Wealth Effect
Incredible?
Last Wednesday, Pres. Gloria Arroyo announced that the Philippine economy rose at its fastest pace in 20 years. Based on the recent figures reported by National Statistical Coordination Board (NSCB); GDP in 2Q07 grew by 7.5% versus the consensus forecast of 6.5%. In 1Q07, GDP rose by 6.5%. The GDP number is clear sign that the economy is roaring ahead. To critics, the figures seem incredible. To me, the numbers are believable. Here's why.
The services sector contributed 4.1 percentage point to the overall GDP growth. The sector grew by 8.4% in the said quarter. The biggest driver in the services sector is the business process outsourcing (BPO) industry. In 2007, BPO revenues is expected to grow by 66% to US$3.5bn from US$2.1bn in 2006. Note that BPO revenues are mainly labor inputs - salary and wages. So this means that the US$1.4bn will translate to incremental expenditure in the economy. The burgeoning BPO sector has emerged as the proverbial "silver bullet" of the economy. Based on estimates, for every US$1.0 generated, close to 80% or US$0.80 is kept at home. In other words, the net value-added high. Contrast this to the mid-90s when growth was reliant on electronics export. For every US$1.0 that was generated then, only 20% or US$0.20 is kept at home since most raw materials have to be imported. So looking beyond the headline figures, the numbers are indeed credible.
Wealth stocks
Amidst the backdrop of a roaring economy, investors should focus on stocks that reflect the new found wealth of the Filipino consumers. Clearly, a paradigm shift will emerge as Filipinos change their spending habits. Below are 2 stocks that fall under this category.
1.) Jollibee (JFC - P55.0). Obviously, eating-out as a percentage of overall expenditure will expand. I guess this is already reflected in the recent earnings result of the company.JFC reported that 1H07 earnings rose by 31%. However, what is more important is that top-line revenue continues to grow at double digit pace. This reflects the bullish trend in thefastfood sector considering that Jollibee is the number 1 chain in the country.
Jollibee currently trades at 22.0x PER to 12/07 earnings. My "gut feel" is for the stock to trade at 30x PER - or roughly around P75.0 per share. The potential re-rating should capture the underlying growth of the company and at the same time ride the "wealth effect" paradigm.
2.) Alaska Milk (AMC - P5.10). To some extent, milk consumption is also a proxy play for wealth effect. Milk is not a staple amongst Filipino consumers, however, with higher disposable income brought about by higher GDP growth, milk consumption will likely increase.
I have written about AMC before and its 1H07 numbers further strengthen my belief that the company is a gem-of-a-stock. AMC reported that 1H07 earnings rose by 156% on top of a 183% increase in 2Q07 net income. Again, what's more important is that top-line numbers continue to grow on back of higher selling price per unit and volume recovery. This suggests that consumers are willing to pay more without affecting consumption behavior.
AMC is currently trading at 6.0x PER to 12/07 earning. To my mind, the company should easily be valued at P8.50, equivalent to 10.0x PER to 12/07 earnings. The ingredients for a re-rating are in place: earnings growth + market dominance. The acquisition of Nestle milk brands earlier this year effectively gaveAMC 90% share in the liquid milk market. I guess the valuations are too compelling to ignore.
The property sector on the other hand will mirror the "feel good" effect of the economic boom. What we are seeing right now is that local property sales is growing at a much faster pace than sales to overseas Filipinos. The amount of property ads that we see in major newspapers is a sign that real estate companies are aggressively tapping the local market. This harps back to the property boom of the mid-90s.
However, what we are seeing is a recovery- and not quite a bull market yet. This means that big money can still be made in the sector and investors can position ahead of the curve. Property play will be a major investment theme in 2008 similar to how mining plays emerged in the past 2 years. Note that property prices are still 30-40% below its 1997 peak. In dollar terms, property prices are mere 30% of its 1997 highs. Thus, it is safe to assume that property prices have more room to grow - until such time we see it go back to those levels.
