Hidden Gems: PCI Leasing (PCIL – P1.40) Philippine Stock Exchange (PSE – P280.0)
Hidden gems are hard to find in this market. Majority of the stocks with good fundamentals have “glittered” to reach prices not seen in 5-10 years. However, amidst the shimmer, there are still some stocks that looks “dull” on the outside but is definitely worth more once its “polished”. I guess it is a matter of time before the market sees these gems. I am referring to PCI Leasing and Philippine Stock Exchange – yes, the stock exchange where we trade Philippine stocks.
Let me start with PCI Leasing or PCIL.
PCIL is a leasing company that is 85% owned by Equitable-PCI Bank. There is nothing spectacular about the leasing business. Leasing companies do quasi-banking functions but it cannot take deposits. It mainly serves as a conduit between the banks and the SMEs, which might be too “expensive” for the banks to service. However, despite the boring nature of its business, PCIL still manages to generate stellar earnings numbers. For 2006, the company is on track to generate 21% earnings growth.
What attracts me is that despite the good numbers, PCIL continue to trade at “distressed” valuations. This means that investors have generally ignored this gem (of a stock).
At current levels, PCIL is trading at 7.7x PER to 12/07 earnings and a “mere” 0.77x Price to Book Value (P/BV). I do not think valuations will continue to stay this low. The only time you value financial companies below book value is when the company is teetering on bankruptcy. PCIL is nowhere in that league. In fact, in 2005 PCIL paid out P0.20 cash dividend to its shareholders. The company is on track to do the same this year, I think.
At the least, PCIL should trade at par with its book value of P1.84. This should give us a 31.0% upside from current levels. Not bad considering that the market has already risen by 42.0% in 2006.
Philippine Stocks Exchange or PSE is another gem waiting to be discovered. From how the market has performed in the last 12 months, it seems that the market has more room to grow. What’s good for the market; is also good for the PSE. My gut feel is that the PSE can easily double its net income in 2007 to around P450m.
PSE derives its income mainly from listing fees and service revenues form clearing operations. In 2006, companies raised P57.2bn from the market. On the other hand, average daily turnover reached P2.9bn.
For 2007, I expect the market to double the amount raised in 2006. In January alone, Megaworld (MEG – P2.40) and Filinvest Land (FLI – P1.80) are expected to raise P20bn from the market. This is already equivalent to 40% of what was raised in 2006. So, we can easily surmise that listing fee for 2007 can potentially double.
On the other hand, revenue from clearing operations will likely increase on the back of higher value turnover of the market. Again, my “gut feel” is for the market to generate US$100m or P4.9bn in daily turnover equivalent to what was achieved before 1997.
So based on these assumptions, a P500m net income target is doable. Note that the PSE do not have to incur additional cost to grow its revenue. Almost 90% of the incremental revenue will likely go straight to its bottom-line.
At P280.0 PSE is trading at mere 9x PER to 12/07 earnings. I believe that similar to exchanges around the region, PSE ought to trade at a premium. On the average, regional exchanges trade at 15x PER. Assuming, we use that as a “back of envelope” target, PSE should be trading at P500 per share.
The only drawback in owning these stocks is the lack liquidity. However, the potential reward is worth the wait.
Let me start with PCI Leasing or PCIL.
PCIL is a leasing company that is 85% owned by Equitable-PCI Bank. There is nothing spectacular about the leasing business. Leasing companies do quasi-banking functions but it cannot take deposits. It mainly serves as a conduit between the banks and the SMEs, which might be too “expensive” for the banks to service. However, despite the boring nature of its business, PCIL still manages to generate stellar earnings numbers. For 2006, the company is on track to generate 21% earnings growth.
What attracts me is that despite the good numbers, PCIL continue to trade at “distressed” valuations. This means that investors have generally ignored this gem (of a stock).
At current levels, PCIL is trading at 7.7x PER to 12/07 earnings and a “mere” 0.77x Price to Book Value (P/BV). I do not think valuations will continue to stay this low. The only time you value financial companies below book value is when the company is teetering on bankruptcy. PCIL is nowhere in that league. In fact, in 2005 PCIL paid out P0.20 cash dividend to its shareholders. The company is on track to do the same this year, I think.
At the least, PCIL should trade at par with its book value of P1.84. This should give us a 31.0% upside from current levels. Not bad considering that the market has already risen by 42.0% in 2006.
Philippine Stocks Exchange or PSE is another gem waiting to be discovered. From how the market has performed in the last 12 months, it seems that the market has more room to grow. What’s good for the market; is also good for the PSE. My gut feel is that the PSE can easily double its net income in 2007 to around P450m.
PSE derives its income mainly from listing fees and service revenues form clearing operations. In 2006, companies raised P57.2bn from the market. On the other hand, average daily turnover reached P2.9bn.
For 2007, I expect the market to double the amount raised in 2006. In January alone, Megaworld (MEG – P2.40) and Filinvest Land (FLI – P1.80) are expected to raise P20bn from the market. This is already equivalent to 40% of what was raised in 2006. So, we can easily surmise that listing fee for 2007 can potentially double.
On the other hand, revenue from clearing operations will likely increase on the back of higher value turnover of the market. Again, my “gut feel” is for the market to generate US$100m or P4.9bn in daily turnover equivalent to what was achieved before 1997.
So based on these assumptions, a P500m net income target is doable. Note that the PSE do not have to incur additional cost to grow its revenue. Almost 90% of the incremental revenue will likely go straight to its bottom-line.
At P280.0 PSE is trading at mere 9x PER to 12/07 earnings. I believe that similar to exchanges around the region, PSE ought to trade at a premium. On the average, regional exchanges trade at 15x PER. Assuming, we use that as a “back of envelope” target, PSE should be trading at P500 per share.
The only drawback in owning these stocks is the lack liquidity. However, the potential reward is worth the wait.
posted by jack galt at
9:19 PM
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