Experts upbeat on consumer, retail plays as spending rises

The benchmark Philippine Stock Exchange index (PSEi) may be richly valued, having gained 14 percent in the first half of 2017 to end at 7,866.52.

Still, analysts see select buying opportunities that would arise from crucial policy shifts, led by the expected tax reform package to be passed by Congress.

“Flows and tax reform developments will drive the market,” Hermenegildo “Haj” Z. Narvaez, BPI Trade Head of Equity Research, said in an email.

Narvaez noted the strong performance of the PSEi, which gained another 7 percent in the second quarter of 2017.

This was also due to strong foreign buying and better-than-expected corporate earnings. He said the PSEi was already trading at 19 times expected earnings for 2017.

“We believe stock-picking and rotation remains the way to go,” Narvaez said.

For top picks, Narvaez noted that the consumer and retail segments would benefit most from the policy changes ahead.

“Tax reform, in our view, will not only accelerate GDP (gross domestic product) growth but will likewise increase the spending capacity of most individuals,” he said.

“This should result in increased spending on staple items. We also see decent upside for most consumer names,” he added.

He noted a shift to these segments was due given the “outperformance of banks, industrial, and property” companies.

Analysts also favored other key sectors that might have been overlooked in the past.

April Lee Tan, COL Financial Group Inc. research head, favored gaming, power and real estate. Mark Angeles, research head of First Metro Securities, saw opportunities in construction, banking and retail.

For his part, Regina Capital Development Corp. managing director Luis Limlingan was bullish on energy and construction.

“We expect the outlook for the Philippine economy to remain favorable,” Limlingan said. “Consumption growth is also expected to remain steady.”

Limlingan also expected government spending to ramp up, adding that this would continue to “crowd in private investment.” Crowing in occurs when deficit government spending spurs investments.

April Lee-Tan

Research head
COL Financial Group Inc.

Stock Picks: Megaworld Corp., Bloomberry Resorts Corp., and Manila Electric Co.

Megaworld (MEG):

“Based on listed property companies’ first quarter earnings results, there are signs that the oversupply of residential units has been absorbed as take up sales of residential and office properties increased by 19.6 percent to P88.2 billion while launches have remained subdued. In fact, based on our discussions with management of property companies, most are planning to increase launches this year as inventory levels have returned to more manageable levels.”

“A possible glut in the office segment is also no longer a concern due to the stronger than expected demand for office space brought about by the fresh demand from Philippine Offshore Gaming Operators or Pogos which recently received licenses from Pagcor.”

“We expect MEG to benefit from the improving outlook of residential and office properties given its huge landbank and expansion plan. Valuations are also attractive, with the stock trading at a 38 percent discount to NAV (net asset value) and only 11.8 times 17E P/E (estimated 2017 price/earnings ratio).”

12-month target price: P5.59 per share

Bloomberry Resorts Corp. (BLOOM):

“Contrary to expectations, gross gaming revenues of BLOOM continued to increase strongly and beat estimates in first quarter 2017 despite the opening of Okada. Problems with receivables have also been addressed.”

“Growth outlook remains strong given increasing tourist arrivals (especially from China) and increasing affluence of Filipinos.”

“Despite its significant share price appreciation for the year to date period, BLOOM remains attractively valued as it is trading at only 10.9 times [enterprise value/ earnings before interest, tax, depreciation and amortization], a discount relative to the 13.5 times average EV/Ebitda of regional gaming peers. We don’t think Philippine gaming companies deserve to trade at a discount given their more attractive growth outlook.”

12-month target price: P12.30 per share

Manila Electric Co. (MER):

“Defensive play, with distribution revenue growing steadily as power demand is picking up due to economic growth. Focus on distribution also makes it immune to the oversupply problem facing power generation companies.”

“MER was sold down earlier this year as its major shareholder, MPI [Metro Pacific Investments Corp.], sold a 4.5-percent stake for only P250/share. However, investors should not be worried as the sale was not due to MPI’s wavering confidence on MER. MPI sold the shares at only P250/share since it had an opportunity to buy MER share (indirectly) at an even lower price of only P222/share.”

“Capital appreciation potential remains attractive relative to our fair value estimate of P360. The stock also provides an attractive dividend yield of around 5.6 percent.”

12-month target price: P360 per share

Hermenegildo “Haj” Z. Narvaez
Trade head
BPI’s Equity Research

Top picks: Semirara Mining and Power Corp., Puregold Price Club Inc. and Max’s Group Inc.

Semirara Mining & Power (SCC):

“Robust two-year EPS CAGR (earnings per share compound annual growth rate) of 21 percent year-on-year driven by higher utilization of its power plants and the year-on-year improvement in coal prices.”

“SCC’s valuations remain undemanding with the stock trading at an FY17F (full year 2017 forecast) EV/Ebitda (enterprise value/earnings before interest, tax, depreciation and amortization) of 7.6 times, below its Philippine power peers average of 8.6 times.”

12-month target price: P207 per share
Puregold Price Club (PGOLD):

“Provides a healthy, balanced topline growth due to its exposure to both traditional and modern trade.”

“Has room for margin expansion from the integration of its new stores and the increasing contribution of its S&R format.”

“Its healthy balance sheet allows it to pursue significant store expansion and undertake acquisitions.”

12 month target price: P53 per share

Max’s Group (MAXS):

“Expected to post 13 percent year-on-year sustainable sales growth over the medium-term from domestic and international store expansion.”

“New personnel investments and brand-building efforts expected to gain momentum and boost overall revenue growth.”