In the coming weeks, I will write more about the property sector and discuss some possible property plays to watch out. We saw how C&P Homes (CMP - ) morphed into Vista Land (VLL - P5.10) and in the process rewarded its shareholders with 150% return when VLL was listed. Please read The Saga Continues . I have also written extensively about Fil-Estate Land (LND - P1.16) and looking ahead, I think the stock remains to be attractive at current levels. Please read Fil-Estate Land
Last Wednesday, Pres. Gloria Arroyo announced that the Philippine economy rose at its fastest pace in 20 years. Based on the recent figures reported by National Statistical Coordination Board (NSCB); GDP in 2Q07 grew by 7.5% versus the consensus forecast of 6.5%. In 1Q07, GDP rose by 6.5%. The GDP number is clear sign that the economy is roaring ahead. To critics, the figures seem incredible. To me, the numbers are believable. Here's why.
The services sector contributed 4.1 percentage point to the overall GDP growth. The sector grew by 8.4% in the said quarter. The biggest driver in the services sector is the business process outsourcing (BPO) industry. In 2007, BPO revenues is expected to grow by 66% to US$3.5bn from US$2.1bn in 2006. Note that BPO revenues are mainly labor inputs - salary and wages. So this means that the US$1.4bn will translate to incremental expenditure in the economy. The burgeoning BPO sector has emerged as the proverbial "silver bullet" of the economy. Based on estimates, for every US$1.0 generated, close to 80% or US$0.80 is kept at home. In other words, the net value-added high. Contrast this to the mid-90s when growth was reliant on electronics export. For every US$1.0 that was generated then, only 20% or US$0.20 is kept at home since most raw materials have to be imported. So looking beyond the headline figures, the numbers are indeed credible.
Wealth stocks
Amidst the backdrop of a roaring economy, investors should focus on stocks that reflect the new found wealth of the Filipino consumers. Clearly, a paradigm shift will emerge as Filipinos change their spending habits. Below are 2 stocks that fall under this category.
1.) Jollibee (JFC - P55.0). Obviously, eating-out as a percentage of overall expenditure will expand. I guess this is already reflected in the recent earnings result of the company.JFC reported that 1H07 earnings rose by 31%. However, what is more important is that top-line revenue continues to grow at double digit pace. This reflects the bullish trend in thefastfood sector considering that Jollibee is the number 1 chain in the country.
Jollibee currently trades at 22.0x PER to 12/07 earnings. My "gut feel" is for the stock to trade at 30x PER - or roughly around P75.0 per share. The potential re-rating should capture the underlying growth of the company and at the same time ride the "wealth effect" paradigm.
2.) Alaska Milk (AMC - P5.10). To some extent, milk consumption is also a proxy play for wealth effect. Milk is not a staple amongst Filipino consumers, however, with higher disposable income brought about by higher GDP growth, milk consumption will likely increase.
I have written about AMC before and its 1H07 numbers further strengthen my belief that the company is a gem-of-a-stock. AMC reported that 1H07 earnings rose by 156% on top of a 183% increase in 2Q07 net income. Again, what's more important is that top-line numbers continue to grow on back of higher selling price per unit and volume recovery. This suggests that consumers are willing to pay more without affecting consumption behavior.
AMC is currently trading at 6.0x PER to 12/07 earning. To my mind, the company should easily be valued at P8.50, equivalent to 10.0x PER to 12/07 earnings. The ingredients for a re-rating are in place: earnings growth + market dominance. The acquisition of Nestle milk brands earlier this year effectively gaveAMC 90% share in the liquid milk market. I guess the valuations are too compelling to ignore.
The property sector on the other hand will mirror the "feel good" effect of the economic boom. What we are seeing right now is that local property sales is growing at a much faster pace than sales to overseas Filipinos. The amount of property ads that we see in major newspapers is a sign that real estate companies are aggressively tapping the local market. This harps back to the property boom of the mid-90s.
However, what we are seeing is a recovery- and not quite a bull market yet. This means that big money can still be made in the sector and investors can position ahead of the curve. Property play will be a major investment theme in 2008 similar to how mining plays emerged in the past 2 years. Note that property prices are still 30-40% below its 1997 peak. In dollar terms, property prices are mere 30% of its 1997 highs. Thus, it is safe to assume that property prices have more room to grow - until such time we see it go back to those levels.
In the coming weeks, I will write more about the property sector and discuss some possible property plays to watch out. We saw how C&P Homes (CMP - ) morphed into Vista Land (VLL - P5.10) and in the process rewarded its shareholders with 150% return when VLL was listed. Please read The Saga Continues . I have also written extensively about Fil-Estate Land (LND - P1.16) and looking ahead, I think the stock remains to be attractive at current levels. Please read Fil-Estate Land
posted by jack galt at
5:59 PM
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