Big Big Trade

Thursday, February 15, 2007

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.

1 Comments:

  • Hi jack,
    I'm on to PCIL too and I'm so glad to have found someone who actually sees the potential of this gem as no one seems to believe me it was still P1.32 back then. Will look forward to your continuous updates.

    By Blogger Jacks, at 6:38 AM  

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