Top picks: Construction, real estate

It was a “roller coaster” ride for investors in the third quarter, as a shift in the country’s leadership coincided with a slew of other domestic and global developments.

The benchmark Philippine Stock Exchange Index (PSEi) slid about 2 percent in the last three months, or since President Duterte assumed power in July. Despite that decline, the PSEi was still up almost a tenth since the beginning of 2016.

Analysts polled by the Inquirer gave mixed views on what moved—or didn’t move—the market during the third quarter.

Some cited the President’s irresponsible off-the-cuff remarks as increasing volatility, while others noted that investors managed to look past controversial rhetoric and focused instead on high valuations, the so-called ghost month, and uncertainties over an interest rate hike by the powerful United States Federal Reserve.

More importantly, the Philippines still offered some investment opportunities. The PSEi was still seen to go higher before the end of 2016, or at least stay above last year’s close, despite risks that were highlighted.

“There are some concerns such as the possible change in international policy, but still, overall we are  bullish on the Philippines moving forward,” Manuel P. Cruz, strategist at Asiasec Equities, said in an e-mail.

He noted that the equities market saw some 23 consecutive days of net foreign outflows, the longest streak in almost a decade broken just as the month of September ended. Total net outlfow from August to September hit $400 million, he said.

Nevertheless, Cruz is projecting the PSEi’s upside this year at as high as 8,100.

“It seems that investors are neglecting the fact that the Philippines was the second fastest growing economy in Asia in the second quarter of 2016,” Cruz said.

“Duterte’s proposed policies, such as liberalizing foreign direct investments and increasing infrastructure investment, should be positive news for the local equities.”

Haj Z. Narvaez, head of equity research at BPI Trade, said the third        quarter decline was “no surprise.”

“We believe the sell-off was not due to political events and news,” Narvaez said in an e-mail. Instead, he said that high valuations, no big surprises in corporate earnings, and talk over a possible interest rate hike by the US Fed kept investors busy.

“It is worth noting that the Philippines had outperformed Thailand and Indonesia between 2011 and 2015. Hence, our relative underperformance versus these markets YTD [year to date] also comes as no surprise,” Narvaez.

April Lee-Tan, research head at COL Financial Group Inc., also echoed those concerns while noting that sentiments were “being hurt by the President’s rhetoric.”

“This usually happens after the ‘honeymoon’ period with the new president. What is important now is that he keeps his campaign promises (as far as the economy is concerned) and this will translate to faster economic growth and higher earnings growth,” Tan said in an e-mail.

“This may start to materialize toward the second quarter of next year,” she added.

Joylin Telagen, head of research at I.B. Gimenez Securities Inc., also flagged President Duterte’s rhetoric as a risk, as well as how global investors decide to rebalance their portfolios.

“For the fourth quarter though, the bourse will continue to trade sideways. Basically it’s the Federal Reserve normalization path that will continue market volatility while we’re wait and see over the Duterte administration’s planned reforms and actions,” she said.

Also, new domestic polices on taxes as well as uncertainty overseas would weigh on Philippines stocks in the near-term, Mark Angeles, research head at First Metro Securities Brokerage Corp., said in an e-mail.

“Market will be on heightened volatility toward year-end,”  Angeles said, noting that First Metro Securities’ yearend target for the PSEi was at 7,500.

“External risks are expected to weigh in on sentiment as investors shift focus to the Fed and the US presidential elections,” he added. “On the local front, we see a lack of re-rating catalyst. Strong economic growth this year is already in the price.”

As noted, the current environment still opens up opportunities for investors.

As with previous issues, polled analysts shared their top three stock picks. These companies represent buying opportunities where investors can make a good return over the standard 12 month period.

With the holidays just around the corner, a fair amount of consumer-focused stocks were also included. Another area was construction and real estate, given the administration’s focus on bolstering infrastructure spending.

Manuel Cruz

Strategist

Asiasec Equities

Stock Picks: Ayala Land Inc.,  Robinsons Land Corp., Cemex Holdings Philippines Inc.

Ayala Land:

“Its ability to sustain healthy growth across, residential, retail and office segments amid record high new residential and office supply is a testament of the company’s solid business model.

A major player once the REIT law is revised by the SEC. ALI is seen to benefit once the SEC will make changes on the existing implementing rules and regulations of the REIT law.”

(Inquirer Business note: REITs or real estate investment trusts are a type of security that allows investors exposure in the property sector, typically for assets like shopping malls and office buildings. Our REIT law was shunned after the Aquino administration placed prohibitive tax and public ownership requirements.  The Duterte administration signaled it wanted to ease restrictions).

Valuation at current levels is highly attractive given a 2017 estimate P/E of 24.3 times, way below its 5-year historical average P/E of 30 times.”

Target price: P47 per share

Robinsons Land:

“Another major player in the REIT business.

