Big Big Trade

Cory + Erap = Power Power Fatigue

2008-03-01T22:32:00.001+08:00

I grew up admiring Pres. Cory Aquino. I was awed by People Power I when I was a kid. I remember those yellow headbands and shirts worn by my sisters during that time. I was too young to know what was going on at that time. All I knew was a housewife drove out an evil person from Malacanang and became the country's president.

I was part of People Power II, when Cory and Cardinal Sin again asked people to troop to EDSA to ask for the resignation of Pres. Erap. It was another glorious moment for the Philippines. Erap resigned and Gloria Arroyo became the president. It shows the magic of people power.

Why is there people power fatigue then? I guess, with Cory and Erap leading the interfaith rally last Friday sums it all up.

I cannot understand why Cory has to stoop down to the level of Erap. I cannot imagine why a God-fearing and incorruptible Cory would share the stage with a convicted grafter and a womanizing ex-president. Let's be straight about it. A thief cannot ask another thief not to seal. The scene speaks for itself. It speaks a lot about compromise and transactional politics. Cory represents the oligarch while Erap represents the "masa". It shows that politicians are willing to compromise principles for the sake of power. So, in the end, it is all about power grab.

I guess, we should put people power in context. Cory has only herself to blame. People are wise enough to see the motives behind their moves. Until a genuine people power is put in place, there is no choice but for the protagonist to slug it out in 2010.

Unfortunately, while all these things are happening, it is the country that is suffering. In the end, we just have to accept that we are mere pawns in this chess game.

It's never too late to buy a stock. It's never too late to sell a stock.

2008-02-28T12:36:00.001+08:00

Turtle Traders

Writings on the Wall: Rate Cut + Meralco

2007-12-05T19:19:00.000+08:00

Buy when the writings are on the wall.

That's the best advice my mentor gave me while I am still a budding analyst learning my craft. As always, the best time to buy is when the writings are on the wall. No amount of technical or fundamental analysis can beat this advice.

Two things have emerged, the US Federal Reserve (US FED) is bent on cutting rates to prevent the US economy from slipping into a recession and the movement of Meralco (MER). I see these events as "triggers" in going back to the market.

Last week, US Fed Vice Chairman Donald Kohn said that policy-makers must be "flexible" and "pragmatic". This triggered a 331 points rise in Dow Jones Industrial Average as Wall St. see this as a signal that the US FED will cut rates when it meet on Dec. 11. Already, the futures market is pricing in a 100% chance that the US Fed will cut rates by 25 basis points and a 50% chance that it will cut rates by 50 basis points.

However, the surprise will likely come from a concerted effort by central banks to simultaneously cut rates in order to shore up the US dollar. More than the looming US recession, the weak dollar is creating havoc in the financial markets. As they say, what goes around, comes around. Previously, it was the US FED that acted as the savior for Japanese Yen and Euro.

In 1998, then Treasury Secretary Robert Rubin initiated a US$2.0bn purchase of Japanese Yen to prevent the Yen from falling below Y150.0 to US$1.0. The move stabilized the currency markets and brought the Yen back to Y135.0 to US$1.0 within days. Interestingly, the Japanese banking system was reeling from a US$600bn bad debt that was accumulated during the go-go years of the late 80's. Please read Can This Yen Be Saved?

In 2000, the US Fed and the Bank of Japan (BOJ) stepped in to buy Euros in order to shore up the currency. At that time, the Euro fell by almost 25% to US$0.85 to 1 Euro from its opening rate of 1.16 Euro to US$1.0 in 1999. Since then, the value of Euro has almost doubled to 1.48 Euro to US$1.0 Please read Euro Crisis

In the local market, I guess the movement of Meralco (MER-P82.50) is a sign of things to come. What's good for Meralco is good for the market. From its low of P68.0 last week, the stock has rallied by almost 22.0%. Meralco, is a bell-weather stock. The move tells us that money will be flowing to the utility/power sector. Two weeks ago, the Dept. of Finance (DOF) sold the 60% stake of the government in PNOC-EDC (EDC - P7.00) for P58.0bn. The winning bidder paid P9.75 per share, effectively paying a 40% premium over the market price of EDC. Next week, the government will bid out the concession of National Transmission Co. (Transco). Proceeds from the sale is expected to reach US$3.0bn. So from the looks of it, utility stocks will likely outperform the market. As always, go where the money is.

The bullish case for Meralco is defensible. Last week, Finance Secretary Margarito Teves indicated that the government is bidding out its combined 29.0% stake in Meralco early next year. Meralco is currently trading at 12.0x PER to 12/08 earnings. On the other hand, EDC, was sold at 18.0x PER to 12/08 earnings. Comparatively, Meralco should be priced within the same valuation range. This should put the indicative selling price of Meralco at around P102.0-115.0 per share.

If my assumptions are correct and the market indeed bottomed out at 3,400 levels, then there is a strong chance that the PSEi will make new highs by 1Q08. Note that the PSEi managed to establish higher lows versus the 2,800 (low) that it reached last August. So how high will the market run? Again, will just have to watch for the writings on the wall .....

For comments, you can send me an email at jack.galt888@gmail.com

Quote for the day: "Managing risk is an art in itself"

2007-12-04T18:04:00.000+08:00

David Harding, Managing Director, Winton Capital Management

Random thoughts: Gold at 28-year high, Peso at P43.20, PSE at P1,300; Asian Godfathers

2007-11-09T17:24:00.000+08:00

Gold gold gold

Gold surged to 28-year high to close at US$831.0. The slumping dollar coupled with renewed credit concern triggered by the US sub-prime crisis prompted investors to bid-up the price of gold. Last September, I wrote about the possibility of gold hitting US$1,000.0, please read: Gold at US$1,000

On a contrary view, I think it is prudent to take some money off the table. I guess, there is too much bullishness right now on gold. Everyone is talking about it. On a risk/reward basis, the trek to US$1,000 represents a 20% upside from current levels. To my mind, the big gains may have already been made.

Peso peso peso

Peso closed at 7-year high to reach P43.22 to US$1.0. The break below P44.0 confirmed the long-term uptrend of the the Peso. Most likely, we will see the Peso at P40.0 to US$1.0 by year-end.

The situation right now is an interesting turnaround of the Asian currency crisis that happened 10 years ago. Investors are now shifting out of US assets and moving into other better yielding currencies. Note, that the Asian currency crisis triggered the longest bull-run in US equities market that saw the Dow Jones rose from 3,000 to 11,500 in a span of 4 years. During that period, investors shifted their money out of emerging markets and poured money into the US market.

Analysts are arguing that the "dollar crisis" will have the same effect on emerging markets. My only concern is that the world cannot be immune from the slowing US economy. Unless, we see a clear decoupling, emerging markets will continue to be baffled by the weak US markets.

However, what is obvious is that emerging markets have outperformed the US market since July. Exchange rates are leading indicator for the markets. Funds will most likely invest in markets with an appreciating currency. Since 2002, the US dollar has fallen by 50% against major global currencies. On the other hand, the Peso has appreciated by 23% during the said period. Thus, on a relative basis, the Peso still has a lot of room to appreciate. This might be the catalyst for the Philippine market.

PSE at P1,305

Shares of local stock exchange operator, Philippine Stock Exchange, Inc. (PSE) rose to as much as P1,400 before settling at its current price of P1,305.0. PSE turned out to be my best pick (so far) for 2007. The good thing about PSE breaking above P1,000 is that member-brokers are now more willing to sell their stake. Note that the Securities and Exchange Commission (SEC) has mandated that member-brokers should hold no more than 20% stake in the exchange.

A PSE that is majority owned by institutional investors will generate better shareholder value in the long-run. It is quite ironic that an entity that regulates listed companies cannot even get its own stock dividend approved. Hopefully, with better shareholder mix, PSE can move towards professionalizing how it manages the business and at the same time maximize shareholder return.

For one, I cannot imagine why PSE should be sitting on close to P2.0bn cash that generates a measly 5% return whilst the PSEi is hitting new highs. PSE should come up with a dividend policy that pays out quarterly cash dividends to its shareholders. The exchange does not need to have excess cash in its book considering that it generates close to P150m cashflows per quarter. To my mind, the annual dividend pay-out should be P32.0 and not P8.86 per share.

Please read my past articles on PSE:

Hidden Gems

Hidden Gems II

PSE at P850.0

Current read: Asian Godfathers - Money and Power in Hong Kong and South-east Asia.

Asian Godfather is an interesting narration on how few "godfathers" control the economies of Hong Kong and Southeast Asia. The book, by Joe Studwell, compares these "godfathers" to the mafia overlords in New York who's business competencies are acquired through "concessions" and "wheeling-dealing" rather than innovating.

The book also gives a historical insight on how the "godfather" class emerged during the colonial times and how it continues to maintain its position.

Amongst the Philippine tycoons mentioned in the book are Henry Sy., John Gokongwei, Lucio Tan and Jaime Zobel de Ayala.

For reference,please read the commentary by William Pesek; Strictly Business: Godfathers in South East Asia. Please read: Godfathers in Asia

For comments, you can send me an email at jack.galt888@gmail.com

Quote for the day: "Survive first and make money forward"

2007-10-22T00:41:00.000+08:00

George Soros

Quote for the day: "My theory is that the next bubble will only come when everyone stops talking about bubbles all the time"

2007-10-12T12:49:00.001+08:00

Marc Andreessen, Founder, Netscape Communications

Quote for the day: "Never risk what you can't afford to lose"

2007-10-11T14:50:00.000+08:00

Anonymous

Weekend Notes: Peso at P25/US$1

2007-10-08T22:49:00.001+08:00

Over the weekend, an article came out in Manila Standard quoting Albay governor Joey Salceda as saying that the Peso will reach P25.0 to US$1.0 in 5 years on the back of strong economic growth and continuously rising remittances. He further said that “I’m thinking [that because of these factors], in five years the peso would go back to the 25 [level]. It’s very clear as sunlight." Please read: Peso seen rising to P25/US$1

The call made by Gov. Salceda might sound like a "Marco Barrera upset" for now, but we should not take this lightly. After all, Gov. Salceda is the chief architect of the country's economic turnaround which saw second quarter gross domestic product (GDP) growth hit 7.5% - the highest level attained in 15 years.

To me, the level as to where the P/US$ rate will settle is immaterial. The most important thing to know is that the Peso is clearly on an uptrend (period). Below are the factors that will sustain the Peso uptrend in the coming years:

1.) Rising dollar inflow. Aside from OFW remittances, revenues from business process outsourcing (BPO) industry is growing at US$1.5bn annually. BPO revenues can potentially be as big as the remittance market. In 2006, total OFW remittances reached US$12.7bn and will likely hit US$15.0bn this year. On the other hand, the BPO industry generates US$4.0 in revenues and is expected to grow by 30% per year. Since BPO is mostly labor inputs, it is safe to assume that 85% of revenues will be kept in the local economy.

2.) Dollar savers no more. The past 10 years saw a massive increase in foreign currency deposit unit (FCDU) held by local individuals. This explains why the Peso remains at 69% below its pre-crisis level of P26.5/US$1. Local "savers" are the biggest hoarders of US dollars. Amidst the specter of a falling US dollar, local "savers" will likely shift their savings to Peso denominated assets. A key break below P44.0/US$1.0 will trigger a massive withdrawal of FCDU accounts.

3.) Compelling relative values. Traditionally, Thai Baht and Peso traded at parity. Currently, Thai Baht is at 34.029 whilst the Peso is at P44.75. This implies that Thai Baht is trading at 30% premium to the Peso. Considering that the Philippines has a much better growth outlook than Thailand, the premium is unjustified. At most, the Thai Baht should be trading at 15-20% premium over the Peso. This suggests that on a relative valuation, Peso should be hovering between P38-P41/US$1.0 levels.

An appreciating currency will definitely generate positive funds flow. To my mind, the movement of Philippine Long Distance Tel. Co. (TEL-P3,100) was driven mainly by the expected appreciation of the Peso. The fundamentals of TEL has not changed since the market bottomed last August 22. The surge in the share price of TEL merely mirrored the movement of the P/US$ rate. TEL is usually a leading indicator on where the P/$ rate is going.

However, in the long-run, the biggest beneficiary of an appreciating Peso will be property values. Property prices will have to adjust versus the value of the currency. Thus, as mentioned, the next big thing in the stock market will be property plays.

For comments, you can send me an email at jack.galt888@gmail.com

Weekend notes: Property - the next big play, Peso to hit new highs

2007-09-30T20:50:00.000+08:00

Property - the next big play

Property stocks are set to take center stage. After mining, the property sector staged the biggest comeback since the market hit bottom last August 17. The PSE property index rose by 27% compared to the 24% increase in the PSEi Index. On the other hand, the mining index rose by 66.3% during the same period.

Mining stocks rose on the back of the decision of the U.S. Federal Reserve (US Fed) to cut rates by 50 basis points to 4.75%. The move led to a weaker US Dollar which boosted the value of gold and other base metals. Analysts term this as "asset reflation". In other words, prices of assets are moving inversely proportional to the value of US Dollar.

The "asset reflation" that we saw in the mining sector should spillover to the property sector as well. Real estate assets are no different from gold and other base metals. Real estate values will also move inversely proportional to the value of US Dollar. The Hong Kong market reached new highs in the past month on the back of an expected property revaluation. The Hang Seng Index (HSI) is heavy on property counters.

Hong Kong is viewed as the proxy for the property sector in the region. In other words, the "property revaluation" will eventually spillover to the rest of the region. Hong Kong essentially triggered the property bull-run in the early 90s.

Locally, the crucial event to watch out is how the bidding for the remaining lots in Fort Bonifacio pans out. The government is set to bid out 1.2-hectare lot in Fort Bonifacio Global City for a minimum bid price of P160k per square meter. Already, 8 bidders have signified interest. My gut feel is that the bid will likely surprise on the upside.

In 1996, lots in Global City sold for P168,000.0 or US$6,350.0; based on P26.5:US$1.0. Fast forward to 2007, the P160,000.0 is equivalent to US$3,550.0 at current exchange rate. So, in effect, the asking price is still 44% below what it was 10 years ago. To approximate the value paid in 1996, price per square meter should go up to P292,000.0. This leaves a lot of room for upside.

I have written a lot about the upcoming property boom. However, the most compelling argument is that property prices are nowhere near the levels we saw in 1996 despite that fact that per-capita income has doubled to US$1,400 while the PSEi index has climbed back to the 1997 levels. Everything else equal, property values should follow.

As mentioned, Fil-Estate (LND-P1.22) is my top-pick. The expected property revaluation will further enhance the value of LND considering that it owns close to 3,000 hectares of landbank. Based on its current market capitalization of P3.5bn, the implied value of its landbank is just P1,166.0 per square meter. This is way "too cheap" considering the prospects of asset revaluation and an ongoing turnaround plan. To date, LND has arranged close to P2.5bn worth of financing to complete its various projects.

I am also looking closely at SM Dev't Corporation (SMDC - P4.30). From the looks of it, the SM group will likely consolidate all its property and tourism ventures under SMDC. After successfully merging Equitable PCI Bank with Banco de Oro (BDO - P56.0) in 2007, it would not be a surprise to see SM Group make a major move in 2008 to restructure its property and tourism assets under one listed vehicle. Already, Henry Sy has mentioned that the next big thing for the country is tourism. Simply put it, follow where the billions are going.

Peso to hit new highs

A leading investment bank has predicted that the P/US$ rate will hit P42.0 to US$1.0 by end of the year.

The best gauge on where the P/US$ rate is heading is to look at the movement of Philippine Long Distance Telephone Co. (TEL - P2,950.0). TEL, the largest Philippine company by market capitalization, is a proxy for foreign funds flow.PLDT rose by 30% since it hit bottom last August 17. Typically, the P/US$ rate captures 60% of the movement of TEL shares. So base on this, the P/US$ will likely appreciate by 18% from its recent low of P47.00 to US$1.0, to around P40.0.

TEL is the only PSEi component stock that made new highs after the market rout. There is no material change in the fundamentals of PLDT. The move merely reflects a looming Price Earnings Ratio (PER) expansion. TEL is currently trading at 16x PER to 12/07 earnings - its highest level in more than 5 years. So most likely, other PSEi component stocks will follow.

For comments, you can send me an email at jack.galt888@gmail.com

Weekend Notes: Another "P" for Jollibee (JFC-P52.0), The GEO Grace (GEO - P1.96) phenomenon

2007-09-24T17:46:00.000+08:00

Another "P" For JFC

JFC added another "P" in its "4P" metrics.

Last Friday, JFC announced that it will acquire Beijing based Hongzhongyuan chain of congee restaurants. JFC is paying US$50.5m for the acquisition. In a disclosure, the company said that Hongzhongyuan operates 33 stores and generates close to US$24.5m in sales. It also mentioned that Hongzhongyuan is "highly profitable" and debt-free. This is the second acquisition of JFC in P.R. China. In 2004, JFC paid US$22.5m for a controlling stake in Shanghai-based Yonghe King. This brings JFC total store count in P.R. China to 138.

The acquisition should bolster the potential of JFC. China is a vast market for JFC to grow. Each province in China can potentially be as big as JFC's reach in the Philippines. I am confident that JFC can replicate its success in Yonghe King. In 2005, Business Week named Yonghe King as "Top 10 Most Valuable Brand Franchise" in China. From how things are shaping, JFC will likely develop a "home-grown" franchise for each province in China to suit the local taste.

As a "4P" stock, the value of JFC should approximate its average growth prospects in the next 3 years. JFC is currently trading at 17.0x PER. To my mind, JFC should trade at around 20-22x PER.

The GEO phenomenon

Is GEO a "hype" or a "reality"?

GEO has a market capitalization of P5.0bn. On paper, it has P500m in cash that was generated from the recent rights offering and P173.0m worth of mining claims. For 2008, GEO expects to generate US$70m in revenues and US$20m in net income. So from a valuation perspective, GEO trades at 7.4x and 7.8x Price to Assets (P/A) and Price to Earnings (PER) respectively based on 2008 forecast.

Thus at these levels, valuations look "hyped-up" and the "reality" of seeing any earnings is still months away. Who knows what will happen to commodity prices in 2008.

However, more than the argument on "hype" or "reality"; GEO is a phenomenon that we cannot ignore for as long as the commodity boom stays its course. GEO is a proxy play on the renaissance of the local mining industry. Based on estimates, the sector is expected to generate US$6.0bn revenues by 2010 or roughly 10x what it was three years ago. In 2004, total mineral output reached a mere US$650m. What is happening to GEO is a microcosm of the turnaround in the mining sector. Despite the huge run-up of mining stocks, the combined market capitalization of the sector is "just" P85.0bn. This suggests that mining is still underrepresented in the market. For comparison, Megaworld (MEG - P3.20) has a market capitalization of P60.0bn.

