Growth in ’14 corporate earnings seen slowing

Col Financial, the country’s leading online stock brokerage, sees corporate earnings growth slowing to a lackluster 5.9 percent next year from this year’s 12 percent due to the likely flattening of banks’ earnings after posting extraordinary trading gains this year.

While the general economic outlook of the Philippines is quite positive, COL head of research April Lee-Tan said 2014 earnings would likely be lackluster as some sectors and large-cap companies encounter challenges.

The Philippines is less vulnerable compared to other emerging Asian economies but remains vulnerable to “contagion” risk as fund managers put the country in the same basket as Thailand and Indonesia.

In the short-term, Tan thus expects local equities to suffer from a weaker peso, rising interest rates and volatile financial markets.

“To combat these risks, investors should adopt a selective approach in buying stocks,” Tan said.

The 5.9-percent growth in earnings per share (EPS) projected by COL for 2014 represents the average expansion for companies included in the main-share Philippine Stock Exchange index (PSEi).

Consumer and property sectors are expected by COL to deliver double-digit EPS growth rates in 2014 at 15.6 percent and 13.7 percent, respectively. Conglomerates’ earnings are projected to grow by 7.9 percent while power and telecommunication sectors are seen to improve earnings by 3.5 percent and 2.6 percent, respectively.

COL’s top stock picks are: construction firm EEI Corp., retailer Puregold Price Club Inc., conglomerates Ayala Corp. and Alliance Global Group Inc., property developers Megaworld Corp. and Robinsons Land Corp., telecom giant Philippine Long Distance Telephone Co. and D&L Industries, a food ingredient and specialty plastic additive manufacturer.

The brokerage removed banks from its model portfolio due to the increasing likelihood that these stocks could underperform the market in the short-term as their non-interest income and trading portfolios are seen vulnerable to rising interest rates.

COL expects the favorable macroeconomic fundamentals and a cash-awash financial system to keep local stocks buoyant, allowing the PSEi to end this year at 7,250 to as high as 7,500.

By the middle of next year, the index is seen trading at new highs between 7,450 and 7,700.

“We’re still bullish on Philippine equities even with less liquidity,” said Tan, citing a favorable and more sustainable economic growth trajectory and lower vulnerability to global risks.

At the same time, she said the restriction on special deposit accounts (SDAs) at the central bank will free up a lot of liquidity.

“We expect some of them to go to the stock market and this will help mitigate impact of foreign fund (out)flows given the very positive picture of the Philippines,” she said.

The low end of COL’s PSEi forecast range (7,250 for this year and 7,450 for mid-2014) is the “bear” case scenario which assumes an increase in 10-year local Treasury bond yields to 4.5 percent. The “base” case assumes that 10-year T-bond rate will be capped at 4 percent.