Among the biggest REIT players, RLC valuation is the most undemanding at 17 times, though in line with its historical average.  However, given its possible play in the REIT market and decent growth of 11 percent over the next three years, RLC remains a buy.”

Target price: P35 per share

Cemex Holdings Philippines Inc.

“Cement demand is seen to remain robust given the Duterte administration’s commitment to improve infrastructure spending particularly in the Visayas-Mindanao region. CHP is a direct infra play on Philippine equities.

Growth will continue to be upbeat given its strong earnings profile with EPS CAGR at 16 percent.”

Target price: P12.50 / share

April Lee-Tan

Research head

COL Financial Group Inc.

Stock Picks: First Gen Corp., Metropolitan Bank & Trust Co. (Metrobank), Ayala Land

First Gen:

“Focus on clean energy minimizes regulatory risk (given the DENR’s stricter policies on environmental protection).

Stable core operations.

Increasing coal prices should act as a catalyst as it will improve the company’s ability to lock in new power contracts at higher prices.”

Target price: P35 per share

Metrobank:

“Being one of the big three banks makes it a major beneficiary of growing demand for loans that will arise from higher infrastructure spending and faster economic growth.

High CAR levels after its P32-billion rights offering in March 2015.

Concern over weak net interest income growth during the first half overblown as this was due to the timing of loan bookings. Loan growth remains strong.”

Target price: P113 per share

Ayala Land:

“Strong brand; good track record in delivering growth. Targeting five-year profit CAGR of 17.8 percent, partly driven by the expansion of its mall and office rental portfolios.

To benefit from growth in tourism, given growing number of hotel rooms.

Potential beneficiary of the revision of the REIT law. Huge landbank of 8,948 hectares in 55 growth areas nationwide.”

Target price: P47.10 per share

Haj Z. Narvaez

Head of equity research

BPI Trade

Stock Picks: Robinsons Retail Holdings Inc., Ayala Land, Semirara Mining and Power Corp.

Robinsons Retail:

“RRHI will benefit from the expansion of its target market—the middle-income segment—on the back of healthy GDP per capita growth and rising disposable income.

RRHI’s large cash position, scale, and distribution network puts it in a strong position to pursue a nationwide expansion and acquisition strategy.

Valuations attractive with the stock trading at 20 times full-year 2017 P/E, a discount to the 22 times multiple of its regional peers.”

Target price: P97.50 per share

Ayala Land:

“Size and location of its 8,900 hectare land inventory allows ALI to benefit from key themes driving the real estate sector such as the ramp up in infra spending and desire to live in mixed-use developments.

ALI is on track to deliver 18 percent EPS CAGR over full year 2015-2018, the highest among the property stocks we cover.

Valuations attractive with the stock trading at an full year 2016 PER of 29 times, below the stock’s 10-year average forward PER of 31 times.”

Target price: P48 per share

Semirara:

“Robust three-year EPS CAGR of 17.7 percent year-on-year driven by higher mining capacity and expansion of its power generation capacity.

SCC’s vertically integrated power generation business makes it cost competitive, and this will put SCC in a strong position to secure sizeable long-term off take agreements.”

Target price: P139 per share

Joylin Telagen

Head of research

I.B. Gimenez Securities Inc.

Stock Picks: Megawide Construction Corp., Metro Retail Stores Group Inc., Xurpas Inc.

Megawide Construction:

“The company’s construction segment will continue to reach strong profit performance from awarded construction contracts and stable airport operations.

It will benefit from the Duterte administration’s plan to accelerate and increase infrastructure spending.

Its public-private partnership (PPP) projects and power generation businesses will boost the company’s revenue stream over the long-term.”

Target price: P18 per share

Metro Retail Stores Group:

“With the Duterte administration’s plan to focus largely on the countryside, we expect that MRSGI will continue to post stable revenue due to its large footprint in the Visayas region.

The company also plans to double its gross leasable area(GFA) to 800,000 square meters in the next five years (until 2020) while improving cost efficiencies to grow its bottom line.”

Target price: P6.08 per share

Xurpas Inc.

“It started as a mobile content provider. Since its debut in 2014, the company is aggressively expanding overseas.

Earnings are likely to grow as it produces more content and these additional investments will contribute to the firm’s solid future revenue.”

Target price: P17.98 per share

Mark Angeles

Research Head

First Metro Securities

Brokerage Corp.

Stock Picks: (Basket of consumer picks)  Century Pacific Food Inc., Puregold Price Club Inc., Robinsons Retail Holdings

“They are the first to benefit from a rising household wealth backdrop and are resilient to adverse shocks in changes in consumption patterns.

We prefer a defensive approach. We like consumer staples over consumer discretionary names and counters with high dividend yield, low beta, and low index weight in the MSCI [Philippines] universe.”