Experts’ stocks tips in a challenging market

THE THIRD quarter was a challenging period for stock market investors, whose portfolios were battered by external worries coming from China’s slowdown and the uncertain timing of a rate hike by the powerful United States Federal Reserve. Locally, second quarter earnings came in weaker than expected.

The shifting global economic landscape has prompted some analysts to revise forecasts lower as the benchmark Philippine Stock Exchange index sank almost 9 percent to 6,893.93 in the third quarter. That’s also about 15 percent down from the recent peak last April.

At least one analyst argued that the Philippines can consider itself in bear market territory, usually defined as a decline of about 20 percent.

“We may be short by percentage points of the bear benchmark but we argue that’s just technicality, at best, and semantics, at worst,” according to Jose Mari Lacson, head of research at stock brokerage firm Campos Lanuza and Co.

Dampening the outlook was China, the world’s second-biggest economy and a major trading partner of the Philippines.

“Q3 saw more selling pressure as foreign funds headed for the exits on the back of the weakness in the Chinese economy,” Manuel Antonio Lisbona, PNB Securities Inc. president, said in an e-mail.

April Lee Tan, research head at COL Financial Group Inc., also cited worries over a so-called competitive devaluation of the Chinese yuan as well as “continuous weakness” in markets across Asean.

“The lack of clear direction from the US Fed on whether lift-off was going to happen also prompted many to lighten up on their positions in anticipation of a rate hike,” Lisbona said.

Locally, Lisbona noted the “worse-than-expected of the El Nino phenomenon, and its impact on energy prices.

In the meantime, as markets become more interlinked, investors need to adopt a broader mindset, Lacson said.

“We agree that the Philippines was not necessarily a bubble at its peak…. However, we do have a neighbor that has been in a bubble for the past decade, namely China. Its recent stock market fall was what triggered everybody else,” he said.

On local fundamentals like corporate earnings, he said initial expectations “were clearly too optimistic”.

“We estimate that the true earnings for 2015 is 10 percent below what the market was expecting before the release of [first quarter 2015] earnings,” Lacson said.

While analysts had plenty to say about the recent poor performance of the equities market, they said investors need not shy away entirely.

“The strategy is obviously to maintain a defensive posture. We advocate a consumer-centric sector allocation and a patient approach to cost averaging,” Lacson said.

Providing support to the local economy are lower oil prices, credit ratings upgrades and dollar revenues from Filipinos abroad and the business process outsourcing sector, he said.

Lisbona said the PSEi could move higher toward the end of 2015, with a year-end target at 7,300. Still, this was hinged on factors like the pace of growth in China and a US Federal Reserve decision on a rate hike.

Amid this challenging backdrop, analysts polled by Inquirer Business gave their top stock picks and price targets that are applicable over the standard 12-month period.

TAN

April Lee-Tan

Research head

COL Financial Group Inc.

Top picks: SM Prime Holdings Inc., First Gen Corp. and Cebu Air Inc.

SM Prime Holdings:

“It’s a defensive property company, with 70 percent of operating income and 64 percent of net asset value coming from malls.

“We forecast profits to grow by a 12.1 percent CAGR [ compound annual growth rate] from 2014 to 2017.”

Price target: P25.30 per share

First Gen Corp.

“It was sold-off recently after 49-percent-owned subsidiary Energy Development Corp. came out with negative earnings guidance.

“We believe all the negatives are priced in (P/E of 14.2 times, dividend yield of 2.1 percent.

“Also a defensive play as 90 percent of capacity is covered by LT supply contracts, providing stability.

“Recurring profits projected to grow by 24 percent from 2014 to 2016 due to capacity expansion.”

Price target: P35.80 per share.

Cebu Air

“Major beneficiary of falling oil prices, with 2015 core profits projected to jump from P3.2 billion in 2014 to P9 billion.

“Attractive valuation, trading at only 7.7 times 2016E P/E, below the 9.8 times median P/E of other low cost carrier.”

Price target: P158 per share

LISBONA

Manuel Lisbona

President

PNB Securities Inc.

Top picks: Aboitiz Equity Ventures, Metro Pacific Investments Corp., Ayala Corp.

Aboitiz Equity Ventures (AEV):

“Main subsidiary [ Aboitiz Power’s] 150 MW Davao coal-fired power plant is scheduled to commence operations in 3Q15 followed by the 150 MW Unit 2 in February 2016. The impact on earnings spans from 2015 to 2017.

“This will increase AEV’s net income by 14 percent and will contribute 12 percent of AEV’s net income.

“AEV acquired 51 percent of PETNET Inc., a Philippine money remittance business with 250 locations. AEV also invested an estimated P24 billion in holding companies for the acquisition of the various Philippine assets and businesses of Lafarge S.A.”

Price target: P64.45 per share

Metro Pacific Investments Corp. (MPI):

“MPI’s businesses are resilient against economic downturns and provide basic necessities such as water utilities, power distribution, toll-roads, healthcare and rail.

“MPI has its highest cash level of P32 billion ready to be deployed for expansion and new investments. If need be, MPI can reduce its healthcare and water utility stakes to fund toll-roads. MPI also has minimal US dollar debt and manageable interest-bearing debt levels.