Looking back, the "GEO phenomenon" is not an aberration. It is a reality that we saw during past booms - internet, property, telecoms, emerging markets etc. At the height of the internet boom, 2 stocks that best reflect this phenomenon are College Marketing Group, Inc. (CMGI) and Softbank Capital (SB). Both companies saw its market value surge from less than US$1.0bn to almost US$140.0bn. CMGI and Softbank seeds start-ups that will eventually become major players in their markets. Some notable names include Yahoo, eTrade, Snapfish and Geocities.

So, beyond "hype" or "reality"; investors should learn to live with the phenomenon.

Quote of the week

Henry Sy: You cannot just depend on what is happening; you should always be ahead. Many of the things that we do are not according to market trends

Deconstructing Henry Sy, The Asset, July/Aug 2007 Issue

For comments, you can send me an email at jack.galt888@gmail.com

"4Ps" - Finding the next Starbucks in the Philippines

2007-09-21T17:15:00.000+08:00

Last week I wrote about the "4Ps" - great People, leading Products, huge Potential and Predictability, that was coined by Michael Moe, founder of Think Equity Partner as a basis for finding the next winners. To know more about the "4Ps", please log on to www.findingthenextstarbucks.com.

I received several emails asking me if the "4P" methodology is applicable to Philippine companies. Obviously, the answer is YES. Two companies that come to my mind are Jollibee and SM Prime Holdings. Let's look back and see how these 2 stocks performed since it went public.

Jollibee (JFC - P52.0) was listed in 1993. Its market capitalization upon listing is P3.3bn. Systemwide sales at that time was a "mere" P4.1bn. Today the company generates P34.0bn in revenues with systemwide sales reaching P44.0bn - roughly 10x from where it was 14 years ago. Its current market capitalization is P52.1bn. Earnings, on the other hand is expected to hit P2.5bn this year or 8.6x more than the P290m it reported in 1993.

So, if you kept your Jollibee shares since IPO, your P6.0; would have grown 9x to P52.0. On top of that, the company paid out P2.35 in cash dividend which further reduces your investment cost to P3.65 per share.

As a budding analyst, Jollibee was one of the first companies I covered. I was fortunate to have a one-on-one interview with its founder, Tony Tan Caktiong. Skeptics were saying that the Philippines cannot support the growth that its founder has set. At that time, there are less than 100 Jollibee sores. I remember vividly Mr. Tan Caktiong saying that he envisioned Jollibee to have 500 stores in 10 years. Today, after 14 years, Jollibee has a total of 1,559 stores - outpacing even the target set by Mr. Tan Caktiong.

So let's do the "4P" test on Jollibee.

First, great people. You can never argue with a visionary. Mr. Tan Caktiong set out to build Jollibee into the biggest quick service chain in the country. He has the distinction of beating US fastfood giant McDonald's in its own ballgame. Second, leading product. "Chicken Joy" is the top selling fastfood item in the country. It is something that Filipinos all over the world craves for. In fact, "Chicken Joy" brought Jollibee to where it is now. Third, huge potential. Jollibee leveraged its expertise in the quick service sector by expanding into other sub-segments of the market and eventually being leader at that. It owns the number one Chinese fastfood chain - Chowking, the largest pizza chain - Greenwich Pizza and the biggest bakery outlet - Red Ribbon. With the way things are going, Jollibee can more than double its current size to 5,000 stores by 2012. Fourth, predictability. It is very easy to estimate the earnings of Jollibee. Drivers for earnings growth are clear - revenue per outlet multiplied by number of stores. For the past 14 years, the company has consistently delivered double digit earnings and revenue growth. Based on current trend, earnings for Jollibee can reach the P5.0bn mark in the next 5 years.

SM Prime (SMPH - P11.0) was listed in 1994. Its market capitalization upon listing was P29.3bn. Total revenues was P2.2bn with net income reaching P1.0bn. There were only 3 SM Malls operating that time. During its IPO, SMPH was priced at a lofty 29x PER. Analyst said it was overvalued. However, Mr. Henry Sy stuck to his vision and mentioned that the growth potential of SMPH far outweighs its lofty valuations. During the roadshow, Mr. Sy mentioned that SM Malls will be present in all major cities in he Philippines and promised that earnings will grow by at least P500m every year. People doubted but the taipan persisted.

Today, SMPH generates P15.0bn in revenues with earnings expected to reach P6.0bn. By year end, there will be 31 SM Malls nationwide. On the other hand, its market capitalization has reached P130.0bn. From its listing, shares of SMPH have risen from dividend adjusted P2.36 per share to P11.50 - or roughly 400% return. During the same period, the company paid out close to P2.0 in cash dividend.

So let's do the "4P" test on SMPH.

First, great people. No one can argue with the richest man in the Philippines. Mr. Henry Sy set out to build SMPH into the biggest retailing concern in the Philippines. No doubt, he is Sam Walton's counterpart in the Philippines. Second, leading product. SM Mall has the largest retail space in the country and commands a 30% price premium over its nearest competitor. I guess, the 50% net margin is a testament to this leadership. Third, huge potential. Until such time that SM Mall is present in all the major cities in the Philippines, skeptics should stop asking how SMPH can grow its revenue. The 31 malls in its portfolio today, can potentially be 100 malls in 10 years. Fourth, predictability. Like Jollibee, earnings drivers for SMPH are clear - revenue per sqm. multiplied by the number of retails space. For the past 13 years, earnings for SMPH has grown by an average of 25% p.a.

No doubt SMPH and JFC are "4P" stocks that investors should own. Incidentally, Henry Sy is the biggest shareholder in JFC outside the Tan family. It shows that Mr. Sy practices the "4P" principle in his investments as well.

For comments, you can send me an email at jack.galt888@gmail.com

Technicals vs. Fundamentals: It's all about risk management

2007-09-19T09:37:00.000+08:00

One of the most debated topic in stock investing is whether to use technical or fundamental analysis. To me, its a non-issue; both analysis are as important. In simple language, technical analysis tells us when to buy whilst fundamental analysis tells us what to buy. Investors should use both in coming up with their investment decisions. In fact, even "purist" on either sides cannot ignore the fact that they use both analysis in arriving at their conclusions. Investors who use fundamental analysis will ultimately based his/her decision on certain fair value assumptions which is based on price. On the other hand, investors who use technical analysis will refer to certain fundamental reasons - be it a hot tip, rumors, earnings news etc. in choosing which stock to chart.

Investing is not an exact science. No system can predict with certainty which way a stock price will move. It boils down to probability. The most important thing, to my mind, is how risk is managed. As a regular reader of Finance Manila , I suggest to keep a close watch on the posts of agent_tracker and Mark T. Market. These guys are good in presenting their arguments using both technical and fundamental analysis.

Previously, I talked about how I apply the "rule of 3" in allocating my portfolio into three groups of stocks based on expected returns: speculative, long term and patient bets. Please read: Rule of 3 I also follow the "rule of 3" in building my stock position. As a rule, I buy stocks in quantities that are divisible by 3. This allows me to divide my holdings into three, 1/3 positions. The first 1/3 is my "trading" position whilst the other 1/3s are my "core" and "insurance" positions. The trading position is for me to trade out the price range whilst waiting for the price to go up. By doing so, it helps me lower my average cost and at the same time hedge my bets just in case things go wrong. On the other hand, my "core position" is what I long until the stock reaches my target price. Finally, my "insurance position" is what I keep after I sell my core and trading positions. Most likely, by that time, the "insurance position" has zero cost in my books. So whatever happens, I have already realized the full benefit of my position.

Thus, by combining technical and fundamental analysis, one gets to manage portfolio risk. In the end, it is not about winning all the time but more about winning most of the time that matters.

For comments, you can send me an email at jack.galt888@gmail.com

Weekend Notes: Gold, Banking sector + The 4 Ps

2007-09-10T11:05:00.000+08:00

Gold at US$1,000?

It seems that gold is heading towards US$1,000.0 based on its recent price action. For the first time this year, gold closed above US$700.0. A chartist friend of mine told me over the weekend that a major breakout is in the works for as long as the central banks would refrain from selling gold in the open market.

I totally agree with my friend's observation. There are two things that will trigger a breakout. First, the US Federal Reserve will likely cut interest rates by more than 75 basis points in. Based on the futures number, the expectation is for a 25-50 basis points cut in overnight borrowing rate. The US job report for august - which saw the labor market shrunk by 4,000 jobs, will likely fuel this move. This is the first time since 2003 that the US economy registered negative job growth. Second, holdings of US treasury bonds by government and central banks at US Federal Reserve fell by 3.8%, the steepest decline since 1992. Please read: Treasury Rally May Falter These two trends will likely see the US dollar trade lower in the coming weeks. Considering that gold price is inversely correlated to US dollar, I must say that the writings are clearly on the wall.

Banking sector consolidation seen

Investment banking giant UBS Securities Philippines is bullish on the banking sector due to reforms seen leading to better asset quality, loan growth and operating efficiency. They also expect mergers and acquisitions (M&As) to perk up the industry with the top 3 banks -Metrobank (MBT-P55.0), Banco de Oro (BDO-P58.0) and Bank of P.I. (BPI-P62.0) expected to acquire banks with specific niche. Please read: UBS Bullish on RP Banks

The best way to play the sector is to look at banks that will likely be the targets. I do believe that both Security Bank (SECB - P72.50) and RCBC (RCB - P23.75) are candidates for acquisition. SECB has a strong niche in the mid-size/Chinese merchant market that will fit nicely into BPI's portifolio. On the other hand, RCB can provide the "asset boost" to either BDO and MBT in their quest to become the largest bank. RCB is also the cheapest bank in the sector at .80x P/Bv giving investors the best upside potential in any m&a plays.

The 4 Ps

I am currently reading "Finding the Next Starbucks" by Michael Moe. The book was recommended by CKP through his blogsite www.ckp168.com. Mr. Moe is the founder of ThinkEquity Partners - an investment management company based in San Francisco. During his stint as an analyst in Merrill Lynch, he was amongst the first to recommend Starbucks Coffee Co. The company turned out to be one of the best performing stock in the last decade. From a mere US$250m company during IPO in 1992, Starbucks now sports a market capitalization of US$20.0bn

In looking for the next big winners or the next Starbucks, Michael Moe suggests that we focus on the 4 Ps - great People, leading Product, huge Potential, and Predictability. Please log on to www.findingthenextstarbucks.com to read excerpts from the book.

Wealth Effect

2007-09-03T17:59:00.000+08:00

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

Quote: "I can spend money faster than Imelda Marcos when things are right"

2007-08-22T11:18:00.000+08:00

Warren Buffet, Chairman, Berkshire Hathaway

"Investors are far more concerned about missing the next leg in the bull market on the upside, than about the risk of losing a lot of money"

2007-08-19T22:27:00.000+08:00

Marc Faber, www.gloomboomdoom.com

Quote for the day: "It's always darkest before dawn."

2007-08-17T14:17:00.000+08:00

Author unknown

Vista Land (VLL - P6.855) - The good, the bad and the ugly

2007-07-21T15:56:00.000+08:00

I replied to a comment by a reader regarding VLL. Please read
The Saga . I guess to be fair to my readers, let me "blog" down my comment.

Let me start with the "ugly". Investors are hesitant to subscribe to the offering because of the poor performance of Aboitiz Power (AP - P5.60)

Lets put the performance of AP in perspective. The offering price of AP was priced at a premium to the utility/power sector average valuation. So this means that investors are better off buying other cheaper utility counters like Meralco (MERB - P100) , Manila Water (MWC - P14.50), First Generation (FGEN - P68.0) which trades at 20% discount to AP's offering price. Obviously, the market has to correct the disparity. Besides, its parent - Aboitiz Equities (AEV) never traded at a premium. So from the start, its a long shot for AP.

What's "bad" about the offering of Vista Land is that investors are still haunted by the the C&P Homes debacle that happened at the height of the financial crisis. In 1999, the company defaulted on US$150m worth of debt leaving investors with worthless papers. I guess the "C&P" stigma is just hard to shake-off. However, taking out "emotions" from our judgment, the situation is not unique to C&P Homes. Most heavily indebted companies went through that phase as well. So it is unfair to single out C&P Homes. What we have to realize is that companies that have undergone successful restructuring are the big winners in this market. Think Bepnres (BPC - P5.30) and Meralco (MERB - P100.0). In fact, the market has voted. Share price of Vista Land/C&P Homes rose by as much as 406% in 2007, making it one of the best performing stock in the market today.

So what's "good" about the offering is that the fundamentals of the company have gotten better. C&P Homes is a totally different animal after the company was acquired by Vista Land. So how do the numbers stack up?

My price target for VLL is between P8.0-P10.00. This has been my target since I recommended C&P Homes last February. Vista Land is expected to make P3.5bn net income this year. This translates to a Price Earnings Ratio (PER) of 18x to 12/07 earnings. Both Megaworld (MEG) and Filinvest Land (FLI) trades at 30x to 12/07 earnings. Assuming VLL trades at 25x PER, this should bring its price to P9.40 per share. I feel that 25x is a fair PER vis-a-vis MEG and FLI. My premise is that we are just at the beginning of the property bullrun where earnings are likely to surprise than disappoint. Thus the higher PER is justified at this point on the back of an anticipated re-rating in the coming months.

Note that after the offering, VLL will have a net cash position of P8.0bn and roughly 1,100 ha. of land bank to develop. This will make VLL one of the better capitalized property company in country. This gives VLL an enviable war chest to parlay in the booming property sector. Simply put, the turnaround chapter is now in play.

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

2007-06-25T17:04:00.000+08:00

Ken Lewis, CEO, Bank of America

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

2007-06-21T17:05:00.000+08:00

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"

2007-06-15T16:04:00.001+08:00

Author unknown

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

2007-06-13T10:45:00.000+08:00

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)

2007-06-07T16:17:00.000+08:00

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."

2007-06-06T18:26:00.000+08:00

Author Unknown

Lessons From The Elections

2007-05-20T23:18:00.000+08:00

Voting in the elections and investing in the stockmarket are similar in a lot of ways. The recent elections gives us some valuable investment lessons that we can adopt.

First, it's not about popularity. Manny "Pacman" Pacquiao - a 130 lbs world boxing champion was floored by a 90 lbs incumbent congresswomen - Darlene Antonino Custodio. People might see this as an upset considering that the Pacman is a national icon. In reality, the odds are stacked against the Pacman from the very start. First, his fans don't want him to run and instead wanted Pacman to focus on boxing. Second, Pacman is popular nationwide but opted to run for a local post. However, in General Santos City, the Antoninos are as popular as the boxing champ. So it evens out the popularity factor. Third, its the machinery that counts. The Antoninos have dominated local politics for the past 40 years. Its machinery is entrenched whilst Pacquaio has none. This is the same predicament faced by losing celebrity candidates like Richard Gomez and Ceasar Montano.

In the stock market, the odds of choosing the winners or "outperformers" are driven by the following: fundamentals of the company which is dictated by earnings and earnings growth and valuation.

Since January 2006, the PSEi has risen by 74%. While 95% of the stock has appreciated, the biggest winners are stocks that have shown significant improvement in their fundamentals and not necessarily the popular stocks. Amongst the big winners are:

1.) Geo Grace (GEO: P.0675 - P2.20) - from a losing holding company called Global Equities, the company was transformed into a major player in the local mining industry.

2.) Republic Cement (RCM: P0.84 - P5.80) - price of cement continue to surge on the back of resurgent property sector. At P0.84, RCM was trading at 2x PER compared to 10x PER of market peer Holcim (HLCM - P9.10). The discount was too good to ignore.

3.) Philipine Stock Exchange (PSE: P145.0 - P600.0) - surging local equities market and comparative valuation of other exchanges makes PSE a "steal" despite the never ending politicking amongst the board members. PSE trades at 17x PER compared to the average 35x PER of regional exchanges.

Second, (always) do your homework. Team Unity (TU) won the elections despite losing the senate battle. Obviously, TU did their homework by ensuring victory in the local elections and conceding the senatorial race where they have little chance of winning. How did TU achieve this? They fielded 2 allies in areas where they are weak. In the end, 90% of the the TU candidates in the local elections won. In the the congressional race, estimates show that opposition lawmakers are now down to 20 from around 50 during the last congress. This will ensure that the President will not be impeached. This is a classic case of winning the war and losing the battle.

A lot of times, investors would ask for "tips". Instead, investors should try to do their own research. You only need some common sense to interpret what the disclosures are saying. Don't be afraid. Just go ahead and read the fillings. In fact, the Philippines has one of the most stringent disclosure requirements amongst the Asian markets. The SEC fillings and the PSE disclosures offer a lot of insights on where the companies are heading.

I stumbled upon PCI Leasing (PCIL - P2.38) at the start of the year when the stock was trading at P1.34. What attracted me to the stock aside from its valuation - 0.80x P/BV vs. 1.8x average P/BV of non-bank financial stocks; is that the company has been paying out dividends and has an existing stock buy back program. In 2005, the company paid out P0.20 cash dividend, declared 120% stock dividend and bought back around P90m worth of shares. So, with 2006 earnings growing by 12% to P441.0m, PCIL should be able to sustain its dividend and buyback program. Besides with Equitable PCI Bank owning 85% of the shares, there is very limited free float in the market. So with share price appreciating 74% this year, i guess doing some research will yield good returns in the long run.

Hope these lessons will make us better investors.

Quote for the day: "The world awaits. This is what you have been waiting for. Let's get ready to rumbbbleeee ..."

2007-05-20T23:15:00.000+08:00

Michael Buffer, Voice of Champions, de la Hoya vs. Mayweather; May 5, 2007

Power Play

2007-05-07T11:38:00.000+08:00

As I mentioned at the start of the year, the key theme for 2007 is to overweight power/utility sector. Let me share with you some excerpts from the power sector report of Citiseconline.com. Both analysts - George Ching and Paul Lu got it all right. There is a clear paradigm shift in the industry that merits a second look.

Here are some highlights of the report.

1.) Power sector reform in place. In 2006, the government launched the Wholesale Electricity Spot Market (WESM) to create a competitive market for trading of electricity for the power sector. This will spur new investments, as the economics of the sector will move from regulatory bias to market driven parameters. Next step in the reform agenda is to move the pricing mechanism to Performance Based Regulation (PBR) scheme from the current Return or Rate Base (RORB). In simple terms, PBR will allow utility companies to charge rates based on their efficiency versus the current framework of charging based on a fixed return.

2.) Privatization play. Last year, Power Sector Asset Liability Management (PSLAM) was able to sell 472 MW of government owned power generation assets. In the next 3 years, the PSALM is looking to sell 5,580 MW of power assets. On top of this, is the pending privatization of TransCo.

3.) Electricity shortage. In the next 10 years, government estimates that additional 4,074 MW of installed power is needed to meet the country’s power demand.

Against this backdrop, I guess it’s a matter of time before power stocks become in vogue again. As I always say, buy when the writings are on the wall. So let me give you my take on how these factors can boost the sector.

1.) Go where the money is. As always – “show me the money”. Based on my estimate, proceeds from privatization and investments in new capacity will reach US$10.0bn in the next 5 years. The privatization of TransCo is expected to fetch US$3.0bn while the construction of 4,072 MW in new capacity will have an implied investment value of US$4.2bn based on US$1.2m per installed MW.

