Quote for the day: "We need a little bit of sanity in a period in which everyone feels invincible"

Ken Lewis, CEO, Bank of America

Fil-Estate Land (LND - P1.32) + Philippine Stock Exchange (PSE - P850.0)

For the past few days, I have received numerous emails asking me about LND and PSE. Just to be fair to all my readers, here is my take on the 2 stocks (again):

Fil-Estate Land
LND together with C&P Homes (CMP - P4.05) are my top picks in the property sector. I always believe that big money is made when there is a paradigm shift in the fundamentals of the company. For CMP, it is a continuing saga and we should likely see the share price trade near P10.0 as the new entity - Vista Land; prepares to do a follow-on offering.

For LND, I do believe that my near term target of P1.70 is already a given. When I wrote my arguments for LND, (please read ... Casino Royale) last January, my thesis is that LND owns valuable land-bank which it can use as equity in pursuing new projects. At that time, LND was trading at P0.80 or roughly 33% of its book value. My back-of-the-envelope computation is for LND to trade at 50% book value or roughly P1.70 per share.

However, things have improved. LND entered into a partnership with Megaworld to develop its property in Nasugbu, Batangas. On top of this, Megaworld was given warrants to purchase 1bn new shares of LND at P1.25 per share. Also, LND issued P500m convertible bonds to LIM Asia to fund its existing projects. So clearly, LND has a properly funded "move forward" plan that should bring it out of its dormant state. I guess, beyond the projections on how much revenue the new projects will deliver, I do believe that in the next 3-6 months, LND should approximate its revised book value of P2.65/share. Here's why?

1.) LND is out of the bankruptcy scenario. This means that we can already value its asset at face value - P1.0 of asset is now equivalent to P1.0.

2.) The "Sobrepena discount" is still factored in even if LND trades at book value. Note that most property companies trade at multiples to book value. So, I guess, at 1x book value, there is still sufficient discount in the valuation.

3.) On the other hand, we have the "Megaworld" premium. Since Megaworld is taking over the Twin Lakes project, this asset should be valued at a premium.

4.) Money is flowing into the property sector. The recent tie-up with Megaworld will put LND in a better position to ride the bull.

Just like the C&P Homes story, LND is crafting its own turnaround saga. I am betting that there are more chapters to come. CMP rose from P1.50 to P4.25 in a span of 5 months. So based on that analogy, LND still has a lot of room to catch-up. Beyond the property sector, we also saw Benpres (BPC - P5.10) rose 5-folds on the back of a recovery story. So, as I like to emphasize, the writings are clearly on the wall.


Philippine Stock Exchange

PSE is another stock that gained a lot of attention in the past few days. I have always like PSE as a proxy to the bull market. Note that PSE has beaten the PSEi Index by more than 20-folds. PSE has risen 486% compared to the 24.7% increase in the PSEi Index.

There are two things driving the stock right now.

First, earnings. I guess, with the market trading at an average of P6.0bn per day compared to the P1.5bn average in 2006, earnings will beat even the most optimistic estimates. On top of that, there are more mega-IPOs, follow-on offerings and mergers to come. To my mind, the P34.5bn raised so far in 2007 is "peanuts" compared to the coming deals. Vista Land alone, is looking to raise P25.0bn in 2H07. Initially, I was looking at P500m net income for PSE, but based on current trends, PSE can easily make P750m.

Second, the m&a trend. Recently, the Tokyo Stock Exchange (TSE) bought a 5% stake in Singapore Stock Exchange (SGX) for US$300m. I am betting that there are more deals to come and PSE will definitely be in the watch-list. Globally, shares of listed stock exchanges are breaking new highs.

So I do believe that my initial target of P1,000.0 is already a given. The target is based on P500m net income valued at 30x PER. So, based on a revised net income target of P750m for 2007, PSE, can potentially trade at P1,500.0. To put things in perspective, the market value of PSE in dollar terms is US$277m. It is hardly enough to buy a 5% stake in SGX. Clearly, there is room for upside, even if PSE is a "dog" amongst the exchanges in the region.

