Local stock index seen hitting 7,100 this year

The local stock index may surge further to 7,100 by the second half of this year but should consolidate in the near term given that most key stocks are at all-time highs and vulnerable to profit-taking, according to Macquarie Capital Securities (Philippines) Inc.

In a Jan. 7 equities research written by Macquarie analysts Alex Pomento, RJ Aguirre and Aaron Salvador, it was projected that the stock market rally should be sustained as economic and corporate earnings growth remained strong.

Macquarie is expecting the domestic economy to expand by 6 percent this year, on pace with last year’s growth, underpinned by rising investments, consistent inflow of remittances from Filipinos abroad and the growing business process outsourcing (BPO) industry. It estimates that investments would grow by 12 percent this year, continuing the “decent” growth in the first nine months of 2012.

Macquarie is projecting remittances to grow by 5 percent this year to $22.5 billion while BPOs are seen generating revenues of almost $14 billion, or 20 percent higher year on year.

But with the stock market now up by as much as 42 percent (US dollar terms) in the past 12 months, Macquarie said it was “ripe for investors to take money off the market at this stage until we see new catalysts that could propel the market to new highs.”

At its Philippine Stock Exchange index (PSEi) target of 7,100, this would translate to a valuation of 21x the expected 2013 earnings, falling to 17.7x the likely earnings for 2014—at the upper end of the trading range of the market in the past five years.

“Our optimism is based on the potential upside surprise in the earnings outlook—in our view, the market is factoring in low earnings expectations at only 10 percent, which we believe makes current valuations look artificially high—and our expectation that the peso-dollar (exchange rate) should appreciate by 5 percent to P39 by yearend, providing additional gains for foreign investors that enter at this level of the market,” the report said.

Moreover, Macquarie said Philippine corporate balance sheets remained healthy, with a gearing (debt-to-equity ratio) of only 41 percent in 2012 with a return on equity of 16 percent.

“In addition, we believe the upcoming midterm elections should provide additional boost to the overall income of sectors that are highly linked to elections like consumer companies, retailers, fast-food chain, telecoms and media,” the report said.

When earnings upgrades are factored in on its PSEi target, the report said this would translate to 13x the expected earnings for 2014—at the lower end of the price to earnings range of 10x to 18x over the past 10 years.

The stocks favored by Macquarie based on potential upside to its target prices are Banco de Oro, Metropolitan Bank and Trust Co., Security Bank, Rizal Commercial Banking Corp. and SM Development Corp.

Macquarie said BDO would continue to be the leader in loan growth, with an estimated annual growth of 15 percent over the next three years.

In the case of Metrobank, the research said that among the top three banks in the country, it was in the best position to capture loan growth given its loan-to-deposit ratio of 68 percent. Also cited was Metrobank’s improving return-on-equity profile, which it estimated to grow from 10 percent to 13 percent in the next four years.

For Security Bank, Macquarie said the bank was transforming itself into a more traditional bank, with management now more committed to growing its lending business. Despite strong competition and depressing margins, the bank is seen maintaining net interest margins to at least 3.8 percent, driven by low-cost deposits.

Meanwhile, the report said RCBC was “the most undervalued, under-owned bank with stable margins and earnings outlook.” It said the bank was ready to compete after beefing up capital and maintaining a strong balance sheet that allowed its expansion.