The power sector is in the same situation as the telco industry in the late 90’s. During that period, we saw a dramatic shift in sector fundamentals as the industry moved from landline to mobile and - from analog to digital/internet - thereby generating new wave of money. Note that shares of PLDT and Globe during that period were trading at 1/5th of their current value.

2.) Demand driven dynamics. Clearly, there is a looming power shortage. This means that power companies have the pricing advantage. As power generation is an incremental business, any increase in capacity utilization will go straight to bottom-line. Most power companies are still operating at slightly above 80% utilization. This means there is still upside for earnings expansion based on current utilization.

3.) Room for re-rating. Obviously, 2 stocks that come into play are First Generation Holdings (FGEN – P58.50) and EDC Energy (EDC – P5.90). FGEN is currently trading at 8.7x PER whilst EDC is valued at 10.0x PER. These valuations have not reflected the paradigm shift in the sector. So, I guess a re-rating to around 12.0x – 14.0x PER for both companies should generate at least 30-40% upside from current levels.

Even if we exclude the sector upside, FGEN and EDC are cheap since both companies are currently generating above market return on equity (ROE) of 17.1% and 54.7% respectively. So, in itself, both companies deserve to trade at a much higher valuation.

So, looks like another win-win scenario to boot.

Quote for the day: "Some men see things as they are and say "Why?". I dream things that never were, and say "Why not?"

2007-04-18T14:42:00.000+08:00

George Bernard Shaw

The Prince and the Ayalas - another bull out of the pen

2007-04-03T22:25:00.000+08:00

Saudi Prince Alwaleed bin Talal bin Abdulaziz forged a joint venture agreement with Ayala Land (ALI – P16.50) to build a US$153.0m hotel complex in Makati. Please read

Prince

I guess this is another event that will unleash the property bull. Earlier, I wrote about how Lucio Tan triggered the property bull. Please read:

Lucio Tan

Prince Alwaleed, aside from being the 13th richest man in the word, is a major player in the global real estate market. He is touted as the Donald Trump of the Middle East. He is also the biggest single shareholder in Citigroup. I guess, a vote from the Prince is something we should not pass-up. As I always like to say, buy when the writings are on the wall. This is clearly the scenario right now. The Prince has written the “bull sign” for us to overweight property stocks.

The case for a property bull is easily defensible. Here are my arguments:

1.) Income and wealth factor. Since 1997, per capita income in dollar terms, has risen from US$1,000.0 to around US$1,300.0. In peso terms, income has actually doubled during the same period. On the other hand, stock market capitalization has risen by 300% since it bottomed in 2001. All these point to the fact that there is a lot of excess wealth sitting around in the economy. Wealth is the key driver for pushing up property prices. As we have seen in 1997, property boom is almost always preceded by significant growth in income and wealth accumulation.

2.) Crisis values. Property prices have not moved since falling an average of 60% from its 1997 peak. Note that in 1996, lots in Makati CBD went as high as P460k per sqm. Currently, lots in the same area are doing at around P130k to P150k. This means that prices still has a lot of room to appreciate. In dollar terms, property prices are mere 20% of its 1997 peak. Assuming property prices go back to its 1997 values, it will still be 42% lower in dollar terms.

3.) It is still quiet out there. I guess the strongest argument for a property bull is that no one is talking about it yet even if there are clear signs that the sector is turning around. This means majority of the people are not convinced that a property bull is forthcoming. Remember, bull markets are born out of skepticisms. This is similar to smart investors buying stocks when the PSEi was trading at the 1,500 levels.

In the long run, “market” will always correct itself. We have seen the P/$ rate appreciate from P55.0 to P48.1 and PSEi rose from 1,000 to 3,200. I guess it is a matter of time before the property sector do the same. In the end, we just have to keep our eyes open and follow where the billions are going.

One year of Big Big!

2007-03-25T12:56:00.000+08:00

Time flies!

Little did I notice that it has been over a year since I started blogging in Big Big Trade. I wrote my first entry on March 1, 2006 about the property sector, please read

Property Sector

At that time the PSEi was trading at around 2,050 - 2,250 range. To date, I have written over a hundred entries and gotten numerous feedback (including criticisms) from my readers. The PSEi is currently trading at around 3,000 - 3,200 levels. Honestly, I am amazed with how fast I can convert thoughts to action ideas. I guess, I have my readers to thank, for inspiring me to do so.

Big big on the map.

There are several notable calls that I made and some "duds" along the way. Stocks that put Big Big Trade on the map are Philippine Stock Exchange (PSE - P650.0), Republic Cement (RCM - 5.80) and JG Summit (JGS - P12.75). These 3 stocks have returned an average of 350% since March 2006 compared to the 58% rise in the PSEi. As always, we have the market to thank for - and not ourselves, for bringing the stocks to its right value. I guess its not being right all the time but being right most of the time that counts.

One of the most common question from my readers is my investment philosophy.

Essentially, my investment principle is to find value. I usually look for stocks that are trading way below its "real" value, sit on it and harvest the returns when the market properly price the stock. As always, my favorite philosophy is to buy when the writings are on the wall rather than play hero. As my mentor would always remind me, " In the stock market, heroes are guillotined". I am not too worried about short term price swings for as long as I am confident about the value of the stock. Eventually, the market will finds its way to pay the right price for the stock. As for risk management, I always stick to my 25%-50%-25% rule. Instead of limiting my exposure to certain number of stocks, my strategy is to group the stocks into three baskets - patient, long term and speculative bets. Please read

Rule of Three

So what's up for the market in the coming months. I believe that the PSEi will trade at new highs within the year. Here's why:

1.) Mismatch in income growth and market capitalization. Since 1997, the country's GDP has expanded from US$62.0bn to around US$96.0bn in 2006. The close to 50% expansion in the country's GDP has not yet been captured by market. In dollar terms the PSEi is still trading 54% below its 1997 highs. Eventually, the market has to correct this discrepancy. So, seeing the PSEi rise further from current levels is very defensible. Assuming the market tracks the 1997 highs - in peso terms, this should bring the PSEi to 6,250. I am not saying that this will happen in the next 24 months. Long term - say 3 to 5 years, this can be the psychological target that the market is looking at.

2.) Price Earnings Ratio (PER) expansion. Moving forward, I expect an overall re-rating of the market. The market is currently trading at 15x PER. Excluding Ayala Land (ALI - P15.75) and SM Prime (SMPH - P11.0), the market is actually trading at mere 11x PER to 12/07 earnings. The key drivers to PER are earnings, earnings growth and discount rates. Higher earnings growth and lower discount rate will eventually lead to higher PER valuation. I do believe that discount rates on Philippine assets will go down to around 8% from the current 12% benchmark. This will likely expand PER to 15x - 16x. At those levels, the PSEi should be trading at around 3,800. Even with the recent market run-up, stalwarts like PLDT, Meralco, PNOC - EDC and Petron are trading at mere 10x-11x PER. Note that in 1997, the market was trading at a forward PER of 20x. So I guess, the PER target is doable based on past experience.

As we close the first quarter of 2007, i wish everyone a Big Big year ahead.

Quote for the day: "In the short run, the market is a voting machine. In the long run, the market is weighting scale"

2007-03-21T09:20:00.000+08:00

Benjamin Graham

Turnaround saga - The C&P Homes (P2.90) story

2007-03-13T12:18:00.000+08:00

Good stories begin with a nice prologue.

A few weeks ago, I mentioned that C&P Homes is one restructuring story that the market has ignored. It's share price has since rallied to around P3.05 despite the recent market sell-down. However, I still believe that the story will not end at these levels. There will be more chapters to the C&P Homes saga. The good thing is, the market has not factored these in yet and thus it gives us another chance to accumulate the stock. Here's how I see the chapters will unfold:

Rehabilitation. Last week, C&P Homes announced that 90% of its Floating Rate Currency Rates Notes (FRCN) creditors have accepted the terms of its debt buy-back offer. A total of US$126.0m worth of debt were bought back at US$47.0m plus 750.0m new C&P Homes shares. Effectively, the creditors were paid C&P Homes shares valued at P8.00. The exercise extinguished US$79.0m worth of debt. This should translate to an incremental P0.80/share gain in its book value. On top of the P3,600.0m debt that was swapped for equity last year, the estimated book value of C&P Homes is equivalent to P1.63 per share.

My investment premise is to buy when the writings are (clearly) on the wall. This minimizes a lot of risk. If the FRCN creditors are willing to value C&P Homes shares at P8.00, there is every reason to believe that the value will one day be achieved. Note that in 2001, PLDT (TEL - P2,360.0), offered to swap the debt of Piltel (PLTL - P7.00) at P1,775.0 per PLDT share. At that time PLDT was trading at around P500.0. So I guess, the creditors are usually in the know of whats happening in the company. I don't think they are "stupid" to accept a "no-win situation" deal.

Recapitalization. The next step is to see how the recapitalization chapter unfolds. C&P Homes announced that it will launch P5.0bn worth of new projects in the next 2 years. The company has negligible cash-flows at this stage, I am pretty sure a fund raising activity is in the works. How it will be done remains a mystery. However, its clear that this will be done.

Assuming, my premise is correct, I do not think that an offering will be done at this point. I guess the values are just too low at these levels for any offering to materialize. This brings me to my next chapter - revaluation.

In 1997, C&P Homes traded at an adjusted price of P160.0 per share. Its market capitalization then was around P73.7bn, roughly equivalent to its Net Asset Value (NAV). Taking into account the 90%, dilution from the debt reduction exercise, the P160 is (now) equivalent to P16.0.

So at P2.90, we are essentially paying a "mere" 18% of its 1997 NAV. Since property values have bottomed at 40-50% below the 1997 prices, we can safely assume that its current NAV is around P7.20 - P8.00 per share. So, in effect, we are still paying a huge discount to its adjusted NAV.

So, how far will the share price of C&P Homes go? That's for the market to write the succeeding chapters. However, whats clear is that there is little risk in investing in the company at this stage. Who knows, maybe C&P Homes will follow the Benpres (BPC - P3.55) storyline. If that happens, the creditors will be laughing all the way to the bank.

Buffet and Soros

2007-03-10T14:49:00.001+08:00

Here are some excerpts from the book "The Winning Investment Habits of Warrent Buffet and George Soros", written by Mark Tier.

Buffet and Soros do not diversify. When they buy, they buy as much as they can.

They're not focused on the profits they expect to make. Going in, they're not investing for the money at all.

According to Buffet "It is not risky to buy securities at a fraction of what they are worth."

Soros says "To survive in the financial markets sometimes means beating a hasty retreat."

I highly recommend the book. The author did a good job in presenting the similarities between Buffet and Soros despite their contrasting investment style. We should all learn from the "Masters".

Quote for the day: "Survive first and make money forward"

2007-03-05T22:34:00.000+08:00

George Soros

Some questions from my readers

2007-03-04T15:05:00.000+08:00

Q: Thank you for your valuable insights, sir jack. In the light of the recent market dive, are there any changes on your views regarding the property sector? How long will it take for the three stocks (LND – P0.84, SMDC – P3.85 & CMP – P2.50) you reviewed to attain the price targets? -cocoy71@ xxx

A: The fundamentals of the property sector remain intact. I continue to believe that we are just seeing the "beginning" of the property bull-run.

As for stock prices, I guess we just have to wait a little bit longer. Stock market fundamentals have changed. It might take awhile for the market to digest the selling pressure that we saw this week.

Unfortunately, I cannot predict the exact time line as to when the stocks (that I mentioned) will attain the price targets. However, as always, my investment philosophy is to buy stocks with limited downside risk. LND, SMDC and CMP are all trading below their book value (BV) and Net Asset Value (NAV). Considering that property values have not moved for the past 10 years - in dollar terms it is still down by 75%, the odds are, asset values will increase in the coming years.

Q: How do I play the market in the coming weeks? – mjoy@xxxx

Play it safe. Let me quote Investor Business Daily (www.investors.com):

“Throughout the past few days, we’ve highlighted strategies for coping with the market’s correction. Cut losses from initial buy prices quickly and sell your laggard stocks. Selling weaker stocks should naturally help you raise cash and protect yourself against the market’s choppy waters.

Don’t even consider buying stocks until you see the market hit bottom and stage a follow-through day. Even then, don’t buy until leading stocks break out of sound basing patterns.”

In my case, I have sold out all my speculative bets and reduced my holdings in my long-term portfolio. I have kept my patient bets intact. Please read
Rule of three

Q: What’s your view on Philippine Stock Exchange (PSE – P740.0) after the recent market sell-down? inqui@xxx

A: PSE is part of my “patient money” portfolio. Its share price has performed beyond my expectations. However, I continue to remain bullish on the stock and will hold it for the long haul.

As mentioned, the paradigm has changed. The recent market swoon further reinforced my belief. Here’s why:

1.) Average value turnover has increased to P4.0bn per day compared to P1.07bn last January’06.

2.) Last February 28 - during the market panic, turnover reached a record high of P12.0bn. This shows that liquidity will continue to flow into the market, despite the recent sell-down.

3.) There are more IPOs and M&A deals in the pipeline. Last week the PSE approved the merger of Banco de Oro (BDO – P55.00) and Equitable PCI Bank (EPCI – P100.0). Based on my estimate, the deal alone netted PSE close to P50m in listing fees.

4.) Investing is becoming more global. This is positive for the exchange. Fund managers can no longer ignore the Philippine market.

I maintain that PSE can easily make P500-600m in net income this year. For 1Q07, I expect PSE to report P150m in net income. This is 3x what it made in 1Q06.

Note that earnings growth is the key driver for valuation. If we expect the exchange to grow 100% this year, there is certainly more upside to its valuation. PSE is currently trading at about 18.5x PER. It is one of the cheapest in the region.

Quote for the day: "Act what you think, do what you think. Trading is just a game."

2007-03-01T09:21:00.000+08:00

Top Dog Traders

Lucio Tan “triggers” property bull!

2007-02-23T00:57:00.000+08:00

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!"

2007-02-19T12:15:00.000+08:00

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

2007-02-15T17:07:00.000+08:00

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"

2007-02-14T16:29:00.000+08:00

Unknown

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

2007-02-07T11:54:00.000+08:00

Jesse Owens

The rule of three

2007-01-31T18:59:00.000+08:00

One of the most common questions that I receive from my readers is how many stocks should they own in their portfolio. Unfortunately, there is no hard and fast rule on this. It all depends on your comfort level.

However, to simplify things, I have devised a “rule of 3” strategy in allocating my funds. Instead of focusing on the number of stocks, I would group my stocks into 3 categories depending on its risk profile and expected return. So let me go through these categories and do an analogy with some popular game shows on TV. Anyway, stockmarket is one big game in itself.

Patient money – This is similar to the game show “Who wants to be a Millionaire”. You need a lot of brainpower in choosing the right stock (or the right answer). Just like the said game show, once you hit the right stock (or the right answer), you will most likely hit the jackpot. My minimum upside target for stocks that fall under this group is 100%. However, investors have to be patient and be willing to hold the stock for at least 2 years. Mostly, these are out of favored stocks that have compelling turnaround story to boot. They may not necessarily be losing companies. Here, we are looking for stocks with “paradigm shift” in its fundamentals. Stocks that I bought under this category are Philex Mining (PX-P3.80), Republic Cement (RCM – P5.10), Philippine Stock Exchange (PSE - P445.0) and PCI Leasing (PCIL – P1.60).

Long term money – Like the “Game KNB” game show of ABS-CBN (ABSP – P22.25), you need some brainpower in choosing the right stock (or the right answer) but the odds of hitting the correct answer is much better compared to my earlier analogy. My minimum upside target for stocks in this group is 25%. Usually, you have to wait at least 6 – 8 months to see the full potential of your bet. Mostly, these are stocks that are in vogue. The best indicator is to watch for a significant increase in volume activity of the sector leader. Like in 2006, the best performers in the PSEi were banking stocks led by Bank P.I. (BPI – P71.0 that rose from P40.0 to P70.0 within the year. So what is good for BPI is good for the banking sector. So there is a strong chance for other bank stocks to follow suit. The movement of the sector leader is telling you to overweight the sector. As I always mention, the writings are on the wall. For 2007, the vogue sector is obviously the energy/utility sector. The turnaround of Meralco-B (MERB – P70.50) and the strong showing of PNOC Energy Dev’t. Corp. (EDC – P4.95) IPO signal that money flow is biased towards this sector.

Speculative money – It’s simply deal or no deal. Similar to the namesake of the game show, this is purely speculative play. You need very minimal brainpower and all you have to do is to observe the money flow of the stock (and a lot of luck). The most important rule here is to sell when the news is out – no matter what “whispers” you hear. Take for instance GEO Grace (GEO – P0.80). The stock rose from P.0675 to P0.80 in 2006. When the story was announced, the stock moved within a narrow range of P0.70 to P0.80. Had you held on to GEO since the announcement, you would have missed out on other opportunities in the market. Once the news is out, the speculation is over and it is time to say “deal”.

So, the next question is how much to allocate per group? Again, there is no hard and fast rule. Currently I am maintaining a 25%-50%-25% allocation. I have allotted equal weight to speculative and patient money since the liquidity of the market is quite good. In case there is a reversal, first to go will be all my speculative bets.

In the end, it is not how much money you make but how you manage your risk that matters. That’s how you play any game.

Quote for the day: "It is better to "average up" than to "average down"

2007-01-29T22:41:00.000+08:00

Dickson G. Watts

Quote for the day: "Like artists, the best research minds use a lot of imagination and gut feel"

2007-01-25T23:49:00.000+08:00

Quote for the day: What's obvious is not what you see. What's obvious, is what you don't see.

2007-01-24T08:04:00.000+08:00

Top Dog Traders

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

2007-01-22T19:06:00.000+08:00

Today the PSEi broke past the 3,100.0 levels to close at 3,141.3. What this signifies is that the market is entering a new “run”. As mentioned in my earlier post Bull Running on 4 Legs, this is an affirmation that the bull is running on all 4 legs. The “footprints” are clearly marked in the bull’s pathway. Foreign fund managers, local institutional investors, local market players and retail punters have joined the run.

However, what’s evident today is that Empire East (ELI – P0.72) broke out of its long consolidation phase. I consider ELI as a proxy for retail money. Once, ELI moves, we should see funds flowing to the punter’s chips. So, the next leg of the market will likely see strong activity from retail money with punter’s chip taking the center stage.

Amongst the punter’s chips, my top two bets are Fil-Estate Land (LND – P0.85) and Boulevard Holdings (BHI – P0.28). There is nothing great about these two chips but as the saying goes: “Every dog has its day”.

