Hefty growth in corporate earnings seen

With the country posting an above-trend economic growth, corporate earnings will likely rise at a pace outperforming regional peers and supporting a resurgence of the local stock barometer toward 7,200 by the end of the year, investment bank First Metro Investments Corp. said.

“The 7.8 percent expansion in GDP (gross domestic product) in the first quarter is a sign that we are on the right track,” FMIC president Robert Juanchito Dispo said in a briefing on Thursday.

FMIC sees full-year growth at 7 to 7.5 percent this year driven by the strong performance of the manufacturing and consumer sectors alongside higher government spending on infrastructure.

At the same time, interest rates were expected to remain low given a benign inflation rate regime, with long-term bond yields seen declining further as liquidity overwhelms demand.

Despite the recent bloodbath in the equities market, FMIC vice president and head of investment advisory group Bede Lovell Gomez said accelerating GDP growth would underpin the expansion in corporate earnings. Although deemed expensive now, Gomez said the local stock market still offered some upside.

Amid the recent sell-off caused by the US Federal Reserve’s pronouncement of the unwinding of its stimulus program by 2014, Gomez said the landscape in the Philippines was very different. He said the Philippines was the only Southeast Asian market that could post an average growth in corporate earnings per share (EPS) of 18-20 percent when consensus elsewhere in the region was a growth of below 5 percent.

At the same time, he said the softening of global commodity prices should benefit the Philippines, which had been a net importer of raw material.

FMIC’s equities outlook assumes a price- to-earnings ratio of 18.7x this year by the end of the year.

The recent equities selldown has brought the Philippine P/E ratio from 21x during the recent peak down to 16x, which means investors are paying 16 times the amount of money they expect to make from this market.

Growth opportunities are seen in manufacturing, infrastructure, consumer retailing and tourism, specifically gaming. “The industrial sector, we believe, will be a new equity performer,” he said.

Justino Ocampo, FMIC senior vice president and head of investment banking group, said manufacturing was not a segment the company was monitoring in the past but one which was now attracting renewed interest.

Ocampo said FMIC was continuing to work on a number of corporate financing deals. “We don’t expect Rome to burn so we’re continuing with the process,” he said.

“As most banks have already hit their ceiling for lending to real estate projects, developers may resort to issuing corporate bonds. Given the still favorable interest rate environment and single borrowers limit, we expect more bond issuances in the second half of the year,” Dispo said.

“For equity market transactions, it is still fundamentally healthy but timing is key,” he added.