Brokers’, analysts’ top stock picks in an expensive market

The country’s main stock index saw continued stellar gains early on in the second quarter although levels above 8,000 could not be sustained as the market corrected on a string of negative news, from disappointing economic growth at home to rate hike uncertainties in the United States.

From a record high of above 8,100 in early April, the Philippine Stock Exchange index closed the quarter at 7,564.50.

Market analysts polled by the Inquirer noted that the third quarter of 2015 offers its own set of challenges and investors may refrain from jumping in as they wait for more clues on the market’s direction for the rest of the year.

Jose Mari Lacson, head of research at stock brokerage firm Campos Lanuza and Co., said the current quarter was a crucial time given the upcoming second quarter earnings season.

“If earnings fall in the second quarter, we will downgrade [our outlook],” Lacson said, adding that lower earnings would likewise make the PSEi relatively more expensive.

“Investors would most likely want to see more solid evidence that the weakness in the first quarter is only temporary and we will slowly see this around August when companies start releasing second quarter earnings results,” April Lee Tan, research head at COL Financial Group Inc., said in an e-mail.

In the meantime, she said investors could expect “lackluster trading in the market.”

Lacson also noted weaker than expected infrastructure spending and the late arrival of  election money, likely due to various controversies surrounding the list of would-be candidates.

“With so much controversy, nobody wants to put in too much money. They are looking for more clarity down the road,” Lacson noted. He said the PSEi could consolidate around the 7,200 to 7,700 period.

Plenty of focus was also placed on the timing of a possible rate hike by the powerful United States Federal Reserve.

This is still a “big factor,”  Manuel Lisbona, president of PNB Securities Inc., said in an e-mail.

“It’s no help that the market is still very expensive, trading at around 20 times forward earnings,” he said.

“International focus has been on when the US Federal Reserve will start to increase interest rates, and what effect that will have on asset prices,” Jonathan Carlyle, director at stock brokerage firm I.B. Gimenez Securities, said in an e-mail.

“Uncertainty caused by this has resulted in many investment managers reducing risk and locking in gains, selling equity positions and holding cash instead until the investment horizon is a little clearer,” he added.

Those factors likely tempered foreign buying during the period and may shape the tone of inflows in the months to come.

“I don’t think the market will be able to sustain a rally without the assistance of foreign investors,” Alex Tiu, equities analyst at AB Capital Securities Inc., said by phone.

Carlyle, for his part, said the PSEi could remain in the 7,400 to 8,000 levels “with risk to the downside.”

“This time, the Philippine economy has lost a little of its former ‘shine’. External factors such as the US Fed action and slowing growth in China are going to have a dampening effect on all the regional exchanges,” he said.

While many analysts agreed that the third quarter was “challenging” in terms of selecting stock to buy, the list below shows their top choices at this time. For target prices, the standard six- to 12-month period applies.

Lisbona

Manuel Lisbona
President
PNB Securities Inc.

Filinvest Land

“FLI is well-known for developing residential subdivisions and five-story residential medium-rise buildings (MRBs) within a spacious living estate. FLI normally completes a housing unit or an MRB within a year.

“FLI’s growth was fueled by its successful MRB development and expansion into office and retail spaces. FLI’s revenue growth is at double-digit levels since 2010.

“It also has superior margins down to the net income level, but it has a negative free cash-flow due to its huge capex requirements. FLI has a fair financial condition. Cash and receivables are its current assets.”

FLI target price: P2.49 per share

First Phil. Holdings

“The bulk of FPH’s net income comes from power followed by real estate development, investment holding, construction and others, and loss-incurring manufacturing. After solidifying its identity as a power, manufacturing and property holding company, FPH will be benefiting from the expansion of its power generation business.

“Revenue growth has been modest in the last five years as well as net income margin due to high depreciation and interest expenses.

“FPH has weak ROA (return on assets) and ROE (return on equity) and has a volatile free cash flow. This will be changing starting this year as EDC (an FPH unit) has its Bacman geothermal power plant finally up and running after its original target of five years ago and with First Gen’s upcoming San Gabriel combined cycle power plant.”

FPH target price: P110.63 per share

Petron Corp.

“PCOR is the biggest petroleum company in the Philippines. PCOR’s Limay, Bataan refinery has a crude distillation capacity of 180,000 barrels of oil per day (bopd).

“It also expanded abroad with Petron Malaysia. Its assets include its Port Dickson refinery with a capacity of 88,000 bopd, seven fuel distribution terminals and a network of 560 retail stations of which 420 are company-owned.

“Margins have been in single-digit levels justifying the need for its Refinery Master Plan Phase 2 (RMP). PCOR is the most leveraged company in the coverage due to RMP. It generally pays around one third of previous year’s net income as cash dividends.”

Carlyle

Jonathan Carlyle
Director
IB Gimenez Securities

Lopez Holdings Corp.

“The most undervalued stock among the conglomerate sector, profit growth at around 25 percent vs sector average of 10 percent, 2015 estimates present book value (PBV) of 0.68 times vs sector average of 2 times and a 2015 estimated price-to-earnings ratio of 7.20 times vs sector average of 20.58 PE.

“The continued performance of subsidiary ABS-CBN Corp. will be boosted further by the upcoming Presidential election, and the solid performance of the business units associated with First Philippine Holdings  are expected to boost 2015 earnings.”

Lopez Holdings target price: P11/ share

SSI Group Inc.

