PSE seen to benefit from global wave of mergers

The current trend toward market integration across the globe is seen favoring the demutualized Philippine Stock Exchange, making its stock a good merger and acquisition candidate in the near future, according to a research study.

Jose Mari Lacson, head of research at local stockbrokerage Campos Lanuza & Co., noted in the recent study that the PSE is pushing for unification on two fronts—domestically with the bond market and regionally with other Southeast Asian stock exchanges.

“The current activities lead us to believe that the company may be trying to enhance its appeal and be part of the growing trend of stock exchange mergers,” Lacson said.

While the Philippine bond and stock exchange unification was still in the conceptualization stage, Lacson noted that the PSE was already implementing its part in the trading integration of the Association of Southeast Asian Nation (Asean) bourses.

The establishment of an Asean trading link, Lacson said, was the “trickiest” part of the plan and an area where his brokerage house was most concerned with.

“Apart from execution risk, dreams of merging with a larger exchange may also be impeding the company’s attention to risk assessment and other market reform issues. Ultimately, however, the entry of a new investor may just be what PSE needs to stay regionally competitive,” Lacson said.

Campos Lanuza has a “buy” recommendation on PSE and has upgraded its target price to P350 from P250 per share. Last Friday, the PSE’s share price closed at P235 per share.

Lacson cited some key strengths that the PSE could offer to potential investors:

— Low replacement cost for trading system as the PSE has just completed the commercial launch of PSETrade, the new trading system purchased from the NYSE.

— The PSE was established in 1992 as a merger of the Manila and Makati Stock Exchanges, both of which have a very long corporate history—far older than many of its peers.

— The PSE has a “fairly strong” regulatory and control framework. Because of the BW Resources scandal, the PSE has invested a lot in market regulation and corporate governance controls. It has systems that comply with anti-money laundering laws and the Securities Regulation Code.

— Although the multiples may say that PSE is not a bargain, on an absolute value perspective, the exchange may be affordable. The local stock exchange is cheap as the market capitalization of the company is only $370 million in contrast to SGX and Bursa Malaysia, which have market capitalizations of $6.5 billion and $1.4 billion, respectively.

Despite its strengths, Lacson acknowledged that pushing for the sale of PSE may be difficult because the SRC prevents any single shareholder from owning more than 5 percent and any shareholder group or industry from owning more than 20 percent of the outstanding shares. The PSE, however, secured exemptive relief from this rule as the trading participants and some shareholder groups are actually in excess of this legal limit.

Another key issue is whether the controlling shareholders are willing to part with their shares, Lacson said, noting that trading participants own an estimated 32 percent of the outstanding shares of PSE, and are supposedly the single biggest shareholder group.