Lucio Tan “triggers” property bull!

The recent move by Lucio Tan to go “loud” on his property ventures prompted me to change my “neutral” stand on the sector. I do believe that its time to go overweight on property counters.

Lucio Tan joins Greenbelt Race

Mr. Tan is not a known player in the local property sector. However, he is big both in Hong Kong and China property markets. In other words, he is with the big boys – Cheung Kong’s Li Ka Shing, Shui On’s Vincent Lo etc. Mr. Tan must have seen something that prompted him to go full blast in the local property market. We can never argue with Mr. Tan’s timing .... or his billions. He is known to have a keen eye on spotting turnaround opportunities. Note that Mr. Tan bought into Philippine Airlines and Philippine National Bank (PNB – P55.0) when things are looking nasty.

What this tells me is that the property sector will certainly enter the expansion phase.

For the longest time, I have been neutral on the sector since I do not see any “triggers” for property companies to generate meaningful “economic profits”. Most property companies are reliant on purchases by overseas Filipinos. However, this alone is not enough to pull the sector out of its slump.

Moving forward, purchases by local investors will be the "trigger" for the sector.

Here’s why:

Mismatch between growth and deflation. The country’s per capita income has risen to US$1,500.0. In Dollar terms, it has risen by 50% over the past 10 years. But in Peso terms, per capita income has expanded by 100%. On the other hand, property prices are down 70% from its peak in 1997. This means that in Dollar terms, property prices are mere 15% of its peak. Thus, the deflation of property values in the past 10 years has to be corrected. There is a big mismatch between income growth and property values. So most likely property values will start going up in the coming years.

91-day T-bills at 2.885%. The current 91-day t-bill rates will force the banks to move money to the consumers. For the past 10 years, banks have curtailed its lending simply because they can sit back, relax and make 10% return by lending to the government. The paradigm has changed. Banks will have to start lending to the consumers. Currently, banks are still offering mortgage rate at 10%. Moving forward, mortgage rate can go down to as low as 6%. This will definitely boost property purchases.

So with systemic risks and growth scenario emerging, there is every reason to overweight property stocks. However, instead of focusing on mainline property companies with clear earnings picture, I would bet on property stocks that have recapitalization and restructuring angle. They will likely outperform other property stocks.

My top 3 property stocks are Fil-Estate Land (LND – P1.02), C&P Homes (CMP – P2.85) and SM Dev’t Corp. (SMDC – P4.25).

LND has emerged as my top pick since the stock is still trading at “crisis” values. At current prices, LND is trading at mere 30% of its book value. At these prices, we are just coming in at the same footing as how much “vulture” funds would have paid for anyway. So downside is limited. My bet is for LND to trade at 50% of its book value or P1.70 per share in the near term. Long term, assuming the company comes up with a “go forward” plan, LND can trade at par with its book value.

Please read “Casino Royale”: some chips that are worth betting on; buyers beware


CMP is one restructuring story that the market has ignored. CMP is looking like another Benpres (BPC – P4.20) in the making. Major shareholders have already bought back P3.6bn in outstanding loans from banks. The existing Floating Rate Notes (FRN’s) amounting to US$140m can easily be tendered at 20-30% to a dollar based on comparable transactions. So moving forward, CMP has a strong chance of emerging as a debt-free entity. Its current market capitalization of P11.0bn dwarfs the value of its landbank. CMP is known to have the biggest landbank in the country today.

As for SMDC, it is clear that the company will emerge as the property vehicle of the SM Group. My speculation is that there will be more deals in the coming months to consolidate all the property projects/landholdings of SM Group under SMDC. Just like Mr. Tan, Henry Sy is making big bets in the property sector.

Quote for the day:"It’s a bull market… it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!"

Reminiscences of a Stock Operator by Edwin Lefevre
Philequity Corner

Gems found, Philippine Stock Exchange (PSE – P510.0) and PCI Leasing (PCIL – P1.98) part II

Last January 2, I wrote about PSE and PCI Leasing as gems waiting to be discovered. Please read:
Hidden Gems

Both stocks performed beyond my expectations. PSE and PCIL are two of the best performing stocks in the market with share prices rising 85% and 44% respectively. To date, the PSEi Index has returned 10.7%. They have beaten the market by a mile.

So, the next question is how far will these two stocks go? Here’s my take.

PSE has a market valuation of P7.6bn. Taking out the P1.4bn cash and available for sale investment securities on hand, the enterprise value of PSE is roughly P6.2bn. In dollar terms, this is equivalent to US$126.0m.

At its peak in 1996, the PSE has an implied market value of P16bn. I derived this by multiplying the price of the seat then - P80m, by the number of seats - 200. In dollar terms, the market value is around US$603m based on the P26.5 to US$1.0 P/$ rate.

At current levels, PSE is trading at “mere” 20% of its peak valuation. Considering that the PSEi has recovered roughly 50% of its index value in dollar terms, this makes the valuation of PSE compelling at current levels. On a one to one basis with PSEi, PSE should have a market valuation of US$360m, equivalent to P17.6bn or around P1,000.0 per share.

Moving forward, these are the factors that will likely push PSE to those levels.

Earnings. PSE can easily double its earnings this year to around P600m. As I like to say, the writings are clearly on the wall. Based on my estimate, the transaction value of the exchange in the first one and half months of the year is already equivalent to the first 6 months value turnover in 2006. In other words, we are just seeing the tip of the iceberg as far market activity is concerned.

IPO’s and Mega IPOs. What’s clear is that there will be more Initial Public Offerings (IPO) and follow-on offerings this year. This is a dealmakers’ market. Companies will take advantage of the present situation to raise funds, recapitalized its business or divest its assets. This will again be a positive revenue driver for the exchange.

Dividend play. PSE has consistently paid out P5.0 cash dividend per share during the past 4 years. I do believe that the exchange can easily increase the payout to P15.0. This should easily match the 3.5% coupon on the 91-day T-bill notes.

Institutional following. Slowly, the stock is gaining institutional following. Below P500.0, the stock is illiquid. At these levels, the liquidity of the stock has improved substantially. So it is a matter of time before fund managers add this stock to their portfolio. This is similar to what happened to Republic Cement (RCM – P6.40) when the stock broke out of P5.0.

Franchise value. Finally, there will only be one stock exchange in the Philippines. It has survived, the war, martial law, coup etc. Note that the incremental business generated by the bull market will not translate to additional cost to the exchange. It all goes to the bottomline. Thus, PSE merits premium valuation.

Having said those positive points, my only concern is that PSE is not doing enough to maximize shareholder value. The exchange is sitting on a lot of cash - P1.4bn. The PSE should start returning the excess funds to its shareholders. It is pathetic to see the PSE generate single digit returns on its cash pile while the market is hitting new highs.

So the best way to ride the bull is to bet on PSE. Unless, the market turn negative, the P1,000.0 target should be achievable in the next 12 months. Similarly, we have seen this before when Sun Life (SLF – P2,130.0) and Manulife (MFC – P1,620.0) de-mutualized and went IPO. Both SLF and MFC saw its share price rose 5 folds from its offering price. Looks like PSE can follow the same path.

As for PCIL, I have a much simpler argument. The stock is currently trading at 1.2x Price to Book Value (PBV). Its parent Banco de Oro (BDO – P65.0), is trading at 2.5x P/BV. Fairly valued, PCIL should at least approximate the valuation of its parent. Say, PCIL manage to capture 80% of BDO’s valuation; the stock is potentially worth P3.60 per share.

Quote for the day : "Hindsight is always 20/20"

Unknown

Quote for the day : "One chance is all you need."

Jesse Owens