My key argument in “speculating” on these two companies is that the worst is over for them and it seems that management have a “move forward” plan that will “likely” enhance shareholder value in the future. Besides, there is still enough upside to speculate based on their “stories”

LND recently announced that it is negotiating for a US$12.5m construction loan to complete P2.5bn worth of leisure/high-end projects. It also got LIM Asia – a real estate specialist fund in Asia Pacific to invest US$5m into the company. While the amount involved is negligible, it is a small “first” step for the company towards rehabilitation. LND also claims to have 1,000 ha. of landbank. This will be valuable in nursing the company back to full recovery.

However, what really attracts me is that at current levels, LND is trading at 75% discount to its book value of P3.45/share. This means that we are paying a mere P0.25 for every P1.0 of net asset. We are essentially coming in at the same footing as other “vulture” funds that would have paid the same valuation. I guess with the stockmarket trading at 10-year highs, there is a strong chance that real estate assets will start to appreciate. My gut feel is that near term, LND can easily trade at 50% discount to its book – equivalent to P1.72 per share.

As for BHI, I like the stock because of its relatively small market capitalization – P290m. The stock has the potential to emerge as a punter’s favorite. Beyond that, I also think that its investment in Friday’s Boracay Resort is easily worth more than P300m. Friday’s Boracay has one of the highest room rates in the region despite its so-so facilities compared to other resorts in Asia. It shows that it has retained its franchise value despite the numerous resorts that have sprouted in the area. From my estimate, Friday Boracay generates around P180m revenues and contributes roughly P40m to BHI’s bottomline.

Recently, BHI announced it would increase its capitalization to finance the construction of a second hotel in Puerto Gallera. Most likely, a capital call is in the pipeline. So we should see more market making activities on the stock in order to make the rights offering more attractive.

Finally, as I have mentioned these are speculative chips. So buyers beware and punt at your own risk.

IBD's 10 secrets to success

2007-01-21T13:23:00.000+08:00

Investor Business Daily (IBD) – (www.investors.com) is a must read for every investor. William O’Neil – a stockbroker, entrepreneur and writer, founded the site. To know more about Mr. O’Neil, please go to http://en.wikipedia.org/wiki/William_O%27Neil

1. How you think is everything. Always be positive. Think success, not failure. Beware of negative sentiment.

2. Decide upon your true dreams and goals. Write down your specific goals and develop a plan to reach them.

3. Take action. Goals are nothing without an action. Don’t be afraid to get started. Just do it.

4. Never stop learning. Go back to school or read books. Get training and acquire skills.

5. Be persistent and work hard. Success is a marathon, not a sprint. Never give up.

6. Learn to analyze details. Get all the facts, all the input. Learn from your mistakes.

7. Focus your time and money. Don’t let other people or things distract you.

8. Don’t be afraid to innovate; be different. Following the herd is a sure way to mediocrity.

9. Deal and communicate with people effectively. No person is an island. Learn to understand and motivate others.

10. Be honest and dependable; take responsibility. Otherwise, Nos. 1-9 won’t matter.

Quote for the day : "In a bull market, even monkeys make money"

2007-01-19T10:28:00.000+08:00

Anonymous

Quote for the day : "If you love a stock, think about when to set it free"

2007-01-18T10:52:00.000+08:00

Anjali Cordeiro - AWSJ 01/18/07

Bull running on 4 legs

2007-01-13T21:07:00.000+08:00

The quiet bull has matured into a raging bull running on all 4 legs. This is how I see the market in the coming months. Last Friday, the PSEi closed at 2,992.0 with value turnover increasing significantly to P3.5bn. From experience, value turnover, more than the index level is the best barometer in gauging the market. This is a powerful signal for me. As I always like to stay, the writings are (clearly) on the wall.

For the last 3 years, we have seen the PSEi bull running on “just” 2 legs. Essentially, foreign funds and local market insiders have pushed the market to the 3,000 levels. However, there are signs that the other “2 legs” – local institutional funds and retail players are beginning to enter the market.

With the bull running on 4 legs, we should expect value turnover to reach P4.5bn per day soon. As for the PSEi, this will likely push the index to 3,400 level.

The appreciating Peso and the sharp drop in T-bill rates are the key impetus in generating additional liquidity into the stockmarket.

Local institutional funds have no choice but to increase their exposure in local stocks. The continued decline in interest rates will switch liquidity into the stockmarket. Fund managers can no longer justify generating 5% return to their investors. On the other hand, retail players who have been sidelined for the last 10 years have more excuses (now) to play the market. The opportunity costs to speculate in stocks have declined considerably with 91-day T-bill rates at 3.75% and the P/$ rate hovering at 6-year highs – P49.096: US$1.0.

On the flipside, the market might be entering its last leg. The big gains have been made. The PSEi will likely be in its last 10-15% run before cooling off. Whatever it is, there still money to be made in the market. So, ride the bull and enjoy the run while it lasts.

Banco de Oro’s (BDO – P44.50) universe; why it should trade at par with Bank of Philippine Island (BPI – P67.50)

2007-01-13T21:06:00.000+08:00

Some of the best investment ideas that I have were derived from anecdotal evidences on how companies are transforming or reinventing themselves. More than news articles, press releases and analysts’ reports, it pays to have your ears on the ground.

A good example is BDO. Last week, I had lunch with a friend who owns a small and medium enterprise (SME). He maintains an account with BDO for his personal and business requirements. He told me that a couple of weeks ago, a BDO account representative visited him offering all sorts of non-deposit related products of the bank. My friend ended up transferring his insurance requirements to BDO and promised to sign-up for a new BDO–SM Advantage card.

After hearing this, I made some research and found out that BDO has been aggressively scoping out their client base and see what other products the banks can offer. I guess the idea is if you know the account balance, you will likely have an idea on the requirements of your clients. BDO is a universal bank that offers a whole array of financial services products from private banking to credit cards. In a way, BDO is molding itself into a Philippine version of Citibank.

I totally agree with the vision of BDO. Banks can no longer rely on plain vanilla banking services. The days of earning from interest spreads are gone. Banks will have to diversify its products to generate other fee-based income.

This makes me very “bullish” on BDO. The visit made by the BDO account representative to my friend is a microcosm of the big change happening in the bank. BDO is Tessie Coson’s gambit in expanding the empire of her father - Henry Sy. It looks like Tessie is bent on leaving her mark in the banking industry similar to the legacy of Henry Sy in the retail industry.

So, what’s the long term picture for BDO?

First, BDO is poised to become the biggest bank in the next five years. After the merger with Equitable PCI Bank (EPCI – P80.0), BDO will become the second largest bank behind BPI with P615bn in assets. I don’t think BDO will stop at number 2.

Second, BDO is well positioned to expand both its retail and enterprise business. In the retail/consumer side BDO can capitalize on the reach of SM Malls and department stores. On the enterprise side, BDO can easily tap into SM Group’s network of tenants and suppliers.

Third, BDO will realize the full benefit of the merged Equitable-PCI bank. Note that Equitable Bank has a strong niche in the Chinese market while PCI Bank is big in corporate banking.

These three factors should easily catapult BDO to the number 1 position. A bet on BDO, is a bet on Tessie. Having seen how driven she is, I guess, it is a (very) wise bet in the long run.

Against this backdrop, I do not think the market should value BDO at a discount vis-à-vis BPI. Currently, BPI is trading at 2.6x price to book value (P/BV) whilst BDO is priced at 1.7x P/BV. Investors have bid up the valuation of BPI on the back of better assets and earnings quality. However, I do think that growth should be the key consideration in valuing banks. The crisis is over. So moving forward, the market will start paying a premium on growth.

The combined market capitalization of BDO and EPCI Bank is P100bn versus BPI’s P160bn. I think the disparity is way too much. This is clearly a valuation arbitrage opportunity between BDO and BPI. Everything else equal, BDO should be trading at par with BPI. At 2.7x P/BV, BDO is easily worth P70.0/share.

Some questions from my users

2007-01-04T23:36:00.000+08:00

Question - Sir, I have the highest regard in your views and analysis on certain stocks. May I ask you about your outlook on stock market in the first quarter of 2007 and if you have a list of stocks, companies, and industries to watch this year? Wishing you a prosperous 2007 full of great luck, blessings and good health. From Rainman

Investors should overweight utility counters. Please read my entry last week http://bigbigtrade.blogspot.com/2006/12/key-theme-for-2007-buy-utility-stocks.html . Amongst the utility counters, my number one choice is Meralco (MERB – P59.50), followed by Manila Water (MWC – P9.20) and PNOC Energy Dev’t (EDC – P4.50).

Meralco is indeed a turnaround story. Even with the recent price run-up, the stock is trading at mere 7.4x PER. So, a price target of P80.0 or 10x PER is defensible. Longer term, I do believe that Meralco should be trading close to P100.0. Added to this, there is a rumored M&A play in MERALCO. The Lopez’s have expressed their willingness to sell out of Meralco at the right price. I guess the writings are on the wall.

Manila Water has consistently been in my recommended list since early 2006, when the stock was trading at P6.30. I guess, the recent sell-down is a perfect opportunity to add to your position. MWC offers both growth and stability. Seldom do you see these two factors come together in a utility concern. Normally utility counters provide stable earnings picture. This is not the case for MWC. For 2007, the company is expected to generate healthy top-line revenue growth excluding rate hikes. This means that MWC still has a huge untapped market to grow its revenue base. The approved 13% rate hike is an added bonus. In due time, the market should pay a premium on MWC based on its quality of earnings. Easily, MWC is a P12 stock.

As for EDC, I guess the price movement speaks for itself. For a US$300m IPO to jump more than 50% tells you the level of institutional demand for the stock. Most likely, more buying orders will come in. EDC is very similar to the Petron (PCOR – P4.10) IPO in 1995. From its initial offering price of P9.0, Petron rose to as high as P25.0. Mostl likely EDC will follow the same track.

Question – Sir Jack, what are your criteria in choosing a sector or a stock? I notice that you have very different calls on the market. Btw, it seems that you are not been bullish on the property stocks. – From theblackmagic

My key criterion for liking a sector (or a stock) is if there is a significant change in paradigm. For 2007, I like the utility sector since the government has shifted from “anti-utility” to “pro-utility” policy in regulating the sector. With the move, we should expect a re-rating in the coming months. Note that the Price Earnings Ratio (PER) is an indirect pricing for risk. Lower risk translates to higher PER and vice versa.

For 2006, my best picks were RCBC (RCB – P24.50) and Republic Cement (RCM – P4.20).

For RCBC, my argument then was that the company has moved from being “inadequately capitalized” to “adequately capitalized” after the successful P2.0bn “Tier 2 equity” offering. Thus we saw the valuation moved from 0.8x Price to Book (P/BV) to 1.6x PBV.

On the other hand, RCM moved from being a “distressed” cement company to a “cash flow positive” cement company. The change in paradigm saw the stock zoom from P0.85 to P4.20 in less than a year.

Finally, I am not too keen on the property sector. The series of equity calls from Megaworld (MEG – P1.82) and Filinvest Land (P1.66) indicate that the sector is still in the negative investment cycle. This means that property companies are running on negative cash flows and thus, they have to resort to borrowings and equity calls. Note that these fund raising activities have a negative impact on the value of the existing shares. It dilutes the equity value.

So, until the sector starts showing signs of turning around its cash flow position, returns will likely lag the rest of the market. Between 1994-1996, property companies outperformed the market simply because they are generating positive cash flow. Recall that during that time, property buyers were scrambling to purchase properties upfront or even pre-pay the units during the pre-selling phase. Unfortunately, this is not happening right now.

Hidden Gems: PCI Leasing (PCIL – P1.40) Philippine Stock Exchange (PSE – P280.0)

2007-01-02T21:19:00.000+08:00

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.

Key theme for 2007, buy utility stocks (period.)

2006-12-29T21:13:00.000+08:00

The key theme for 2007 is to overweight utility counters. I do believe that it is a matter of time before we see a re-rating of the sector. Currently, the sector trades at an average Price Earnings Ratio (PER) of 10x to 12/07 earnings and 1.3x Price to Book (PBV). Moving forward, my “gut feel” is that the sector will trade closer to 15x PER. This represents a 50% upside from where we are right now. Here’s the summary of how the utility stocks are currently trading and how it will trade assuming the re-rating does occur.

PER(x) P/BV(x) @15x

MERALCO B 7.1 1.0 P116.0
First Holdings 10.0 1.0 P94.5
First Gen 10.6 1.4 P82.5
Manila Water 9.7 1.4 P15.0
EDC 9.2 1.5 P7.8

In 2006, we saw the same phenomenon in the banking sector. Overall, the average valuation of banking stocks rose from 1.2x Price to Book Value (P/BV) to 1.8x P/BV. The re-rating was driven primarily by the improving asset quality of the banks. Thanks to the full impact of the SPAV law. It virtually eliminated all the systemic risk in the sector as banks get to clean up its balance sheet.

So for the utility sector, the key drivers are:

1.) “Pro-business” framework. The recent decision by the Supreme Court allowing MERALCO to keep the P0.0875 per kwh rate increase granted in 2003 shows that the government is willing to let utility companies make a reasonable economic return from their investment. This is also manifested in the recent rate hike granted to Manila Water and Maynilad.

2.) Big-ticket privatization. There are several deals that are coming up in the next few months. The Transco bidding and the NAPOCOR privatization will surely spice up the sector. The successful IPO of PNOC-EDC (EDC-P4.80) is a sign of things to come. Most likely, valuation will continue to improve based on the success of EDC.

3.) Tons of free cash. Fundamentally, most utility stocks are generating a lot of free cash. This allows them to pay dividend or buy-back their shares. MERALCO (MERB – P55.0) declared a P1.0 cash dividend for the first time in 5 years. Valuation wise, you would want to pay a premium on these companies.

Just like the banking sector, these drivers have virtually wiped out the systemic risk in the sector. So fast forward to 2007, there is every reason for utility stocks to take the spotlight.

What goes around comes around ….

2006-12-19T22:54:00.000+08:00

The Philippine market was spooked by the move of Bank of Thailand (BOT) to impose investment control to prevent the appreciation of Thai Baht. Essentially what the BOT did is to prevent short-term funds flow from creating volatility in the currency. Based on the directive by BOT, all banks were required to hold in reserve for one year 30 percent of capital inflows that aren't trade or services-related, or repatriation of Thai residents' investments abroad. Also, foreign investors must pay a 10 percent penalty unless they keep funds in the country for a year. The Thai Baht has so far appreciated by 14% to Bt35.09 to US$1.0. On the other hand, the Philippine Peso has appreciated by 7.9%.

In 1997, Thailand was faced with a similar situation. However, instead of curbing dollar inflow into its financial system, BOT was forced to defend the Baht against depreciation. At its worst, the Baht traded as low as Bt58.00 to US$1.0. This triggered the ASEAN financial crisis. So as the saying goes, what goes around comes around.

So how will this affect the local market? In the short term, we should see volatility in the local market. We cannot deny the fact that Philippines and Thailand are lumped together in the same emerging market basket. Foreign funds will be selling the Philippine market until the situation in Thailand stabilizes. This might erase any hope of any yearend window dressing rally.

However, in the long term, I am still positive on the Philippine market. I do believe that the PSEi will reach 3,100. I guess it’s a matter of time before we reach those levels, for as long as it stays above 2,750.

For investors, the best way to play the market is to be defensive. We should take this opportunity to realign our portfolio and preserve the gains that we had for the year. As the saying goes: “Sell to your sleeping point.” Sit tight and keep a close eye on the market.

The MERALCO (MERB – P55.0) and PNOC-EDC (EDC – P4.55) Bonanza; PSEi at 3,000

2006-12-13T18:17:00.000+08:00

The market has not fully digested the bonanza from two recent events. First, the Supreme Court (SC) ruling on MERALCO allowing it to keep the P0.0875 rate hike that was implemented in 2003. Second, the successful listing of EDC, which saw its share price, rose by 42% during its debut.

There are two implications in the MERALCO ruling.

First, it shows that the government is willing to take a “pro-business” stand in regulating the utility sectors. This is a 360-degree turnaround form the populist stand the government took earlier on. The move should see a re-rating of the utility sector at par with the market. Considering that most utility counters are trading 30% below market PER, the re-rating will thus bring the PSEi to 3,000 levels.

Second, we should not underestimate the liquidity boost provided by the surging share price of MERALCO. To date, its share price has risen by almost 175%. MERALCO is a widely held stock. The wealth effect on MERALCO shareholders should spread to the market. Soon, this "liquidity" seek other undervalued stocks.

On the other hand, the successful listing of EDC will pave the way for other mega deals. In the pipeline are the privatization of National Power Corporation (NAPOCOR) and National Transmission Corporation (TransCo). The share price movement of EDC today is an indication that foreign funds have strong appetite for local equity issues. The offering of EDC is the biggest IPO since the listing of Petron Corp. (PCOR – P4.05) in 1995. Note that the liquidity boost from the Petron listing essentially propelled the PSEi to new highs in 1996. This is exactly where we are right now. To some extent, EDC is the new Petron.

So, I guess all the elements are in place to bring the market to 3,000 levels. As I mentioned before, we need to see “liquidity-flow” from local and foreign investors for the market to break out of the 2,800 levels. I think we are about to witness the move. The only wildcard in the equation is the political situation, which hopefully will be under control.

For investors, the key theme for the market is to overweight utility stocks. The writings are on the wall. My top picks are MERALCO (MERB – P55.0), PNOC EDC (EDC – P4.55) and Manila Water (MWC – P9.80).

The MERALCO effect, 2007 will be the year of utility stocks

2006-12-10T17:37:00.000+08:00

The ruling on MERALCO implies a turnaround in government’s populist stand in regulating the power/energy sector. The ruling signifies a move towards a “pro-utility sector/pro-business” stand by the government.

Re-rating looms
For the past 5 years, utility counters continue to trade below market multiples. This shows that investors are putting significant amount of “regulatory risk” in valuing utility counters. Since 2003, the utility sector traded at an average of 30% discount to market. Moving forward, I expect this trend to change. Longer term, as the government continues to show its hands, the sector should be trading at par with the market.

Postive deal flow
Last week, the government successfully bided out Maynilad Water to a consortium led my DMCI Holdings (DMC – P6.10) and Metro Pacific – (MPC – P2.08). Next week, PNOC-Energy Dev’t. Corp. (PNOC-EDC) will list its shares in the stockmarket. Before the yearend, the government will be biding out the power generation assets of National Transmission Corp. (Transco). All these point to the fact that the government is opening up the sector.

Lower risk
So I do believe that we should go where the money is. Assuming all factors are in place, 2007 will indeed be a year for utility counters. The risk profile has changed and valuations cannot stay this low. The risks of holding utility counters have significantly gone down vis-à-vis its earnings profile. Thus, there is every reason to overweight utility stocks for 2007.

The scorecard on MERALCO (MERB – P50.50)

2006-12-10T17:34:00.000+08:00

Last Wednesday, the Supreme Court (SC) reversed the earlier decision of Court of Appeals (CA) preventing MERALCO from implementing the rate “unbundling” scheme that was approved by the Energy Regulatory Commission (ERC) last June 2003. What the decision implies is that MERALCO can now keep the P.0865/kwh distribution charge that it has been charging its customer.

