of burdening the
economy.

Twenty-two consecutive quarters of positive growth. That's five and half
years. The economy had never grown so fast and for so extended a period
of time. Until now.You may ask: Why is the economy growing so fast? The
answer is that the sectors of the economy that should deliver value
added
are all growing - services, agriculture, industry and manufacturing.
adding vibrancy to these sectors is consumer spending and the rise of
cellular technology. In 2005, agriculture grew by 1.8 percent; industry
by 4.85 percent, and services by 5 percent. Services now accounts from
53 percent of the total output of the economy. What's services? Thats
telecommunications. Transportation. Banking. What's telecommunications?
That's cellular phones and text messaging. Internet mailing and gaming.
Even banking is all about computers and the telephone. How can you
account for ATMs but for the computer and the telephone.

In 2005, of the total production of the domestic economy, on the
expenditure side, of P5,418 billion or 5.4 trillion pesos, personal
consumption expenditure or PCE accounted for 3,773 billion pesos or
P3.77 trillion, 69.6 percent of the total. Government consumption added
another 525.7 billion pesos or 9.7 percent. So consumers and the
government are providing Filipinos 79.3 percent of the economy on the
consumption side.

This means both consumers and the government have money. Government has
money because of the dramatic increases in tax rates, especially of the
value added tax, and in the efficiency of the government tax machinery.


Because of computerization, the incidence of the tax avoidance and the
tax evasion has been markedly reduced. Taxpayers today pay an average
of 20 percent of their income as tax. It used to be zero.

Consumers have money because of OFW remittances, which amounted to $10.7
billion in 2005. That's money remitted thru the banking system, about
P588.5 billion. It is believed the P588 billion represents only 80
percent
of the total remittances. Actual remittances could be as high as $12.8
billion or P706 billion. Where did all that money go?

In cellular phones and e-loading for text messaging. Today, 98 percent
of the 7,107 islands of the archipelago are linked, wirelessly, by
cellular phones. For the first time ever, you can say the country is
united, by technology, by information technology. For the first time,
the country is united by one medium, the cellular phone, and by one
message, that coming from the text messaging.

One hundred ten million messages are sent out everyday by Filipinos.
that's 40 billion text messages a year. This makes us the text capital
of the world.

Today, eight million Filipinos are connected to the Internet, almost ten
percent of the population. Another 3.5 million are linked thru
friendster,
the chat web site. There are 38 million cellular phone owners, about 45
percent of the population. 38 million or 45 percent is not to be sneezed
t, considering that it costs at least P4,000 to get a cellular phone.
That amount is almost eight percent of the per capita income of P53,000
per year.

If you multiply P4,000 by 38 million, you get the figure P152 billion.
That's the amount of fixed capital investment made by the Filipino
consumer in cellular phones, on the equipment side alone.

In 2005, PLDT became the most profitable Philippine company with
whopping
profits of P34.5 billion - the biggest for any company in our corporate
history. Sister company Piltel made P13.45 billion. Rival Globe Telecom
made P10.3 billion in profits.

Abroad, the most profitable business is energy, oil. In the Philippines,
the most profitable business is cellular phone. In 2005, the three phone
companies, PLDT, Piltel and Globe made together P58.22 billion in
combined profits - or 29 percent of the P200 billion combined profits of the 100

most profitable companies listed in the stock exchange.

Did you know that between July 8, last year when the Hyatt Ten resigned
and July 8 this year, when President Arroyo has not yet resigned, the
stock market created a whopping P2 trillion of wealth?

Why? Because business has been good. Companies are registering profits
on a scale they have never experienced before. PLDT 34 billion pesos.
SM Investment P10.4 billion. Ayala Corp. P10 billion. San Miguel P8.97
billion. Why are these companies making so much money? Because of
telecommunications, specifically, wireless phone. And because of
consumer spending.

That is why today, the richest Filipino is Henry Sy, the retailing
tycoon.
He is worth P100 billion, according to my computations. The second
richest?

The family of Augusto Zobel de Ayala. He is worth P49.57 billion. The
third richest? This is surprise. Manuel V. Pangilinan, the chairman of
PLDT. MVP is worth P49 billion, richer than George Ty, No. 4 with P44.5
billion, and Eduardo Cojuangco, Jr. No. 5, What about beer, tobacco and
airline Taipan, Lucio Tan, who for many years, the Forbes Magazine has
ranked as the richest Filipino? He is no longer the richest Pinoy. He
is only No. 6 with 35 billion.

How did the rankings change so drastically? Because consumer spending
habits have changed drastically. Food is no longer the No. 1 consumer
item. It is cell cards and e-cards. People are buying less cola, less
beer, less cigarettes just so they can save money to buy a cell phone,
a SIM card, and an e-load.

