Land Bank of the Philippines is looking to acquire a majority stake at Philippine Dealing System Holdings Corp. (PDS).
In a Jan. 16 letter to the state-run lender’s board of directors, Landbank president and chief executive Alex V. Buenaventura said he was recommending the acquisition of at least 66.67 percent of PDS.
Landbank owns 1.56 percent of PDS through the Bankers Association of the Philippines (BAP), Buenaventura noted.
“On June 15, 2017, BAP signed a share purchase agreement allowing the Philippine Stock Exchange (PSE) to purchase 1,488,902 common shares equivalent to 23.8 percent of the total outstanding stock of PDS for P476,448,640 or at P320 per share. This implies a valuation of P2 billion for PDS and a PE ratio of 8.10x based on 2016 PDS earnings. Research on the financials of comparable market infrastructure enterprises in the region and globally show that such businesses trade at an average LTM PE ratio of 34.1x and 35.8x, respectively. This indicates that at a price of P320 per share, PDS is undervalued and purchasing PDS shares could be a profitable investment for Landbank,” Buenaventura explained.
He added that Landbank would benefit from stable recurring cash flow from the various fees PDS charges to market players as the country’s central securities depository and fixed-income exchange. More than 70 percent of the income of PDS is from the provision of services as a depository, registry, and financial intermediary and over 20 percent of revenues come from trading services, another area of opportunity as the local bond market matures.
“PDS has an asset-light business model and consistently registers healthy Ebitda margins above 45 percent and wide net profit margins above 25 percent. PDS reported an ROE of 14.4 percent and 15.1 percent in 2015 and 2016, respectively, which is depressed due to significant excess cash and liquid assets. From 2014 to 2016, PDS exhibited a CAGR of 9.1 percent, with opportunities for Improvement as the domestic fixed income market still lags behind some of its Asean neighbors in terms of market size and liquidity,” Buenaventura noted.
The Landbank chief’s plan to acquire a majority stake in PDS runs counter to the planned merger of the latter with the Philippine Stock Exchange.
However, Finance Secretary Carlos G. Dominguez III, who chairs Landbank, lamented that the PSE was not being compliant with the conditions set for its merger with PDS.
“Around September of 2016, I told PSE to be compliant with the law with regards to the allocation of their share to groups of shareholders as a condition to the Securities and Exchange Commission’s approval of their plan to acquire PDS. As of now, 16 months later, they are not compliant,” Dominguez said Friday.
“The development of the capital market is being slowed down by the PSE’s inability to be compliant with the law. The Duterte administration will no longer tolerate private institutions thwarting the goal of achieving a robust and inclusive financial system,” said Dominguez, who heads the economic team.