Beyond the ruling, here is the low-down on MERALCO.

1.) One-time gain of P12.82/share. MERALCO has provided around P19.72bn in provisions for probable losses in case the SC ruled against the company. Net of taxes, this should amount to P12.82/share in one-time gain. On the other hand, book value per share will increase significantly to P45.0.

2.) Annual recurring income of P7.0bn. Moving forward, MERALCO is expected to earn P7.0bn per year. On an EPS basis, this translates to P7.0/share. The last time MERALCO generated this much income was in early 2000.

Last Friday, share price of MERALCO rose as much 30% in reaction to this news. The “manna” from SC added close to P14.0bn to its market value. I vividly recall 4 years ago when MERALCO lost close to 80% of its market value when the SC ruled that it has to refund the P0.167/kwh that MERALCO has been charging its customer since February 1994. The ruling cost the company P30.0bn. I guess as the saying goes, what goes around comes around.

So how far, will the share price of MERALCO run? Currently, the utility sector trades at 10.0x PER. Assuming MERALCO approximates these values, MERALCO can potentially trade as high as P70.0/share.

However, there are two other “wildcards” that can potentially add more value to the company.

First, the pronouncement by the Lopez group that they are willing to sell their stake at the right price. So reading between the lines, it seems that a merger and acquisition (M&A) deal is brewing. Assuming, we factor in an acquisition premium, MERALCO can potentially be a P100 stock

Second, I do believe that there will be an overall re-rating of the sector. The decision on MERALCO is a big step in projecting a “pro-utility sector/pro-business” stands of the current administration. Assuming, the sector trades at par with the market; it should be trading at 14x PER and not at 10x PER.

Win or Lose, Manila Water (MWC – P10.25) Wins

2006-11-24T21:31:00.001+08:00

Strong price movement this week
I bought MWC again this week when the stock broke out of P9.50. I do believe that after consolidating for 4 months between P8.80 – P9.50 range, MWC is now ripe for a big move. Today, its share price rose to as high as P10.75, before correcting back to P10.25. I am certainly not afraid of the “shake-out”. Instead, I would take advantage of any weakness to add more to my position.

The price movement of MWC is a "textbook case" of a breakout. As a rule, if a stock broke out of a price range by at least 8%, it is a signal that its share price is heading to new levels. I guess, MWC is firmly supported at the P9.20 – P9.50 levels. So my downside is pretty much limited to 10%. On the other hand, a stock that makes new “highs” has better odds of reaching further “highs”. We have seen how Seacem (CMT – P.90), Holcim (HLCM – P7.20) and Republic Cement – (RCM – P3.70) make new highs after breaching their 52-week highs. I think this will be the same scenario for MWC.

Still undervalued
I firmly believe that MWC cannot continue to trade at these levels. As it is, MWC is only trading at 9.9x PER to 12/06 earnings. This undermines the value of the company. Currently, the market is trading at 15x PER to 12/06 earnings. Fairly valued, MWC should approximate the market PER. This should bring MWC to at least P15.0/share.

I do believe that If investors are paying market PER on companies that are generating less than 10% earnings growth, pretty soon they will realize that MWC is a bargain at single digit PER generating 25% earnings growth. Obviously, there is a valuation disparity that has to be corrected.

Win-win stock
Lastly, there are a lot of uncertainties on the upcoming bid for the West Zone franchise of Maynilad Water. MWC is one of three companies short-listed to bid for the concession. I guess this is partly the reason why its share price has underperformed the market.

However, I see it otherwise. In fact it is a win-win situation for MWC.

Note that MWC is an experienced player in the industry. They will not bid more than the “reasonable” economic return of the concession. So, if they do win, this will be an added bonus for MWC. Perhaps this will finally push the valuation of MWC at par with the market. If they lose, the only reason is that the other bidders overpaid. But this will also increase the implied value of both concessions including the East Zone that MWC currently owns.

So win or lose, MWC wins!

One More Round for Ionics Circuits (ION - P2.06)

2006-11-21T17:15:00.000+08:00

Ionics is a “sleeper” in my portfolio of recommended stocks. The stock has declined by 5% since I first recommended it last June. It even hit a low P1.80 last month despite the buoyant market. However, after several false starts, I do believe that investors should start looking at the stock again. The risk/reward of owning the stock at this point is very tempting. Let’s see how the odds stack up.

3Q06 results affirms turnaround
Ionics reported that earnings for 3Q06 reached US$ 1.1m. Excluding, one-off gains, recurring earnings reached US$ 820k. The 3Q06 number also shows that its 75% owned contract manufacturing subsidiary Ionics-EMS (IONI – SG$0.55) reported a net income of US$ 196k. This is a significant turnaround from the US$ 2.9m loss incurred in 3Q05. Essentially, Ionics derives 90% of its revenue from Ionics-EMS.

Running through the numbers of Ionics, we can safely say that a US$ 1.0m recurring income target per quarter is achievable. Thus, base case earnings for 2007 can reach US$ 4.0m or roughly P200m (EPS = P0.46). At these levels, Ionics is trading at 4.5x PER.

This is the 3rd straight quarter that the company reported significant revenue growth and earnings improvement. In viewing any turnaround situation, a “three-quarter” winning streak is key. Three straight quarters of significant earnings improvement would signify an inflection point in the company’s performance. Note that the company has reported 12 straight quarters of losing performance prior to 2Q06.

Valuations cannot stay this low
I do believe that valuations cannot stay this low. On the back of a turnaround scenario, I do think that valuations should slowly reflect the fundamental change in the company. Besides, a turnaround situation would normally deliver earnings surprise. Assuming, Ionics-EMS continues to deliver, earnings can probably breach the US$ 2.0m per quarter mark. Thus, on the upside, full year earnings can potentially hit US$7m or roughly P350m (EPS = P0.81).

So how far can Ionics go?
Recently, Alliance Tuna (TUNA – P2.55) was offered at 13.0x PER and is now trading at almost 26x PER after the recent price appreciation. On the other hand, Chemrez (COAT – P5.10) will be offered at 13x PER. These two stocks are similar to Ionics in a sense that all of them are single product/service company. My argument is that if the market is willing to pay as much as 26x PER, this makes Ionics “dirt cheap” at current levels. I will be happy to see Ionics at 8.0x PER or P3.68/share.

Going back to my risk/reward argument, my downside is essentially at P1.80 or roughly 12% from current levels, whilst my upside can potentially be 80%. At 4:1 risk/reward ratio, the odds are too tempting to ignore.

Manny (Many) Thanks To My Readers

2006-11-21T17:14:00.000+08:00

I would like to take this opportunity to acknowledge all the readers of Big Big Trade who wrote thanking me for my recommendations. It was indeed a profitable year (so far) for most of us. I am happy that in my own little way, I was able to help investors with their investment decisions.

My ultimate goal is to see the Philippine stock market mature into a more investor friendly marketplace. I will continue to write about what stocks to buy/sell/avoid; teach investors how to properly value companies and above all expose the shenanigans in the corporate world.

However, we have to keep in mind that we only have the market to thank for. Please remember the quote from Yra Harris – “ The market is always right. You’re not.”

Some Questions From My Readers

2006-11-21T17:11:00.000+08:00

Jack Galt,

Is it true that your target for CMT is P1.50

Victory Joe

I never mentioned any target price for Southeast Asia Cement (CMT – P0.71). All I said is that the proper way to value CMT is to divide the share price of RCM by 4.3. Currently RCM trades at P3.30. This means that the fair value for CMT is around P0.76 per share.

I am still bullish on Republic Cement (RCM – P3.30). I strongly believe that there should not be any valuation disparity between Holcim (HLCM – P7.20) and RCM. It defies logic since both companies have 1/3 each of the local cement market carved out between them. What’s good for HLCM is good for RCM. What’s good for RCM is good for CMT.

Sir Jack,

I love your blog! I find it a very informative and well-researched view of the current market situation. KUTGW! Your views made me go invest in MWC. Over the past year, my timing was almost always off. I can never properly time my trades cuz I am only a part-time stock trader. That's why I guess MWC is a good bet, doesn't need much following unlike the speculative bets I've made. ... I'm learning though.

Maybe you can also share your views on the current situation of URC and PCOR. Thanks a lot for your blog.

William Antonio

Universal Robina (URC – P19.25) is a well-managed company. It has several winning brands under its stable. Most notable are Jack N’ Jill and C2. I love how Gokongwei manages his companies. He runs a tight ship and generates tons of cash. However, it will take a lot more convincing for the market to pay a premium on Gokongwei owned companies. As it is, URC is already trading at 16.0x PER to 09/07 earnings. Upside might be limited considering that the market is trading at 15x PER to 12/07 earnings. Please note that Gokongwei related stocks used to trade at 30–50% discount to average market multiples.

Petron (PCOR – P4.05) has been battered by series of bad press lately. First the company did not manage the Guimaras oil spill properly. Second, 3Q06 earnings came in below expectations. I think these issues are just a hiccups for the company. In the long run, I do believe that Petron will be trading at better valuations. Petron is currently trading at 6.5x PER to 12/06 earnings. The valuation reflects the cyclical nature of its business but it does not take into the account the franchise value of the company. Petron has the widest distribution reach in the country and owns almost 38% of the domestic petroleum market. The stock might continue to underperform in the short term but in the long run things will definitely be ok.

The Megaworld Boo-boo!

2006-11-12T23:43:00.000+08:00

I was surprised by the announcement of Megaworld (MEG – P2.10) that it will undertake a 1:2 rights offering. Based on the figures released by the company, Megaworld is looking to raise P12-P15bn from its existing shareholders. The move cheapens the equity and I will not be surprise if its share price corrects back to the P1.60 levels.

I guess the company should come clean and explain clearly the purpose of the rights offering. There is absolutely no reason to issue equity at this stage. Here are my arguments:

1.) Equity is expensive vis-à-vis debt. Amidst the declining interest rate environment and surging stock market, Megaworld could have issued debt. I don’t think Megaworld will pay more than 10% coupon on its debt. Conversely, issuing new equity will have an implied (equity) cost of at least 13-15%. The close to 20% plunge in the share price of Megaworld should send a clear signal to Andrew Tan that investors don’t buy the idea.

2.) Balance sheet has zero gearing. Based on its 09/06 F.S., Megaworld has a net cash position of P5.0bn. So obviously the company can add debt to its balance sheet. Besides, interest cost is a perfectly legal way to manage income tax payments.

Last August, Megaworld successfully raised US$100m from its bond offering. According to the company, the issue is 10x oversubscribed. So, there is no reason why Megaworld cannot tap the debt market again.

3.) Capital call is “contra” the rosy scenario pictured by the company. If indeed, the company is doing (very) well, why would it need to raise funds from existing investors? A more logical scenario is for the company to issue dividends.

4.) Mixed signals. Last summer, Empire East announced a P2.0bn stock re-purchase program. So, if Megaworld needs additional funds to pursue its expansion, then Empire East should have earmarked the P2.0bn as cash dividend.

Until these issues are cleared, I think Megaworld will be a “dog” stock. I do hope that the company can clearly defend and define the rationale behind the move. For now, the minority stockholders are crying foul.

P.S. I do not have any holdings in Megaworld.

3 "Faces" of the Market

2006-11-09T18:58:00.000+08:00

This is the first time that we see the 3 faces of the market come together. They are: foreign fund managers, local investors and the “re-born” players.

The movement of PLDT (TEL – P2,545.0) suggests that foreign funds are still loading up on Philippine stocks. You don’t usually see big-caps rose by 5% in one day. This move cannot be reversed overnight. What’s good for PLDT is good for other big-caps. I expect follow through buying on other index heavyweights in the coming weeks.

Local investors on the other hand have been pushing up select 2nd and 3rd liner stocks. This week, we saw Philippine Realty (RLT – P0.62) and Kuok Philippine Property (KPP – P0.58) take the front seat. Next week, I expect other 2nd and 3rd liners to follow. I am not too clear on what valuation measures investors are using in buying up these two counters. However, you can’t go against sentiment. These stocks will continue to run.

The third face of the market are the “re-born” players. Alliance Tuna (TUNA – P2.85) gained almost 100% from its offering of P1.34. This has brought back old players to the market.

So with all these coming into to play, expect the market to continue its run.

Bully!

2006-11-09T18:56:00.000+08:00

We have a bull that is a “bully”! Just when you think the market is going to take a break, the bull comes roaring back with vengeance. Today the PSEi rose by 63.5 points to close at 2,818.0. I guess, old bets are off and new chips are on the table. The bull will not stop until it reaches 3,000.0. I was “bullied” as well. I was thinking that the PSEi would take a breather at the 2,700 levels. It turned out to be a mere “pit-stop” for the bull.

In fact, it will take a “bully” to push the market higher. As it is, share prices have moved up in an orderly manner. There are equal amount of transactions across the different price fluctuations. This means that investors sitting on significant profit gains have cashed in their chips whilst new players pile in. So what will the old investors do who where left in the pits? Buy-back and push the market higher.

As it is, the scenario is evolving into a textbook case of an early stage bull-run. This suggests that every sector will see significant increase in valuation regardless of the economic cycles they are in. It will simply be liquidity flow chasing every stock in the market. As I have mentioned before, this is a “value-creating” market. So sit tight and run your profits. This can be 1993 all over again when the PSEi reached 3,400.0.

Some stock stories: RCBC + CMT

2006-11-06T23:21:00.000+08:00

RCBC (RCB – P21.0) Recapitalization and M&A play

The Philippine Star come out with a story saying that RCBC will issue P1.0bn preferred convertible bonds and that one if its major shareholder; Bank of Tokyo will be selling its 17% stake in the bank.

http://www.philstar.com/philstar/NEWS200611060709.htm

The writings are clearly on the wall. This gives me two more reasons to buy RCBC. First, I expect the conversion price for the preferred convertible bond offering to be much higher than RCBC’s current share price. Second, Bank of Tokyo (BOT) will not likely sell at these levels.

RCBC is trading at 1.0x Price to Book (PBV). Relatively, It is the cheapest bank in the sector. While the bank has a below average asset quality, the recent recapitalization will likely drive valuations higher. Last month, the bank successfully raised US$100m (P5.bn) Tier 1 capital. This effectively expands its capital base by 40% therefore easing any short-term capital crunch.

So my gut feel is that for any deal – either a convertible bond offer or divesture by BOT, to materialize RCBC should be priced near 1.6x PBV or roughly equivalent to the valuation of Equitable PCI (EPCI – P72.50) when the SM Group did a tender last month. At those valuations, RCBC is easily worth P28/share.

Seacem (CMT – P.54) and Republic Cement (RCM – P2.70) arbitrage

A lot of my readers are asking how to price CMT vis-à-vis RCM. So here is a simple computation.

CMT owns 1.55bn RCM shares. Effectively, the stake is worth P4.2bn with RCM trading at P2.70. So the implied value of RCM in CMT is about P.64/share. To put a ratio into the relationship, 4.2 CMT shares equals 1 RCM share. So you simple divide the prevailing price of RCM by 4.2 to get the fair value of CMT.

As mentioned in my previous entries, I am long on both RCBC http://bigbigtrade.blogspot.com/2006/07/why-cost-of-equity-matters-rcbc-rcb.htm
and RCM http://bigbigtrade.blogspot.com/2006/05/why-i-bought-republic-cement-rcm-p124.html . I believe that these two counters still have a lot of value waiting to be realized.

11th Day High

2006-11-06T23:19:00.000+08:00

The PSEi recorded a rare 11-day winning streak. In total, the market rallied by more than 10% adding 268 points in two weeks, breaching the initial resistance level of 2,725.0. The move indicates that we are clearly in a bull market. So should we start to worry about excessive exuberance? I guess not at this stage. Here are my arguments:

Solid technical grounds
The 11-day rally provides a good “technical” foundation for further run-ups. Eleven days will surely make a definitive trend! I am no chartist, but I do observe closely the price movements. As it is, we saw an orderly movement in share prices. Index heavyweights such as PLDT, ALI, AC and SMPH rose steadily in the past week without any wild “surges”. Shares prices rose by 1 to 2 fluctuations each trading day thus giving buyers and sellers enough time to digest their orders.

Contrast this to the run-up that we saw last summer, when share prices rose sharply in 3 days. Clearly, the rally cannot be sustained. So, we are definitely in a much better footing this time around.

Value over price
While share prices have risen, there is still value in the market. So how did this happen? The Price Earnings Ratio (PER) of the market is driven by 3 factors: earnings, earnings growth and discount rate. So even if the market has risen by 30% in 2006, there is still room for PER to expand since earnings on the average are above consensus expectations while discount rate continue to come down driven by the recent upgrade by Moody’s. So my estimate is for overall market PER to expand from 14x – 16x. This should bring the PSEi to 2,900 by yearend or 1Q07.

(I will discuss (in another article) how Moody’s ratings outlook affect discount rates and therefore market valuation. Beyond, the sentiment play, these factors are important for foreign fund managers in deciding where to allocate their money.)

So what to expect in the coming weeks?

We should see some correction in the market as investors take profits from the recent rally. Market leaders like PLDT, ALI, SMPH and AC will likely take a breather while rotational buying is expected on other “cheaper” blue-chip counters. Please check http://bigbigtrade.blogspot.com/2006/10/blue-cheap.html I expect continued buying of Petron (PCOR – P4.30) and Manila Water (MWC – P9.40), which does not merit any valuation disparity at this point.

Also, local money will likely come in. The move of Philippine Realty (RLT – P0.55) and Kuok Properties (KPP – P0.42) today signifies that “tsupiteros” will not be left out of the market. As mentioned, this is a “value-creating” market. So, the market will unearth every inch of “unrealized” value that can be found.

Quotes from Yra Harris – “Trading God”, Principal, Praxis Trading

2006-11-04T23:38:00.000+08:00

“The market is always right. You’re not.”

“The first thing I know in a trade is not how much I can make, but how much I can lose. So my No. 1 rule is using stop-losses.”

“I’d rather hit singles or doubles consistently. I do a lot of small trades. That keeps me focused and aware of trades going on around me.”

Inside Stories: “The Lolo Files” – Would You Trust Him With Your Money?

2006-11-04T23:35:00.000+08:00

Lolo is a stockbroker who owns several listed mining companies. Lolo is on a roll! In the past 2 years he was able to raise additional capital from new and existing investors. If my numbers are correct, close to P2.0bn was raised. I guess Lolo really knows how to play the market to the hilt.

What puzzles me is why investors continue to be gullible despite the fact that Lolo has a spotty track record in creating shareholder value. One “Lolo-operated” company located in the Northern Philippines has a “remarkable” track record of reporting dismal earnings despite the fact that gold is trading at 25 year high. Based on its latest fillings, this “Lolo-operated” company has a forward hedge for his gold output at US$330!

But this earnings boo-boo is nothing compared to the scam he pulled with his other mining company. This story came from the horse’s mouth.