To read my past article on PSE, please go to Hidden Gem

Quote for the day: "The best way for a person to have happy thoughts is to count his blessings and not his cash"

Author unknown

The Saga continues: what's next for C&P Homes (CMP - P4.05)

Last March, I wrote an article on C&P Homes entitled "Turnaround Saga - The C&P Homes Story" Please read: Turnaround Saga - The C&P Homes Story


I guess the saga has entered the "recapitalization" chapter. Yesterday, Vista Land - the new C&P Homes announced plans to raise P25.0bn in a follow-on offering. Please read: Villar Firm .

The next question is how the "recapitalization" chapter will unfold. To my mind, there is little to speculate about it and instead just read the writings on the wall. First, creditors of C&P Homes have agreed to convert their debt into equity at P8.0 per share. In other words, the debt was paid in C&P Homes shares valued at P8.0 each. I do believe that P8.0 is the accepted Net Asset Value (NAV) per share of the new company. I would put a lot of credence into the valuation since creditors have better access to the financials of the company. Second, in a filling with the Securities and Exchange Commission (SEC), Vista Land plans to offer 2.548bn shares at P10.0 per share. The P25.0bn offering will make it the biggest follow-on offering in the history. So clearly, the recapitalization chapter will likely see C&P Homes at P10.0 per share. If that happens, it will be a nice epilogue to the turnaround saga.

However, beyond the play on C&P Homes, the bigger picture is the overall property bull market which a lot of people are still skeptical. I guess, with P25.0bn that will flow into the sector, there is really no reason why we should not follow where the billions are going. Also, the C&P Homes turnaround strategy will likely be the model for Fil-Estate Land (LND - P1.04). I will write more about LND in the coming days.

Hidden Gem: Wala Pa Rin Tatalo sa Alaska (AMC - P5.40)

As the tagline says: nobody can beat Alaska. I guess the phrase aptly describes my investment argument(s) for Alaska Milk. As the market hits new highs, it's very hard to find bargains that can likely return 50% - 100% in the next few months. Indeed Alaska is one of the few hidden gems still to be discovered by the market.

From the outside, there is nothing "sexy" investing in a milk company. However, looking closely, Alaska has the potential to beat the "hot" sectors right now like mining and property stocks over the next 12 months. The way liquidity is flowing into the market, I guess, it is a matter of time before investors start re-rating Alaska. Here's why:

Earnings + revenue growth. For 2007, earnings are expected to grow by at least 50% to P600m. Growth will be driven by better margins and higher revenues from the acquisition of Nestle's milk business. Alaska expects the acquisition to add at least P3.0bn to its full year revenue. So by 2008, Alaska should be generating at least P9.5bn in sales compared to P6.0bn in 2006.

Nestle acquisition = monopoly. What's surprising is that the market has ignored the potentials of the Nestle acquisition. The combined Alaska and Nestle business will have a virtual monopoly in the local canned milk market. This is a classic case of "1+1=2.5". Alaska is strong in the the retail market whilst Nestle is big in the institutional segment. So moving forward, Alaska will be strong on both ends of the milk market. Added to this, the existing infrastructure of Alaska can readily support both businesses. Thus, there is synergy from day 1.

One of the most "tried and tested" investment philosophy is to buy when there is an obvious change in paradigm. The "new" Alaska is a totally different animal from the "old" Alaska. It is now the undisputed industry leader.

5.5% dividend yield = margin of safety. Alaska pays around P0.375 per share in cash dividend per year. This translates to an annualized yield of 5.5%. At this rate, Alaska pays an even better yield compared to the 365-days T-bill rate which currently is around 5.1%. This is a classic case of investing with adequate margin of safety. At worst, you will still be getting a decent return on your investment. This beats leaving your money with the government.

Valuation is sexy. Alaska currently trades at 7.0x PER and 4.x EV/EBITDA. It's cash per share amounts to P2.20. So effectively, the market is paying a mere P3.20 for the value of its milk business. To my mind, Alaska should be trading at 10.0x PER and 12.0x EV/EBITDA to capture the full value of its business. At those levels, Alaska is easily worth between P7.60 and P10.0 per share. I guess, to be able to buy a stock at single digit PER, generating 50% earnings growth makes an investment sexy. Assuming my assumptions are correct, this should translate to 50 - 100% return in the next 12 months.

Quote for the day: "Where there's smoke, there's fire."

Author Unknown