“Though cash dividend yields are modest, it is recommended to position in MPI for its defensive qualities, future income streams and stable financial condition.”

Price target: P7.59 per share

Ayala Corp. (AC):

“40 percent of AC’s net income comes from less cyclical businesses.

“AC’s earnings are stabilized by net income from Manila Water, Globe Telecom and Ayala Land’s malls and office buildings lease income and low-cost housing net income. This source of earnings is essential especially during economic downturns.

“AC is a recommended core-holding stock, and the market downturn is an opportunity to position in AC at lower levels. AC’s earnings are stabilized by its growing recurring income base, and growth is still present from ALI and rising from AC Energy.”

Price target: P946.07 per share.

Manuel Cruz

Strategist

Asiasec Equities Inc.

Top picks: Ayala Land Inc., SSI Group Inc., Robinsons Retail Holdings Inc.

Ayala Land:

“ALI continued to post strong profits for the first semester of the year buoyed by significant improvement in margins across most segments.

“Margins were maintained notwithstanding various cost pressures. Its strong earnings and attractive valuation of 23 times for 2016 compared to 28 times, five-year historical average are factors why we maintain our overweight rating.”

Target price: P41 per share.

SSI Group:

“Recent sell-off is an over-reaction from a strong dollar. SSI was among the heaviest hit stock as most of its products are purchased in dollar terms.

“SSI generally has flexibility in pricing given that the market is not sensitive with price adjustments. This means that the company has passed on the recent appreciation of the dollar to its existing merchandise, thus effectively maintaining its hefty margins.

“Discretionary spending is still on the rise in Philippines and the company is seen to reap gains next year from its massive expansion in the last two years.”

Target price: P9 per share

Robinsons Retail Holdings (RRHI):

“RRHI is a good proxy for consumption. Its consolidated net sales for the 1H15 rose 11.8 percent coming from the sales contribution of 219 new stores, the healthy blended same store sales growth of 2.9 percent and the six-month sales contribution from newly acquired businesses.

“Consolidated gross margin expanded by 50 basis points to 21.8 percent for the first half of 2015. This means that same store sales and margins have held up despite intense competition as against other consumer related stocks whose margins have shown weakness from competition.”

Target price: P85 per share

LACSON

Jose Mari Lacson

Head of research

Campos Lanuza and Co.

Stock Picks: Philippine Long Distance Telephone Co. (PLDT), International Container Terminal Services Inc. (ICTSI), Emperador

PLDT:

“Dividend yield remains acceptable at 5 percent relative to risk. Parent debt requirement assures guidance or better- than-guidance payout in the future.

“Downside risk is further downgrade in payout ratio.

Price Target: P2,200 per share

ICTSI:

“Positive: ROE remains high at over 20 percent.

“Negative: ROE momentum may be on the decline on global slowdown.”

Price Target: P85 per share

Emperador:

“Positive: Market leader in liquor market with large upside over new product innovations e.g. scotch whisky.

“Negative: Weaker peso may impact profit margins on import costs.

Price target: P8 per share.

Joseph Roxas

President

Eagle Equities Inc.

Stock Picks: Vista Land & LIfescapes Inc., Philippine Long Distance Telephone Co. and Prime Orion Philippines Inc.

Vista Land:

“Its valuation in terms of P/E are very attractive.

“Also, Vista Land does not cater mainly to the high end but the broader middle-income. Their projects are also all over the country and are not limited to Metro Manila.

“One of their markets is overseas Filipino workers and they come from all over the Philippines. So the risk from a bubble is mitigated because of the different locations they have.

“Vista Land also continuously buys back its owns shares. So earnings per share goes up and it also shows confidence by management in the company.”

PLDT:

“Valuation-wise, its share price has come down a lot.

“Also we expect its third quarter to show improvement, this should help offset declines in the first half.”

Prime Orion Philippines Inc.

“We’re positive on the announcement on the venture with Ayala Land Inc. This is Ayala buying-in and taking over management.”

“So in my mind, it becomes an Ayala company. Usually, Ayala companies have a premium to them rather than a discount.”

Alexander Tiu

Senior equity analyst

AB Capital Securities Inc.

Stock Picks: Cebu Air Inc., Megaworld Corp., First Gen Corp.

Cebu Air Inc.:

“Oil prices have stayed down so this will expand the margins of Cebu Pacific.

“They continue to add long-haul routes. Also, we have several PPP projects that will expand airport capacity here and Cebu Pacific benefits from that.”

Target price: P109.60 per share

Megaworld:

“They plan to expand over the next few years in Bonifacio Global City, so growth will be sustained by their rental income.

“Megaword’s share price hasn’t recovered yet from the drop so there is plenty of upside.”

Target price: P6 per share

First Gen Corp.:

“Its subsidiary Energy Development Corp. is expected to have improved earnings, also it has a lot of power plant expansion ongoing.

“It’s very defensive. Power is still a play in the local stock market given that it’s resilient to what’s happening externally.”

Target price: P32.60 per share.