Last year, Lolo started buying out the overdue payables from its suppliers at 50% discount to face value. Lolo used a Cayman Island (or a British Virgin Island) registered company to buy the payables. Naturally, the suppliers could not have been happier since these payables are 3-5 years overdue! Most of these suppliers are based in Binondo.

But Lolo has a bigger plan for his supposed generosity. Recently, his other mining company raised new capital. This is perfectly fine except that part of the proceeds was earmarked for payment of advances and overdue payables. To put 1 and 1 together, you will see how skimming Lolo is. In effect, Lolo who already bought out the payables at 50% discount is now being paid in full. Amazing, how Lolo can play such a trick. If my computations are correct, Lolo easily pocketed P250 – 300m from the move. In other words, the company was “plundered” by Lolo. Had he been forthright, the discount from the buyout of the payables should have benefited the company and not him. I wonder why it’s auditors continue to sign-off the financial statements without doing proper due dilligence.

This situation sounds like the Enrons, Worldcoms and TYCOs of the past. Unfortunately, we cannot expect anything from our local SEC. They are clueless on how to "properly" enforce governance and transparency amongst listed company. Also, the current bull market will most likely bury this as a mere footnote in the overall boom of the mining sector. However, as an investor, it pays to know where you put your money.

So will you trust Lolo with your money? Think twice!

Blue (Cheap)!

2006-10-25T22:59:00.000+08:00

The roaring PSEi has lifted prices to levels not seen in 9 years. Despite the upsurge, the PSEi is still trading at reasonable valuations. Based on a forward Price Earnings Ratio (PER), the market is trading at 14x PER to 2007 earnings. The valuation excludes Ayala Land (ALI – P15.0) and Meralco (MERB – P33.0).

However, there are some big-cap counters that merit a second look. So lets review some blue (cheap) counters. These are essentially big-caps that are still trading at discount multiples.

Petron – (PCOR – P4.15)
The price of Petron still reflects the risk associated with the recent oil spill in Guimaras. I do believe that this provides investors an excellent buying opportunity. Petron is not off the hook as far as Guimaras is concerned. However, the potential cost to the company is overblown. The company is insured against oil spill. We also have to take into account that a potential litigation under Philippine settings will take at least 20 years to resolve. So in the end, this incident will just be a mere footnote in the overall picture.

We should see what happened to ABS-CBN Broadcasting (ABSP – P20.50) and gauge how the market can price in these “one-off” incidents. The share price of ABS-CBN has doubled after the ULTRA stampede incident that happened last January. Two weeks ago, the Department of Justice (DOJ) recommended filling of criminal complaints against ABS-CBN. The market simply shrugged of the news and push ABS-CBN to new highs.

Petron trades at 6.5x PER to 12/2007 earnings. Normally, Petron trades at a 30% discount to the market. Based on this assumption, Petron should be trading at 10x PER to 12/2007 earnings equivalent to P6.50/share. This represents a 56% upside from current levels. In this buoyant market, the potential return is definitely worth a second look.

Manila Water (MWC – P9.20)
MWC remains to be one of the cheapest blue chip counters in the market despite the 50% run-up in share price that we saw this year. MWC trades at 9.0x PER to 12/2007 earnings. I do not think that MWC should trade at a discount to the market considering that the company is poised to deliver 20% average earnings growth in the next 2 years. MWC should even be priced above the market. This means that MWC should be trading at P14.0 and not P9.20.

MWC is a unique utility play since it has both “growth” and “stability” in its earnings. You do not normally associate growth with utility counters. Utility stocks are usually “boring” and “steady” earners. In the case of MWC, it essentially relies on two factors - new customers and reduction in non-revenue water to grow its earnings. On both counts MWC continues to deliver. Total connections as of 1H06 grew by 13% generating while non-revenue water fell to 30.9% from 35%.

The situation of MWC right now is akin to MERALCO (MERB – P33.0) in early 90’s. During the said period, MERALCO aggressively invested to upgrade its infrastructure in order to get new customers and reduce its systems loss. Having delivered on both fronts; we saw the share price of MERALCO soar to as high as P250 from its offering price of P10.0/share in 1992.

A Lot of Bull!

2006-10-22T23:41:00.000+08:00

There is a lot of “bull” going around the market lately.

Quiet bull. Baby bull. Silent bull. Cautious bull. These are some of the bull tales that I heard in the past few weeks from market insiders. The good thing about these bull tales is that not everyone is convinced. These tales are mere “whispers” from key market movers. The public is still oblivious on what’s going on in the stock market despite the fact that the PSEi has moved form 1,200 to 2,600. A quiet run-up would give the market further room to expand. This will induce new funds to flow into equities.

I continue to receive emails asking when to sell the market. I guess, there is still no reason to sell the market. For now, the only reason to sell is to take profits. However, it is a weak argument considering that the odds favor the PSEi reaching new highs. Again, to quote Jessie Livermore: “In a bull market, it is the sitting that counts.” So sit tight and run your profits!

The only time to sell is when the ”bull” becomes a “bullheaded bull”. The Philippine Daily Inquirer (PDI) has not published any headline/front-page stories on the market. So on that note, we are still safe. Personally, I have not received any calls from long-lost friends asking me what stock to buy. Thus, the “housewife/doctor” theory has not been triggered yet.

Bank of P.I. (BPI – P58.50) + PSEi 2,617
Two things caught my attention last Friday. BPI rose 4.5% whilst the PSEi closed above 2,600.0 for the first time in 7 years. From experience, a strong move by BPI would normally signal a turnaround on either direction. If BPI continues its run on Monday, expect foreign buying to pour into the market. Note that at these levels, BPI is already trading nears its pre-1997 level prices. Again, these two milestones have gone unnoticed. However, these are key impetus in further re-rating of the market. For a bull-run to mature we need the banking and property sectors to lead the market. With BPI already off the blocks, it is a matter of time before other stocks chase the tape.

Republic Cement (RCM – P2.12); what now?
One of the best calls I made is on RCM. Since my post last Oct. 04, the stock has risen by 51% to P2.12. I do believe that it has more room to go. As mentioned, this is a value creating market. If “weaker” stocks like House of Investments (HI – P1.90), A. Brown (BRN – P1.58) have gone up significantly, there is no reason for stocks with very strong fundamentals not to trade nears its real value.

RCM has a market value of P15.26bn whilst Holcim (HLCM – P5.80) is valued at P37.0bn. In between these two identical stocks is P22bn in market capitalization. This means that for RCM to trade at par with HLCM, it should be priced at P5.20/share. This is a glaring valuation discrepancy that the market will have to correct soon.

Small (Cap) Wonders – Part 2, Don’t Be Afraid!

2006-10-12T18:18:00.000+08:00

Last week I wrote about why small is beautiful. Please read - http://bigbigtrade.blogspot.com/2006/10/small-cap-wonders-why-small-is.html .

What is good for BPC/DGTL is good for small-caps
I am glad to see the small-caps that I recommended have moved up except for Ionics – (ION – P2.02). I guess it is obvious that the play will shift to these counters. Liquidity flow to these counters is very encouraging. Based on my estimate, roughly 30% of the average daily value turnover of the market has shifter to small-caps. What is also obvious is that Benpres – (BPC – P1.46) and Digitel (DGTL – P1.50) have emerged as the small cap leaders. Note that for the past weeks, Benpres never traded below US$1.0m per day.

As a gauge, investors have to closely watch the movement of Benpres and Digitel in deciding when to unload their small-cap holdings. However, I do believe that both stocks still have a lot of room to move. So, the play is certainly not yet over.

Don’t be afraid
Don’t be afraid. Small-caps are generally more volatile than the other counters. So there will be some “whip-saws” along the way but I firmly believe that prices are still on an uptrend. If you are a good trader, you can certainly trade the ranges. However, if you are willing to wait, I guess sitting tight might be the best thing to do.

Also, I have seen certain cautiousness with the way the prices of small-caps are behaving. I received several emails asking me when to sell. This is good; since it suggests that the exuberance factor has not yet been priced in. Normally, I would sell when there is excessive optimism.

Value creating market
It is also quite clear that we are in a value creating market. This means that money flow will continue to seek undervalued stocks. As I mentioned earlier, a lot of counters are still priced at “crisis” valuation. This will not hold for long. Eventually, stocks that have weathered the crisis and have 100% chance of survival will trade at its proper value. I don’t think the liquidity flow that we are seeing right now will dry-up soon. If at all, we should see further improvement. Note that in 1996, the average value turnover was at P2.6bn per day equivalent to US$100m based on P26.0 : US$1.0 exchange rate. For us to approximate that amount, we should be doing P5.0bn. This implies that liquidity is still has room to grow.

Finally, my take on DGTL and ION
Two stocks that have propped up from my users are ION and DGTL.

For ION, I guess it is a matter of time before we see the stock trade back to its recent high of P2.80. I have confidence in the stock. I do believe that it has indeed weathered the crisis and has a 100% chance of survival. From a salvage value scenario, investors should look at ION on a continuing basis. I cannot speculate how the market will value ION. However, based on my own computation, the stock is worth P4.20 per share. Please check my past post on ION - http://bigbigtrade.blogspot.com/2006/06/ionics-ion-p216-looks-to-turnaround.html

On DGTL, I really do not like the stock simply because the fundamentals do not add up. I guess it will take a lot more resources to take market-share away for Smart, Talk+Text and Globe. What DGTL can offer, the three other networks can easily match or even do better. Note that communication has already been commoditized. The sector is faced with declining revenue per unit environment. So DGTL is faced with a tougher market condition moving forward. As a fringe player, I do not see how DGTL can create a ripple.

Having said that, it does not mean that the share price of DGTL will not go up. It is obviously on an uptrend. From the grapevine, there are talks that a pending deal is about to be forged and the whisper price is P2.50/share. Heck –in this market; there are a lot more stocks that can do better and will make you sleep better at night. So why bother.

Bull run … period!

2006-10-05T19:21:00.000+08:00

To quote Jessie Livermore: “In a bull market, it’s the sitting that counts”.

I received a lot of emails from my readers asking when to sell their stocks since most of their portfolios are sitting on hefty profits. Under current market conditions, patience is definitely a virtue. You rather be “long” than out of “stocks”. There is no argument that we are in a bull run. So don’t be left behind and go for the big gains. Forget about trading the spreads. My belief is stocks will continue to trend higher with all the elements of a major run-up coming into fore. My near term target of 2,725 is a given.

What is interesting is that local money continues to pour into the market. This is the missing link in the earlier run-ups. Note that the rise of the PSEi (PSE – 2,561) from 1,100 in 2003 to its current levels was driven mainly by foreign funds. During that period, we saw index heavyweights such as PLDT (TEL – P2,225), Petron (PCOR – P4.10) and Ayala Land –(ALI – P14.0) rose by at least 300%. Local money plus foreign buying is a potent mix in driving a bull run.

To read more about Jessie Livermore, please go to http://www.marketthoughts.com/jesse_livermore.html

Small (Cap) Wonders – Why Small is Beautiful?

2006-10-04T00:57:00.000+08:00

For the past few weeks, we have seen a steady accumulation of small-caps – stocks with market value of less than US$150m. I do believe that this is a sign that local money is flowing back into the market. Locals – or “tsupitero” in the vernacular would usually trade stocks that are priced below P2.0 per share. The timing is perfect and I do think that investors should ride the tide and start investing in these stocks.

So why am I positive on small caps? Here are my arguments:

1.) Big-caps and second liner stocks have significantly risen in value for the past 3 years. Thus, small-caps look cheap in terms of relative price appreciation. Note that proxy stocks like PLDT (TEL – US$43.90), Petron (PCOR – P4.05) and Megaworld (MEG – P1.84) rose at least 5-folds during the said period.

2.) Profits from the big caps and second liner stocks will likely flow to small-caps. This has always been the pattern. After small caps, my next bet is for investors to chase the “basura” or garbage stocks.

3.) A lot of small caps are still trading at “crisis” prices. This means that share prices still reflect bankruptcy risks that should already be out of the equation.

So what stocks to buy? Here is the list of my small cap wonders:

1.) Kuok Philippine Properties (KPP – P0.28) – KPP is an asset play that investors have ignored. Its 40% stake in Edsa Property Holdings (EPHI – P1.24) is worth roughly P3.0bn or P.88 per share. Excluding its other liabilities, KPP should be trading at P.60 per share.

2.) Benpres (BPC – P1.28) – BPC is definitely a recovery play. First, the P/$ rate is expected to appreciate to P48 to US$1.0. This should add at least P.40/share to its current NAV estimate of P1.24/share. Second, BPC is looking to sell its 49% stake in First Philippine Infrastructure Dev’t Corp. (FPIDC). The company is expected to realize at least P5bn gain from the deal.

Please check my past post on BPC - http://bigbigtrade.blogspot.com/2006/07/benpres-bpc-p112-bet-whats-brewing-sir.html

3.) Republic Cement (RCM – P1.48) – I have said enough about the stock. Please check my past post: http://bigbigtrade.blogspot.com/2006/05/why-i-bought-republic-cement-rcm-p124.html . Simply put, it’s a matter time before this stock trades at par with Holcim (HLCM – P4.90).

4.) Ionics (ION – P1.98) – Please check my past post: http://bigbigtrade.blogspot.com/2006/06/ionics-ion-p216-looks-to-turnaround.html. The stock is a turnaround story waiting to be discovered.

Interesting Comparables; Finding Value In A Bull Market

2006-09-21T00:24:00.000+08:00

As the market roars past the 2,400-resistance level, I have been receiving emails from my readers asking where to find value in a surging market. My advice is to keep the search simple and stick to comparative valuation in deciding where to find value.

Here are some interesting comparables worth pondering:

1.) Banco de Oro (BDO – P38.5) vs. Bank of P.I. (BPI – P58.0). BDO trades at 1.6x Price to Book (P/BV) whilst BPI trades at 2.7x PBV. I do think the valuation disparity between the 2 banks is unwarranted. The debt issues of both BDO and BPI are rated at parity by S&P Ratings, thus there should not be much valuation disparity in its equity stock. My view is that BDO should trade at P50.0, equivalent to 2.2x P/BV. At these levels, BDO will approximate the valuation of BPI. The 20% valuation premium of BPI – 2.7x P/BV over BDO – 2.2x P/BV; is more defensible.

2.) Manila Water (MWC – P9.2) vs. Meralco – (MERB – P29.50). I have been a believer in MWC since I recommended the stock last May. Please check - http://bigbigtrade.blogspot.com/2006/05/why-i-will-buy-manila-water-mwc-p650.html . MWC currently trades at 9.7x Price to Earnings (PER) ratio whilst MERALCO is valued at 18x PER. My view is that MWC should trade at a premium vis-à-vis MERALCO. MWC is in a unique position to grow its revenue by increasing its customer base and decreasing its non-revenue water (NRW). This means that MWC can grow organically without relying on rate increases. Other utility companies like MERALCO, need to petition for a rate hike to see an improvement in it bottom-line. The growth of MWC is predictable based on its track record, while a play on a possible rate hike for MERALCO is speculative.

Given these scenarios, I would be paying more for a predictable growth story. At the least, MWC should be trading at par with the market equivalent to 13x PER or P13.0 per share.

3.) Petron (PCOR – P3.95) vs. Philippine Market (PSEi – 2,512.0). Petron is one stock that has been battered by the negative press from the Guimaras oil spill. My view is that beyond the negative PR, the financial impact is minimal. Petron generates P200bn in revenues and roughly P12.0bn in pre-tax income. Thus, even a P1.0bn clean-up bill should not be an issue. Besides, this will take years to resolve.

Also, refiners and fuel distributors enjoy positive impact in margins against a backdrop of a declining oil price. Crude oil just broke down of the US$63.0/barrel level signifying further downside. This should bode well for the company moving forward. My view is that at 6.0x PER, Petron is way too cheap for an established blue-chip counter in the market. The PSEi currently trades at 13x PER

The Big Move – Why The PSEi Is Poised To Scale New Heights

2006-09-05T23:47:00.000+08:00

We should see a big move in the PSEi in the coming days. It seems that the market will attempt to break the 2,400 resistance level. My medium term target is for the PSEi to reach 2,750 – 2,800 levels.

Why am I bullish? Here are my arguments:

1.) Earnings – 1H06 corporate earnings came in better than expected. In the coming months, we would see an upward revision in earnings. Based on my estimate, earnings for 2006 should grow by at least 15-17% versus the earlier target of 10-12%.

2.) Peso at P48.0 – The Peso has appreciated by almost P3.0 since end July. I do think it will continue to appreciate towards P48.0. Please check my past post: http://bigbigtrade.blogspot.com/2006/03/peso-at-p480-here-we-come.html . The movement of the Peso is a leading indicator for the stock market. As it is, we should see some shifting of funds from US Dollar assets to the equities market.

3.) Positive funds flow – For the past one and half months, money has slowly creep back to the market. We have seen average daily value turnover reach P2.0bn. What is interesting is that for the past two weeks, average volume turnover rose to P2.5bn. This should signal that more money is waiting to be invested in the market.

Nice Read - A Reason or Excuse To Be Optimistic

2006-09-04T16:45:00.000+08:00

Today, I am going to tell you mostly good news....

The Philippine economy is growing at its fastest rate today in the last
quarter century. It has grown by an average of 4.7 percent per quarter
consecutively over the last 22 quarters. This is the highest growth ever
over the longest period since the post-war. This means that economic
production has increased by 25 percent, in real terms, in the last five
years.

During the same five-year period, the population grew by 13 percent or
by ten million Filipinos. In other words, economic growth now outpaces
population growth at a ratio of two to one.

This means that in due time, the economy will be able to feed, educate
and clothe the population that has been born and the population still
to be born. Families can actually multiply without fear of burdening the
economy.

Twenty-two consecutive quarters of positive growth. That's five and half
years. The economy had never grown so fast and for so extended a period
of time. Until now.You may ask: Why is the economy growing so fast? The
answer is that the sectors of the economy that should deliver value
added
are all growing - services, agriculture, industry and manufacturing.
adding vibrancy to these sectors is consumer spending and the rise of
cellular technology. In 2005, agriculture grew by 1.8 percent; industry
by 4.85 percent, and services by 5 percent. Services now accounts from
53 percent of the total output of the economy. What's services? Thats
telecommunications. Transportation. Banking. What's telecommunications?
That's cellular phones and text messaging. Internet mailing and gaming.
Even banking is all about computers and the telephone. How can you
account for ATMs but for the computer and the telephone.

In 2005, of the total production of the domestic economy, on the
expenditure side, of P5,418 billion or 5.4 trillion pesos, personal
consumption expenditure or PCE accounted for 3,773 billion pesos or
P3.77 trillion, 69.6 percent of the total. Government consumption added
another 525.7 billion pesos or 9.7 percent. So consumers and the
government are providing Filipinos 79.3 percent of the economy on the
consumption side.

This means both consumers and the government have money. Government has
money because of the dramatic increases in tax rates, especially of the
value added tax, and in the efficiency of the government tax machinery.

Because of computerization, the incidence of the tax avoidance and the
tax evasion has been markedly reduced. Taxpayers today pay an average
of 20 percent of their income as tax. It used to be zero.