“Valuations attractive with the stock trading at an FY17F (full year 2017 forecast) PER of 20 times, below its peers’ average forward P/E of c. 25 times.”

12 month target price: P29.20 per share

Luis Gerado Limlingan
Managing director
Regina Capital Development Corp. (RCDC)

Top picks: Semirara Mining and Power Corp., Petron Corp., Eagle Cement Corp.

Semirara Mining and Power (SCC):

“SCC continues to keep momentum high as its 1Q17 net income was reported to increase 52 percent year-on-year, from P2.91 billion to P4.42 billion. Of the bottom line, the coal segment contributed P2.59 billion alongside power with P1.83 billion in the period.”

“For the coal segment, the higher profitability was due to the 32 percent increase in coal sold to external customers, totaling 2.9 million MT [metric tons]. Luckily, this was also complemented by a 31 percent increase in the composite (effective) average price on coal, against the same period last year. We expect almost the same performance when second quarter 2017 is reported given that coal prices and production have remained the same.”

“On the power generation side, last quarter, SEM-Calaca Power volume sold surged 63 percent to 562 GWh, with the Unit 2 contributing better against a maintenance shutdown experienced last year. Meanwhile, Unit 1 underwent the same maintenance and upgrade program as the 2nd unit, dropping contributions to nil. Nonetheless, energy sold increased 38 percent to 586 GWh in the said period.

“Again, come next reporting, expect even better contributions from the power sector given less downtime from all plants, and greater usage due to the peak demand experienced during the summer season.”
12-month target price: P185 per share

Petron Corp. (PCOR)

“Petron is still the dominant petroleum player in the Philippine market in terms of car fuel and the leading local market player in terms of lubricants.

“Retail petroleum sales still take up the bulk of PCOR’s revenue mix, followed by industrials. Top line is expected to continue increasing even with the excise tax implementation on account of increasing car volume sales (although it will not be as high as 2016 figures in terms of growth).

“PCOR’s robust sales being currently enjoyed this year is also partly due to the 30 percent increase in nationwide car sales volume for 2016. Although the government refuted this claim of a slower growth for car sales on account of the excise tax to be imposed, RCDC still expects car sales to only grow at around 18 percent for 2017, meaning a spillover effect will be felt moving forward.

“Moving forward, we still expect higher volumes and its Malaysian unit to continue performing better than expected thus contributing more to total sales mix.”

12-month target price: P12.84 per share

Eagle Cement (EAGLE):

“Eagle Cement is the dominant local cement producer in the country and is the 4th largest cement distributor in the country in terms of market share.

“As to guidance, EAGLE is positive to sustain the growth momentum that they have registered in the first quarter. Recall that they booked 30 percent in first-quarter net income, with growth spilling over to the second quarter. Revenues of the company also grew 19 percent to 3.77 billion. Just with that you can already generate a profit margin of 27.3 percent.

“Company Ebitda (earnings before interest, tax, depreciation and amortization) grew 29 percent to P1.61 billion from last year’s P1.25 billion, on account of smaller operational expenses which grew by only 9 percent even with the growth in top line.

“Eagle is set to break ground for a new cement plant in Cebu in the fourth quarter of this year. The plant, which will have a capacity of 2 million MT is expected to start commercial operations by 2019. After the completion of its line III production facility in Cebu, RCDC expects EPS to increase on account of its accretive effects.”
12-month target price: P16.6 per share

Mark Angeles
Research head
First Metro Securities
Brokerage Corp.

Stock Picks: Megawide Construction Corp., Metropolitan Bank and Trust Co. and Robinsons Retail Holdings

Megawide Construction Corp. (MWIDE):

“The solid profit growth of the airport business underpins the company’s bullish outlook (16.7 percent profit CAGR in 2017-18; 50 percent profit share by 2018), which is anchored on the management’s proven capability in capturing airport operational efficiencies and ability to lobby a sound tourism marketing strategy.”

“By 2020, MWIDE will no longer be dependent on the cyclical construction business as earnings will be driven by the opening of Mactan Cebu International Airport (MCIA) Terminal 2, which will raise passenger capacity to 12.5 million from 4.5 million currently.”

“We estimate EPS [after preferred shares] to grow by a CAGR of 13.3 percent to P0.87 by 2019, boosted by the acceleration in growth from airport revenues as MCIA Terminal 2 kicks off and as fresh contribution from the opening of SWIT’s (Southwest Integrated Transport Terminal) retail and office developments come in.”

Metropolitan Bank and Trust Company (MBT):
(Coverage under DBS Bank—First Metro Sec’s research partner)
“Our bullish stance on Metrobank remains. We are starting to see Metrobank reap the benefits of its strategy of rebalancing assets and loans from securities. As such asset yields rose as funds are allocated to higher yielding loans rather than staying in the securities book where yields are lower.”

“We expect NIM (net interest margin) to continue improving as the bank uses its CASA (current account, saving account) build-up to fund longer term loans. While the full impact of its rights issue which resulted in its ROE (return on equity) dipping to 9-10 percent in FY 2016-2017, we expect ROE to re-rate over time with strong loan growth and improved NIM, translating to better earnings.”

Robinsons Retail Holdings (RRHI):

“We project fewer store closures and GFA (gross floor area) to expand 8 percent/7.4 percent in FY 2017/FY 2018—should support revenue growth and steady/improve operating margins.

“Demand is resilient post elections and in the face of higher inflation. Demand is underpinned by constructive industry backdrop (i.e., rising household disposable income, and robust economic and construction activity).

“We view RRHI’s target market to be less sensitive to inflation given higher household income levels.”

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TAGS: Philippine Stock Exchange index (PSEi), tax reform package