This morning I came from a lecture by McCann Erickson on the activities
of the Filipino teenagers. The Filipino teenager is connected,
virtually.

In the McCann survey, text messaging and using the computer for games
and the internet together is now the No. 1 activity of the Filipino
teenager. Window-shopping is now a poor second.

In 2005, according to McCann, 40 percent of Filipino teenagers had for
their usual leisure activities, text messaging; followed by 38 percent
playing computer and video games; window shopping 36 percent; and email,
surfing or chatting on the net, 27 percent. Five years ago, the
comparable ratios were 22 percent window- shopping, 12 percent text messaging, 17
percent playing computer and video games, and 13 percent emailing,
surfing or chatting on the net.

In five years, text messaging increased 3.3 times to 40 percent; playing
computer video games increased 2.2 times to 38 percent, and email or
surfing the net increased two times to 27 percent. In other words, all
these
activities doubled in frequency while that of shopping declined, from 22
percent of teenagers in 2000 to 36 percent in 2005. McCann says Filipino
teenagers now spend more on internet cafes, prepaid phone cards and post
paid cell phone bills, while trying to economize on food, beverage,
personal care, transportation, clothes and reading materials.

That is why sales of Coke are down, sales of hamburgers are down, and
clothes shops are having sales regularly instead of occasionally. This
is why in sari-sari stores, the best-selling item is not milk not
coffee, is not sugar, is not sardines, is not cosmetics. But prepaid phone cards
and e-loading cards.

Tony Lopez
Publisher
BizNewsAsia

Why Equitable-PCI Bank shareholders should reject the SM Group offer; SEC should not approve the terms

Last week, SM Group announced that it would tender all the remaining Equitable PCI – (EPCI – P79.0) it does not own for P92.00 per share. Effectively, SM Group is looking to acquire 55.1% of EPCI for a total consideration of P36.9bn. Payment for the said purchase will be broken down into 4 trances – 10% by October 2, 2006, 10% by June 2 2007, 10% by Feb 2, 2008 and 70% by October 2, 2008.

I strongly suggest that shareholders of Equitable PCI Bank reject the deal. Both SSS and GSIS should seriously consider other options and lead the cudgels for the minority shareholders.

Why the deal sucks? Here are my arguments:

1.) Pricing – The offer price is equivalent to P80.50 and not P92.50 based on the present value of the offer price. This represents a negligible premium over the P70.50 weighted average traded price of EPCI for 2006. In most take over transactions, the pricing is at least 20% above the prevailing market price of the acquired company.

2.) Valuation – Effectively, SM Group is paying “just” 1.5x Price to Book (PBV) based on EPCI’s 06/2006 book value. Last May, Union Bank (UBP – P43.0) paid 2.0x PBV when it acquired iBank – (IBNK – P37.50). At the minimum, EPCI shareholders should be paid the same value equivalent to P107/share.

3.) Payment term – The SEC should not allow partial payment of the tendered shares. This will set a bad precedent in future tender offers. To be fair, they should require the SM Group to offer an outright payment option based on the present value of the offer price.

4.) Other people’s money - What is also unfair about the payment term is that effectively, the minority shareholders are the one funding the SM Group. I cannot imagine how one should sign-off his entire voting rights in exchange for 10% cash payment. Worst, the promissory notes to be issued by SM Group will backed by the same EPCI shares that it is going to tender. The SEC should at least require SM Group to put in additional collateral to back the promissory note.

5.) EPCI does not need SM Group – Obviously, it’s SM Group that needs EPCI to fast track its goal to become the number one bank in the country. All EPCI needs to do is to offer the 10.84% - 78.8m EPCI treasury shares; to its existing shareholders. The exercise should raise at least P6.5bn. This will be enough to recapitalize the bank at minimal dilution to its existing shareholders.

Unfortunately, it seems that the minority shareholders will be sucked out of the deal. Last week, Equitable PCI Investments agreed to tender the 10.84% EPCI treasury shares to SM Group without giving existing shareholders pre-emptive rights to the shares. This clearly violates the SEC Corporation Code which states that all shareholders be given equal rights to retain its stake in case of a dilution. I was wondering why our representatives in EPCI headed by SSS and GSIS chairpersons respectively approved the deal. They were placed in the board of the bank in order to safeguard the rights of the minority shareholders.

It seems that the writings are on the wall. What Henry Sy wants, Henry Sy gets. While, he might have finally won this battle, the group must brace itself for the negative PR impact. It is certainly not a good way to end his swan song.