Consumers have money because of OFW remittances, which amounted to $10.7
billion in 2005. That's money remitted thru the banking system, about
P588.5 billion. It is believed the P588 billion represents only 80
percent
of the total remittances. Actual remittances could be as high as $12.8
billion or P706 billion. Where did all that money go?

In cellular phones and e-loading for text messaging. Today, 98 percent
of the 7,107 islands of the archipelago are linked, wirelessly, by
cellular phones. For the first time ever, you can say the country is
united, by technology, by information technology. For the first time,
the country is united by one medium, the cellular phone, and by one
message, that coming from the text messaging.

One hundred ten million messages are sent out everyday by Filipinos.
that's 40 billion text messages a year. This makes us the text capital
of the world.

Today, eight million Filipinos are connected to the Internet, almost ten
percent of the population. Another 3.5 million are linked thru
friendster,
the chat web site. There are 38 million cellular phone owners, about 45
percent of the population. 38 million or 45 percent is not to be sneezed
t, considering that it costs at least P4,000 to get a cellular phone.
That amount is almost eight percent of the per capita income of P53,000
per year.

If you multiply P4,000 by 38 million, you get the figure P152 billion.
That's the amount of fixed capital investment made by the Filipino
consumer in cellular phones, on the equipment side alone.

In 2005, PLDT became the most profitable Philippine company with
whopping
profits of P34.5 billion - the biggest for any company in our corporate
history. Sister company Piltel made P13.45 billion. Rival Globe Telecom
made P10.3 billion in profits.

Abroad, the most profitable business is energy, oil. In the Philippines,
the most profitable business is cellular phone. In 2005, the three phone
companies, PLDT, Piltel and Globe made together P58.22 billion in
combined profits - or 29 percent of the P200 billion combined profits of the 100

most profitable companies listed in the stock exchange.

Did you know that between July 8, last year when the Hyatt Ten resigned
and July 8 this year, when President Arroyo has not yet resigned, the
stock market created a whopping P2 trillion of wealth?

Why? Because business has been good. Companies are registering profits
on a scale they have never experienced before. PLDT 34 billion pesos.
SM Investment P10.4 billion. Ayala Corp. P10 billion. San Miguel P8.97
billion. Why are these companies making so much money? Because of
telecommunications, specifically, wireless phone. And because of
consumer spending.

That is why today, the richest Filipino is Henry Sy, the retailing
tycoon.
He is worth P100 billion, according to my computations. The second
richest?

The family of Augusto Zobel de Ayala. He is worth P49.57 billion. The
third richest? This is surprise. Manuel V. Pangilinan, the chairman of
PLDT. MVP is worth P49 billion, richer than George Ty, No. 4 with P44.5
billion, and Eduardo Cojuangco, Jr. No. 5, What about beer, tobacco and
airline Taipan, Lucio Tan, who for many years, the Forbes Magazine has
ranked as the richest Filipino? He is no longer the richest Pinoy. He
is only No. 6 with 35 billion.

How did the rankings change so drastically? Because consumer spending
habits have changed drastically. Food is no longer the No. 1 consumer
item. It is cell cards and e-cards. People are buying less cola, less
beer, less cigarettes just so they can save money to buy a cell phone,
a SIM card, and an e-load.

This morning I came from a lecture by McCann Erickson on the activities
of the Filipino teenagers. The Filipino teenager is connected,
virtually.

In the McCann survey, text messaging and using the computer for games
and the internet together is now the No. 1 activity of the Filipino
teenager. Window-shopping is now a poor second.

In 2005, according to McCann, 40 percent of Filipino teenagers had for
their usual leisure activities, text messaging; followed by 38 percent
playing computer and video games; window shopping 36 percent; and email,
surfing or chatting on the net, 27 percent. Five years ago, the
comparable ratios were 22 percent window- shopping, 12 percent text messaging, 17
percent playing computer and video games, and 13 percent emailing,
surfing or chatting on the net.

In five years, text messaging increased 3.3 times to 40 percent; playing
computer video games increased 2.2 times to 38 percent, and email or
surfing the net increased two times to 27 percent. In other words, all
these
activities doubled in frequency while that of shopping declined, from 22
percent of teenagers in 2000 to 36 percent in 2005. McCann says Filipino
teenagers now spend more on internet cafes, prepaid phone cards and post
paid cell phone bills, while trying to economize on food, beverage,
personal care, transportation, clothes and reading materials.

That is why sales of Coke are down, sales of hamburgers are down, and
clothes shops are having sales regularly instead of occasionally. This
is why in sari-sari stores, the best-selling item is not milk not
coffee, is not sugar, is not sardines, is not cosmetics. But prepaid phone cards
and e-loading cards.

Tony Lopez
Publisher
BizNewsAsia

Why Equitable-PCI Bank shareholders should reject the SM Group offer; SEC should not approve the terms

2006-09-04T11:37:00.000+08:00

Last week, SM Group announced that it would tender all the remaining Equitable PCI – (EPCI – P79.0) it does not own for P92.00 per share. Effectively, SM Group is looking to acquire 55.1% of EPCI for a total consideration of P36.9bn. Payment for the said purchase will be broken down into 4 trances – 10% by October 2, 2006, 10% by June 2 2007, 10% by Feb 2, 2008 and 70% by October 2, 2008.

I strongly suggest that shareholders of Equitable PCI Bank reject the deal. Both SSS and GSIS should seriously consider other options and lead the cudgels for the minority shareholders.

Why the deal sucks? Here are my arguments:

1.) Pricing – The offer price is equivalent to P80.50 and not P92.50 based on the present value of the offer price. This represents a negligible premium over the P70.50 weighted average traded price of EPCI for 2006. In most take over transactions, the pricing is at least 20% above the prevailing market price of the acquired company.

2.) Valuation – Effectively, SM Group is paying “just” 1.5x Price to Book (PBV) based on EPCI’s 06/2006 book value. Last May, Union Bank (UBP – P43.0) paid 2.0x PBV when it acquired iBank – (IBNK – P37.50). At the minimum, EPCI shareholders should be paid the same value equivalent to P107/share.

3.) Payment term – The SEC should not allow partial payment of the tendered shares. This will set a bad precedent in future tender offers. To be fair, they should require the SM Group to offer an outright payment option based on the present value of the offer price.

4.) Other people’s money - What is also unfair about the payment term is that effectively, the minority shareholders are the one funding the SM Group. I cannot imagine how one should sign-off his entire voting rights in exchange for 10% cash payment. Worst, the promissory notes to be issued by SM Group will backed by the same EPCI shares that it is going to tender. The SEC should at least require SM Group to put in additional collateral to back the promissory note.

5.) EPCI does not need SM Group – Obviously, it’s SM Group that needs EPCI to fast track its goal to become the number one bank in the country. All EPCI needs to do is to offer the 10.84% - 78.8m EPCI treasury shares; to its existing shareholders. The exercise should raise at least P6.5bn. This will be enough to recapitalize the bank at minimal dilution to its existing shareholders.

Unfortunately, it seems that the minority shareholders will be sucked out of the deal. Last week, Equitable PCI Investments agreed to tender the 10.84% EPCI treasury shares to SM Group without giving existing shareholders pre-emptive rights to the shares. This clearly violates the SEC Corporation Code which states that all shareholders be given equal rights to retain its stake in case of a dilution. I was wondering why our representatives in EPCI headed by SSS and GSIS chairpersons respectively approved the deal. They were placed in the board of the bank in order to safeguard the rights of the minority shareholders.

It seems that the writings are on the wall. What Henry Sy wants, Henry Sy gets. While, he might have finally won this battle, the group must brace itself for the negative PR impact. It is certainly not a good way to end his swan song.

Random Musings: Empire East (ELI – P0.47) Celebrates 10 Years of Listing

2006-08-23T21:26:00.000+08:00

Empire East recently celebrated its 10th year listing anniversary. How time flies! I remember vividly in 1996 that ELI was one of the most anticipated Initial Public Offering (IPO). The issue was offered at a “fung-sui” adjusted price of P12.88 per share. I guess the “88” bodes well for the issuing company.

The offering was a success. It reached a high of P17.25 on its first day of trading. It made Megaworld – its parent company lots of money through the secondary sale of its stake in ELI. It generated additional funds for ELI through its primary offering. For a while, Andrew Tan was the undisputed “King of the Hills”. He has US$400m – roughly P21bn in current peso, in war chest to compete with the well entrenched “Castilaloy” property developers. The market capitalization of ELI and Megaworld combined is in excess of US$1.0bn. This made the Ayalas look like the friars of the forgotten past.

But the reign did not last long. As in sex – it always feels the best just before it ends. By Q297, all hell broke loose. The Thai Baht was floated triggering the now infamous Asian Financial Crisis of 1997. The crisis spread like wild fire across the ASEAN region with every asset class being sold down to its knees. Share price of ELI dropped to as low as P0.41 per share.

Looking back, the IPO of ELI ushered in the 7 year long bear market that ended in 2003. Hopefully, its 10th year listing anniversary should herald the continuation of the bull market that we are seeing now.

What have we learned from this?

1.) Two – and only two factors drive share price: earnings and growth. ELI still has not recovered from its pre-crisis high because its earnings are nowhere near the levels it predicted 10 years ago. At current levels, ELI is still 90% off its split adjusted peak of P4.00.

2.) Bull markets always end in a nasty fashion. The bull market of the early 90’s was driven by the property sector. On the flip side, this holds true as well. This is no different from the bursting of the internet bubble that drove NASDAQ down by almost 70% in one year.

The Benpres (BPC – P1.12) Bet; What’s Brewing Sir?

2006-07-31T19:24:00.000+08:00

Something is brewing in Benpres! For the past two weeks, the volume turnover of the stock has reached 4x its daily average. It is quite an unusual behavior considering that for the past 18 months, the stock has traded at a range of P0.90 – P1.24 with steady volume. We have not seen this surge in volume ever since the share price of Benpres broke out of the P.80 levels in the early 2005. Recall that Benpres was the darling in 2003 when its share price rose from P0.11 to P0.80.

What’s happening? At this stage, we can only speculate – however, I am willing to place my bet since money flow is “pretty good” at this stage. Again – like RCBC (RCB – P18.75), it is one of the “win-win” stocks that merits my attention. On the downside, I can easily get out at a minimal – say 10%, loss since the stock is well supported at the P1.0 levels. On the upside, the “money-flow” speaks for itself. In other words, money talks! It looks like “insiders” are voting with their checkbooks. So the odds are pretty much skewed towards a surprise development.

So, how far can the stock run? Let’s do a rough estimate of the company’s Net Asset Value (NAV). As of end Q206, this is how the assets and liabilities statement of Benpres looks like:

Listed Equities:
ABS-CBN 56% P9.7bn at market value
FPH 44% P11.3bn at market value

Unlisted
FPIDC - 49% P7.3bn at 10x 2005 Income
Sky Vision 22 P0.2bn book value
Rockwell 25 P1.5bn at NAV

Others P1.0bn 50% off carrying cost

Less
LTCP P2.0bn
USD$ Notes P7.9bn
Bayantel P15.8bn

Total P5.6bn
NAV P1.24

At current levels, the NAV of Benpres is at P1.24 per share. So, there seems to be very little room for upside if we based it on NAV play. But, as mentioned, we are speculating on a “surprise” development based on the movement of the stock. Since Metro Pacific (MPC – P0.245) already announced that they are not interested in FPIDC, my next bet is that there might be a deal brewing in Bayantel. Note that Benpres is liable for up to P15.8bn in its telco subsidiary. This is due to the unconditional guarantee that the company gave in 1997 to the creditors of Bayantel. Thus, roughly ¾ of Benpres’ net assets are effectively tied up with Bayantel’s liabilities. This translates to P3.00 per share impact on the NAV of Benpres. Any deal that will remove Bayantel from its books will be positive for Benpres.

How will the deal work out? Your guess is as good as mine? Essentially we are speculating on a possible P3.0 incremental gain in its NAV. Assuming, Benpres gets to recover “just” 1/3 or P5.0bn from its Bayantel fiasco, this should translate to P1.12 per share gain in its NAV. On a risk reward standpoint, my downside is 12% at P1.00 while the potential upside is P2.24 or equivalent to 100% return from current levels. The odds are definitely worth looking into. So what’s brewing, Sir?

Why Cost of Equity matters; RCBC - (RCB - P18.0) is a “win-win” stock

2006-07-20T11:55:00.000+08:00

Cost of Equity - the simple logic
The expected return in putting money into the market is to earn more than the cost of equity (COE)). This is computed by adding the 365-days T-bill rate and the equity risk premium. In the case of the Philippines, its 7.8% plus 5% equity risk premium or roughly 12.8%. The logic here is that if you cannot earn more than the COE, you are better off parking your money in risk-free government securities. That's how the logic works. Investors should simplify their investment objectives by keeping this in mind.

Unfortunately, most people think that they have to hit the jackpot when they invest in the market. Even the Philippine Stock Exchange (PSE) came out with an ad telling investors that they can double their money in the market. Doubling or tripling your money in the market is incidental. In the end it is all about managing your risk. Three key points to remember:

1.) Rationalize your objective vis-à-vis other available investment alternatives
2.) Buy below the intrinsic value of the stock. This separates investors from speculators.
3.) Run your winners; cut your losers.

RCBC is a “win-win” stock
I took note of RCBC and I believe it is worth a second look.

RCBC currently trades at .9x Price to Book Value (P/BV). It is the cheapest stock in the banking sector. I find value in this since RCBC remains one of the top banks in the country. It ranks 7th and 10th respectively amongst local banks in terms of resources and capital

The banking sector trades at 1.6x P/BV. RCBC is the cheapest, while the next cheapest is Equitable PCI (EPCI - P74.50) at 1.3x P/BV. BPI (BPI - P49.0) - the proxy stock for the sector trades at 1.8x.

Both RCBC and EPCI are in the same boat. For the past 5 years, growth has stalled and asset quality has deteriorated. Both banks badly need to recapitalize. The difference is that EPCI has found a white knight in Banco de Oro (BDO). I think it's a matter of time before RCBC can find one.

So on the downside - or in this case, at the minimum, I think RCBC should trade closer to its book value of P20.50. This should give me a comfortable 13.8% return. With the sytemic risk in the banking sector almost at zero, it is a matter of time before the stock trade close to its book value. Thus, this satisfies my first premise of earning more than my Cost of Equity (COE).

On the upside, RCBC is ripe for a mergers and acquisition (M&A) play either as an acquisition target or a recapitalization exercise. In any case, the value will have to go higher compared to where it is right now. Say, we use EPCI as the benchmark; RCBC should then be trading at P26.50 equivalent to 1.3 P/BV. Note that when Union Bank bought iBank, it paid roughly 2.2x P/BV on its acquisition. So, in the long run, there is a chance for RCBC to trade between P26.50 - P40.0 depending on how the M&A scenario plays out.

So, on both ends, RCBC is in a “win-win” situation.

Questions from my readers; MWC (P7.60) and ELI (P0.45)

2006-07-18T17:26:00.000+08:00

I would like to take this chance to answer some questions from my readers.

What do I do with Manila Water (MWC)? Its share price has rallied to P7.90. Should I buy, sell or hold? What is the impact of the Maynilad bidding to the stock? The_black_magic

I remain bullish on MWC. I believe the stock will continue to outperform the market. At current levels, MWC is trading 7% off its high of P8.20. Considering that the Phisix has corrected 16% from its peak, there is really nothing to be worried about. There is a basic rule in investing that says: sell the losers; hold on to the winners. Obviously, MWC is a winner and there is no reason selling the stock.

Aside from being a winner, I also like MWC since the stock is still trading below its intrinsic value. Please check http://bigbigtrade.blogspot.com/2006/05/why-i-will-buy-manila-water-mwc-p650.html . Utility stocks, like MWC, are considered as “boring plays” since earnings are supposed to be steady and predictable. Thus upside will be limited. However, I will not think twice if I can find a utility counter – like MWC, trading at 7.7x PER and growing at 24% per year. The market is simply paying too little for its growth prospects. At current valuation, MWC is trading at .32x Price/Growth (PEG). A more logical valuation should put the stock at .80x PEG or equivalent to 20x PER. That’s a lot of upside for a steady earner like MWC.

On the other hand, it is still quite early to speculate on the possible impact of the Maynilad bid. However, initial reports says that MWC is in the best position to win concession based on its track record in successfully running the east zone water franchise. Should MWC win the bid; that will be a new story to watch out. Stay tuned.

Can you please write something about Empire East (ELI) in your blog? Slick

I have nothing good to say about ELI. In fact, I am quite suspicious about it’s P1.0bn stock buyback program that was announced last April.

Please note that we saw a spike in the share price of ELI after they announced the buyback. The share price reached a high of P0.70 in 3 days. However, after the initial euphoria, the stock underperformed the market. What is even suspicious is that during the huge market rally that we saw last May when the PSEi reached record highs, the share price of ELI did not even budge. Worst, when the market tanked, the share price even outperformed the market on the downside.

Looking at the disclosure of the company, it seems that the last buyback that the company did was on May 26. That was almost 2 months ago. Besides, if you add up all the buybacks that the company disclosed since the announcement, it hardly adds up to P50m – or roughly 5% of the committed amount.

So is the company really serious in its buyback program? Do they have funds to do the buyback? Is the announcement just a grand plan to favor a few market players? An honest to goodness buyback program should see ELI buying their shares over time regardless of the market condition. That’s the essence of a buyback program! In my opinion, there seems to be no program at all.

Universal Robina (URC – P18.50) buys Robinson Land (RLC – P10.75) shares; JG Summit (JGS – P6.10) has some explaining to do!

2006-07-10T23:12:00.000+08:00

Universal Robina disclosed that it will acquire 293m Robinson Land shares from Express Holdings. The deal is valued at P3.5bn based on the P10.75 closing price of RLC today. Express Holdings is a fully owned subsidiary of JG Summit. Express Holdings is primarily a vehicle used by JGS to provide liquidity for its listed units. There is nothing wrong with this except that it has to disclose why it sold its holdings in RLC to URC. It simply transferred the holdings from one pocket to another. The transaction looks odd.

URC recently raised P4.7bn from an international offering. I don’t think the work program calls for URC to invest in RLC. Investors will be critical of this transaction. I guess this is the reason why shares in JGS related companies have been underperforming the market.

I have recently turned positive on JGS related stocks. Please check http://bigbigtrade.blogspot.com/2006/05/emerging-plays-why-jg-summit-jgs-p780.html
However, the conglomerate has to come clean with its recent actions. Why is JGS in a rush to cash out its holdings in RLC. What is the financial objective of URC in investing in RLC. It is totally unrelated to its food business. It seems that JGS is going back to its old habit of moving funds from one related company to another without properly explaining the actions. As a publicly traded company, JGS cannot just move funds as if it is still a family-owned private entity. Until these issues are cleared, I will be staying out of JGS related stocks.