“Despite a slightly slower growth in the first quarter of 2015, we expect the rising consumer demand for luxury goods to bolster revenue. Growth accelerated by 104 percent in the final quarter of 2014 (Christmas /New Year) and we expect a similar boost in 2015.”

SSI target price: P11.50/share

Ayala Land Inc.

“Despite trading at a premium to its peers, we believe ALI will continue to outperform.

“As one of the most diversified of the property groups, it has a proven track record of obtaining exceptional value from its mix of residential spaces, shopping centers, office space, convenience stores, health care facilities, hotels and resorts.”

ALI target price: P42.20/ share

JOSE Mari Lacson

Jose Mari Lacson
Research head
Campos Lanuza and Co.

Belle Corp.

“There’s a lot of negative sentiment about the impact of China (policy on Macau and gaming markets abroad) but my view is this is not a short-term business. Belle has hotels and tourism arrivals continue to increase.

“It has solid business model. Also what people should understand is that management has already started a share buyback program. There is institutional support from Belle at these levels so the downside is low.”

Belle target price: P4 per share

SSI Group

“If there’s a reason why SSI is more compelling now, it’s because the share price has fallen.

“Even with a worst-case scenario, with a bear market, you have to be defensive with your portfolio and the ones that are not going to be hit as much are going to be consumer companies like SSI. It also has the most upside when election spending comes in. When it does enter, consumer companies will benefit.”

SSI target price: P13.50 per share

Philippine Seven Corp. (operator of 7-11 stores)

“This company stands to generate value. It’s return on capital is actually the best that I’ve seen so far for consumer-related companies.

“So far they have also been able to sustain their store expansion, they are a main beneficiary in the growth of business process outscoring—that’s the reason why Family Mart and Lawson are in the Philippines.

“They are the biggest convenience store operator in the Philippines. By far, they have the critical mass, they are innovative and have new products out there right now. And at the end of the day, everyone is trying to capture market share from them because the are the most recognizable brand for convenience stores here.”

Philippine Seven target price: P145 per share

April Lee Tan

April Lee Tan
Research head
COL Financial Group Inc.

Cebu Air Inc. (operator of Cebu Pacific and Cebgo)

“It’s a market leader for domestic travel with a 64 percent market share.

“CEB a major beneficiary of industry consolidation and falling oil prices and its profits are expected to more than double in 2015.”

Cebu Air target price: P156 per share

SM Prime Holdings

“Despite being one of the biggest residential developers in the country, it is still predominantly a Philippine mall operator (70 percent of operating income and 64 percent of net asset value) providing it with strong recurring cash flow and making it a good proxy for consumer spending.”

SM Prime target price: P23.60 per share

Metropolitan Bank and Trust Co.

“Metrobank is one of the major beneficiaries of the growing demand for loans being among the top three banks in the country.

“No more risk of capital raising after it already raised P32 billion from its recently concluded rights offering.

“Attractive valuation, trading at only 1.5 times P/BV vs 2.05 times P/BV for BDO Unibank Inc. and 2.5 times P/BV for Bank of the Philippine Islands”

JOSEPH Roxas

Metrobank target price: P109 per share

Joseph Roxas
President
Eagle Equities Inc.

Leisure and Resorts World Corp. (LR)/ Premium Leisure Corp (PLC)

“Most of (LR’s) gaming businesses is not really dependent on Chinese visitors so if that’s what’s bothering the rest of the gaming industry (in Entertainment City), it’s not bothering LR.

“I think LR and PLC stand the most to gain from operations of [City of Dreams Manila]. Their contract here is their share of earnings before Ebitda (Earnings before interest, taxes, depreciation, and amortization).

“The two will outperform, at least in July, as the market is headed higher at least during the Sona (State of the Nation Address). That’s when government institutions also buy.”

8990 Holdings Inc.

“I think current  [price] levels are okay. They are not slowing down, remember, the [mass housing] segment which they serve is very under-built. So when people talk about a bubble, it’s not the case for 8990 Holdings where there is such a huge housing backlog.”

Emperador Inc.

“It’s an election year so local demand is assured, spending is about to start.

“I also like their foreign strategy with the acquisition of Whyte and Mackay  (scotch whiskey maker). Because their strength in the local market, the foreign operations are just pure gravy. They just have to expand the market.”

Alex Tiu

Alex Tiu
Equities analyst
AB Capital Securities Inc.

SSI Group

“We like this sector, which is consumer discretionary. We are bullish and we see their top and bottom line growth at 20 percent to 25 percent for the year.

“Aside from targeting the discretionary market, it has ties with Family Mart and thus they would be able to ride the boom in the BPO (business process outsourcing) industry in the Philippines.”

SSI target price: P11.46 per share

SM Prime Holdings

“They have earmarked about P80 billion in capital spending this year so there is a lot of room for expansion.

“SM is still very tied to the consumer market and their mall retail is still growing strong.”

SM Prime target price: P22.06 per share

First Gen Corp.

“First Gen has already outlined its expansion plans for the next few years, and it’s a play on renewable energy through unit EDC (Energy Development Corp.).

“It also helps that EDC has a lot of plants commissioned late last year so we could expect a bump in revenues.

“Power is still pretty much in demand, supply is very constrained especially in the next few years. Aside from that, a growing economy like the Philippines needs power so naturally we will be needing to keep on adding [capacity].”

First Gen Target: P32.60 per share