Ionics (ION - P2.16) Looks To Turnaround

2006-06-27T22:11:00.000+08:00

I saw a report on Ionics written by Abacus Securities published in Finance Manila - http://www.financemanila.net/forum/viewtopic.php?t=356&postdays=0&postorder=asc&start=30

Abacus Securities expects Ionics to earn P161m (EPS – P0.38) in 2006 and P332m (EPS – P0.76). After 3 years of losses, Ionics looks to turnaround its operations this year. The crucial signal is for Ionics to report positive 2Q06 numbers to prove that 2006 will indeed be a turnaround year. In fact, Ionics reported a small profit in March.

I love turnaround stories! This gives investors considerable upside potential.

Based on the numbers presented by Abacus Securities, I believe Ionics should be trading at P4.20 per share. Here is how I arrived at my price target:

1.) Value of Core manufacturing business is P2.66. This is based on 7x 2006 earnings.
2.) Value of other assets, which includes cash and marketable securities amounts to P676m or roughly P1.60 per share.
3.) Adding both values equals to P4.20.

At these levels, investors are paying only for the value of its other assets (P1.60) and effectively paying 1.5x PE on its manufacturing business. I guess the stock looks too cheap to ignore.

Skyped-Out For Telcos

2006-06-27T17:06:00.000+08:00

Skype (www.skype.com) is a service that allows users to do voice call over the internet. The service is fairly simple to use. Just download the application from their website, invite your friends to your call list and viola – u can now talk seamless – and free online! What is amazing is that Skype allows you to call any number worldwide – be it landline or mobile. They call this service Skype-Out. Currently, you can use Skype-Out to call any US or Canada number for free.

Skype was bought by eBay in 2005 for US$2.5bn. Currently, the company generates close to US$100.0m in revenues per year. It has 100m users to date. The company expects to hit US$500.0m in revenues by 2007. For a company that started in 2003, this is another “Google-like” phenomenon in the making.

Skype symbolizes the new era in voice communication. This is similar to the launch of Netscape browser in 1995 that heralded the internet era. We have been talking about voice over internet protocols (VOIP) and I guess the era has arrived. This is bad news for the telcos as users will switch to VOIP service. Note that telcos generate close to 1/3 of its revenue from inbound call traffic.

The worst dilemma for telcos is that they have to grow their internet business but at the same time, they have to cede the high value business to the likes of Skype, Yahoo!, Google etc.

I am "long-term" bearish on telco stocks. They are entering a very difficult operating environment. Here are my arguments:

1.) Telcos are no different from utility companies. Its growth model is scalable only to a certain extent. I guess at 45% mobile phone penetration in the country, it will be very difficult for telcos to grow the market.

2.) There is a finite demand for phone calls. You can only consume as much phone calls no matter how much the price drops. This is no different from water and electricity consumption.

3.) Revenue environment is becoming more competitive. Recently, Globe and Smart announced series of price cuts. This means that revenue per unit will continue to drop.

So I guess we have seen the high of telco stocks. At most PLDT and Globe will only trade within the 8x-11x PER range unless there is an overall PER expansion for the market. I hate to see analysts say that PLDT/Globe is cheap at single digit PERs. I guess, these stocks ought to trade at those levels since their growth era is gone. PLDT rose from P250 to P2,300 on the back of de-leveraging and earnings growth story. With these elements gone, it will be hard sell for the telco stocks.

Money (Off) the table and some random toughts

2006-06-11T00:50:00.000+08:00

Ouch!!
The past weeks have been painful to investors - ouch!!! Money were made and lost in a matter of weeks. I guess the writings are on the wall - at best the market will consolidate within the 2,100 - 2,400 range. At worst, we might trade lower and hit 1,800. So far, I am still bias towards the market consolidating and this should give investors an opportunity to reposition their portfolio. My only worry is that liquidity might dry up. The P900m traded last Friday is quite worrisome. Liquidity, more than anything else is the key driver of the market. I have essentially kept my portfolio intact except that I have reduced my holdings by 25% equally across all my holdings. I have taken money off the table in order to realize some of the gains I made this year.

Gold.... gold ... gold
So will gold still trade higher? I am not an expert on this but I have been following the commentary of Paul Van Eeden. Let me share with you some of his comments.

Please check http://www.paulvaneeden.com/displayArticle.php?articleId=157 and http://www.paulvaneeden.com/displayArticle.php?articleId=158. What Paul is saying is that gold will go up since he does not believe that the recent rise in US$ is sustainable. Gold trades "contra" US$. The recent drop in gold price is driven by the rally in the US$. The slowing US economy will negatively impact the dollar in the long run. However, he is not bullish on other metals such a copper, silver since a slowing global economy will crimp demand for these metals.

RCM
The market ignored the 1Q06 earnings release of RCM. The good news was buried deep in the bear pen. RCM reported that earnings in 1Q06 rose 88% to P294.0m. If we annualize this figure, full year earnings can reach P1.4bn. So at current levels, the counter is trading at 6.4x PER. However, what is more important is to see the cash flow of the company. In 2005, the company reduced its debt by P1.5bn. In 1Q06, total debt repayments reached P558m. So for the past 5 quarters, the company was able to retire P2.0bn in debt. In terms of valuation, debt reduction should translate to incremental equity value. On a per share basis, the P2.0bn should translate to roughly P.30 incremental value. Looks like the market has not factored this in.

Beyond these good numbers. the management of RCM should look into ways to improve the liquidity of the stock. The most obvious thing to do is to distribute the RCM shares held by South East Asian Cement Holdings (CMT) to its shareholders. This should free up some 300m RCM shares to the market. I wonder why management has not thought about this. It does not make sense to have two listed companies for one operating asset.

Money On the Table - My Portolio Summary 05/19/06

2006-05-21T23:39:00.000+08:00

JG Summit (JGS) - 18.0
Republic Cement (RCM) -13.4
Kuok Philippine Prop. (KPP) - 8.3
Manila Water (MWC) - 24.3
Manila Mining (MA) - 13.2
Digitel (DGTL) - 12.3
Global Equities (GEI) - 4.0
Lepanto B (LCB) - 6.6

Added Manila Mining and Digitel

Emerging Plays – Why JG Summit (JGS – P7.80) Deserves a Better Valuation

2006-05-14T23:01:00.000+08:00

Two weeks ago, I wrote about how Manila Water (MWC – P7.70) is emerging as the utility play vice MERALCO (MERB – P22.00). Please check http://bigbigtrade.blogspot.com/2006/05/why-i-will-buy-manila-water-mwc-p650.html . This week, lets see why JGS has emerged as the conglomerate play sans Benpres (BPC – P1.26).

In an ironic twist, we are seeing a switch to “Gokongwei” premium vis-à-vis a “Lopez” discount. Recently, both conglomerates offered their shares to the public. First Generation (FGEN - P50.50) traded down on opening day whilst Universal Robina (URC – P24.0) traded up during its listing.

Obviously, the market voted with their dollars. JGS is trading at a 10-year high whilst Benpres is trading at 88% off its peak. How the fortunes of these two conglomerates have moved in opposite directions is one for the books. In 1998, both companies were riding high when their stake in PCI Bank was sold for US$800.0m.

A quick look at JGS shows that the stock is trading at 22% below its book value of P10.0. I do believe that this valuation discrepancy cannot continue since the company has proven its ability to grow shareholder wealth. Here are some examples:

1.) It bought back close to 350m URC shares when the stock was trading below P6.0. Recently, it placed out the block for P6.0bn generating close to P4.0bn in investment gains.

2.) In 1999, JGS bought a 23% stake in UIC – a Singapore based real estate company for S$310.0m. The stake is now worth S$452.0m. However, what is more important is that JGS was able to reallocate its assets overseas when the local currency was trading at P40 to US$1.0. This allows the company to ride out the depreciation of the Peso.

Recently, investors snapped up US$300m worth of JGS bonds. The offering was 5x oversubscribed. On the other hand, URC and RLC continue to outperform the market. Shares of both companies are up 10-folds since 2003 and is now trading at a premium to the market. URC trades at 17x whilst RLC is priced at 25x versus the 15x PER of the market.

I guess, all these point to the fact that the market is willing to pay a premium on Gokongwei companies. I guess it is a matter of time before they start paying a premium on JGS and thus zero out the valuation discrepancy. At the least, JG should be trading at par with its book or about P10.0 per share. Longer term, I do believe that it should be trading near its Net Asset of Value (NAV) of P12.0 per share.

Money On the Table - My Portolio Summary 05/13/06

2006-05-14T21:06:00.000+08:00

Stocks (Code) - % / Total

JG Summit (JGS) - 25.6
Republic Cement (RCM) -22.1
Kuok Philippine Prop. (KPP) - 10.5
Manila Water (MWC) - 26.6
Global Equities (GEI) - 5.5
Lepanto B (LCB) - 9.8

Big movers - RCM, LCB + GEI
Slowpokes - KPP

Sold out CHI

Money On the Table - My Portolio Summary 05/08/06

2006-05-07T23:23:00.000+08:00

Stocks (Code) - % / Total

Cebu Holdings (CHI) - 15.8
JG Summit (JGS) - 26.3
Republic Cement (RCM) -16.6
Kuok Philippine Prop. (KPP) - 9.9
Manila Water (MWC) - 21.6
Global Equities (GEI) - 3.3
Lepanto B (LCB) - 7.3

Big movers - CHI, JGS, RCM, MWC
Slowpokes - KPP.

Added MWC, LCB and GEI
Sold out OM
Reduced holdings in JGS, CHI

Why I Bought Republic Cement (RCM - P1.24)

2006-05-07T23:18:00.000+08:00

I got several emails asking why I bought Republic Cement. I have 16% of my portfolio invested in the stock.

I started accumulating RCM in 4Q04 when it was trading at P0.50. It is not easy buying RCM since it is thinly traded. You can hardly get 100,000 shares without disrupting the price. It requires a lot of patience. However, with the potentials of the stock, I am willing to play the waiting game. I think RCM is a potential “5-bagger”

To begin, let us do a comparison between Holcim (HLCM – P5.20) and RCM based on 2005 audited results.

HLCM - PER – 27.0x, Price to Sales – 2.3x, EV/EBITDA – 14.0x. 2005 Revenue – P14.0bn; 05 NIAT – P1.3bn

RCM - PER – 6.8x, Price to Sales - .5x, EV/EBITDA – 8.0x. 2005 Revenue – P12.0bn; NIAT P1.0bn

RCM trades at a 75% discount to HLCM. Obviously, there is a huge disparity in valuation. I do not think that with only two cement companies operating in the country right now, there should be any valuation discrepancy. Both companies are well managed and owned by major multinationals. HLCM is majority owned by CEMEX of Mexico while La Farge of France owns RCM. Both companies practically have the Philippine market between them.

Assuming RCM approximates the valuation of HLCM, the stock should be trading at P3.33 per share.

It is a matter of time before the market realizes the value of RCM. Here are my arguments:

1.) There is a strong liquidity flow into the market. Value turnover for the past 2 weeks have reached P3.5bn per day versus the P1.3bn average in 2005. Obviously, liquidity will also flow into inactive but fundamentally sound stocks.

2.) We have seen strong appetite for low PER stocks. Counters like Petro Energy (PERC-P11.25), Roxas Holdings (ROX – P3.35) surged 3 folds in the past 3 weeks. I don’t think good stocks will continue trading at single PER multiples. More funds will surely chase up these “low PER” stocks.

3.) Overall PER expansion for the market will make RCM “relatively” cheaper. Currently the market trades at 15x PER based on 06 estimates. Most likely, we will see the market trade at 17-20x PER.

P.S. Last week, cement prices surged by P50.0 to P220.0/bag. I guess this will be another angle for the market to play up the stock.

Why I will buy Manila Water (MWC - P6.50)

2006-05-01T11:35:00.000+08:00

I have short listed Manila Water in my buy-list this week. The stock looks interesting at current levels. Here are my arguments:

1.) Manila Water is a utility company with a growth stock like earnings performance. Earnings for the company is expected to grow 20% this year to P2.4bn. In 2005, the company reported a net income of P2.0bn.

2.) Earnings growth for Manila Water will be driven mainly by 2 factors: improvement in systems loss ratio and growth in user base. Since 1997, management was able to decrease non-revenue water from 65% to current 35%. The target is to bring non-revenue water to below 30%. On the other hand, total connections (number of users) are expected to grow by 10% this year to 500,000.0 users.

3.) The current situation of Manila Water is reminiscent of MERALCO (MERB – P18.5) in early 90s. MERALCO, was able to deliver double-digit growth rates and thus became one of the market darlings during those times.

4.) Manila Water is an emerging utility play vice MERALCO. The electric company has several issues to resolve before investors will start looking into it. This leaves the market with only Manila Water as a “pure play” utility counter. Besides, being an Ayala subsidiary is an added bonus. Ayala companies are well managed and almost always trade at a premium to market.

5.) Manila Water trades at 5.4x PER and 4.1x Cash Flow. The Philippine market trades at 15x PER. Considering that Manila Water has both stability and growth in its earnings picture, the stock should be trading at a much higher valuation.

Money On the Table - My Portolio Summary 05/02/06

2006-04-30T19:44:00.000+08:00

Stocks (Code) - % / Total

Cebu Holdings (CHI) - 21.2
JG Summit (JGS) - 49.3
Republic Cement (RCM) -15.1
Kuok Philippine Prop. (KPP) - 8.1
OMICO (OM) - 6.3

Big movers - CHI, JGS, RCM
Slowpokes - KPP. OM

Sold out all my Empire East (ELI).

Property Sector Poised to Move

2006-04-22T13:31:00.000+08:00

I have been bullish on the property sector since 1Q06 and I still believe that for the market to move higher, it has to be driven by property stocks. There are several events in the past 3 weeks that signifies that money is indeed flowing into the sector:

1.) Empire East (ELI - P0.69) initiated a P1.0bn stock buy back program. The move suggests that property companies are in the "positive phase" of its investment cycle. Instead of borrowing, they are in the position to give back their surplus capital to its shareholders. What we are seeing right now is that most property projects are self funding, thus giving real estate companies a lot of muscle to initiate new projects at minimal start-up cost.

2.) The average value turnover of Ayala Land (ALI - P11.75) in the past 3 weeks reached P150m per day. Last Friday, some P550m worth Ayala Land was traded in the market. This is roughly 30% of total value turnover of the market. Ayala Land is the proxy for the property sector. This means that foreign funds are buying into the sector.

3.) Megaword (MEG - P1.52) successfully launched its US$ 100.0m offering. We expect to see further activities in the sector.

Finally, the property sector is an indirect play into the OFW market. In 2005, OFWs remitted some US$ 14.0bn into the country. A lot of these monies have found its ways into the property sector. Most property companies generate 50% of their sales from OFWs.

Please check my past posts of the sector:

http://bigbigtrade.blogspot.com/2006_03_01_bigbigtrade_archive.html

Money On the Table - My Portolio Summary 04/21/06

2006-04-22T13:27:00.000+08:00

Stocks (Code) - % / Total
Empire East (ELI) - 14.4
Cebu Holdings (CHI) - 17.5
JG Summit (JGS) - 38.5
Republic Cement (RCM) -13.4
Kuok Philippine Prop. (KPP) - 10.6
OMICO (OM) - 6.9

Big movers - CHI, ELI
Slowpokes - KPP. RCM
Neutral - JGS

Money On the Table - My Portolio Summary 04/10/06

2006-04-09T21:07:00.000+08:00

Stocks (Code) - % / Total
Empire East (ELI) - 14.8
Cebu Holdings (CHI) - 17.3
JG Summit (JGS) - 38.5
Republic Cement (RCM) -14.7
Kuok Philippine Prop. (KPP) - 8.5
OMICO (OM) - 6.2

No movement for my portfolio.

Big movers - OM
Slowpokes - ELI, CHI, KPP
Neutral - JGS

The MERALCO Saga: What’s in store

2006-04-02T21:55:00.000+08:00

MERALCO (MERB – P20.50) monopoly over!
http://news.inq7.net/nation/index.php?index=1&story_id=71353

The Philippine Daily Inquirer (PDI) reported that MERALCO has agreed to let other power producers sell directly to its large industrial and commercial users that consumes at least 1 MW per month. Albay Rep. Joey Salceda is said to have brokered the deal between the Lopez family and the government.

Beyond the headlines, let us see how the move will likely impact the protagonists in the saga.

MERALCO – I expect investors to react negatively to the news. However, looking beyond the headlines, the move is actually good for the company. Here are my arguments:

First, Meralco gets to make peace with the government and keep its franchise.

Second, only 494 out of its 360,000 commercial and industrial customers will be affected. So roughly only 25% of its
revenue stream will be affected.

Third, investors can now rate Meralco based on the continuing value of its franchise. Share price of Meralco has been under pressure due to the threat that the government might take over its operations.

Lopez family – The move signals that the family is willing to make peace with the Arroyo administration. It is an open secret that the Lopez family is at odds with the current administration. The move might signal a start of a warming relationship with the current administration. Positive sentiment might spillover to other Lopez counters such as ABS, FPH and BPC.

Arroyo administration – I am no fan of GMA, but I have to give it to her for showing political will in “cracking” the power sector. Based on how things are brewing, the current administration is bent on pushing the Electric Power Reform Act (EPIRA). GMA can use this as the hallmark of her administration similar to the liberalization of telecom sector that was implemented during the Ramos era. The move will definitely send a strong message to the foreign fund manages. So lets see how the IPO of NAPOCOR and the privatization of Transco will prosper.

Money On the Table - My Portolio Summary 04/03

2006-04-02T21:38:00.000+08:00

Stocks (Code) - % / Total
Empire East (ELI) - 15.0
Cebu Holdings (CHI) - 18.3
JG Summit (JGS) - 39.8
Republic Cement (RCM) -13.2
Kuok Philippine Prop. (KPP) - 8.6
OMICO (OM) - 5.4

No movement for my portfolio.

Big movers - CHI
Slowpokes - RCM, OM
Neutral - JGS

PSE Looks Interesting

2006-03-29T23:15:00.000+08:00

Share price of Philippine Stock Exchange (PSE - P160.0) has risen by almost 10.4% in the past two weeks. The stock looks interesting. Here are some “intriguing” facts:

1.) PSE trades at 10x EV/Net Income. In 2005, PSE made roughly P130m in net income. The company has P1.0bn cash sitting in the bank. The valuation looks cheap considering that the financial services sector trades at average of 13-14x EV/Net Income.

2.) PSE was founded in 1927. It is an institution that has survived the times. There should be a franchise premium on the stock. I don't think another exchange in the country will come into existence in the near future.

3.) The SEC is pushing brokers to reduce their stake in PSE. It seems that a follow-on offering is around the corner. Brokers will not agree to sell at these levels. So most likely, some market making of the stock has to be made to entice brokers to sell.

However, on the flip side, there are a lot of things that has to be done to make PSE into a world-class exchange. The exchange still acts like a purely regulatory body more than a financial services company. It has to do more to increase the investor base in the country.