MPI: A stock too cheap to ignore

Metro Pacific Investments Corp. (MPI) is a very cheap stock. At its current price of P5.20 a share, MPI’s market capitalization is only P164 billion. This means that aside from MPI’s 45-percent stake in Meralco, the implied value of all of its other investments, including shares in Maynilad, North Luzon Expressway (NLEx), Subic-Clark-Tarlac Expressway (SCTEx), other toll roads and its hospitals, is only around P12 billion, which is cheap by any measure.

Unfortunately, despite MPI’s very cheap valuation, the stock has underperformed the Philippine stock market the past three years, making it appear to be a value trap. The stock’s underperformance is due to numerous issues, including disappointment over the company’s inability to raise the tariffs charged by water and the toll roads businesses, and concerns that MPI will need to conduct a share offering to finance the P100-billion capital expenditure requirement of its toll roads business in the next five years.

However, conditions have started to improve recently. In March and June of this year, the Toll Regulatory Board (TRB) finally approved the first tranche of toll rate adjustments for NLEx and SCTEx. Note that this is the first rate hike for MPI’s toll roads since 2012.

Although Maynilad was still not allowed to increase tariffs despite winning its second arbitration case against the government, Maynilad and the government could come out with a compromise soon as Maynilad already said it was willing to drop its arbitration proceeding against the government assuming that the tariff issue was resolved.

Finally, just last week, MPI’s hospital business arm, Metro Pacific Hospital Holdings Inc. (MPHHI), filed a prospectus with the Securities and Exchange Commission (SEC) for its initial public offering (IPO) scheduled to take place this December. Assuming that MPHHI’s shares are sold at the maximum offer price of P182 a share, MPHHI’s pre-IPO market capitalization will be P111.2 billion. This is much higher than analysts’ fair value estimate of P30 billion to P50 billion for MPHHI, adding around P1 a share to the holding company’s net asset value. More importantly, MPI could potentially raise up to P67 billion from the IPO, alleviating concerns that it may conduct a share offering anytime in the near future to finance the large capital expenditure requirement of its toll roads business in the next five years.

Admittedly, these developments don’t change the fact that MPI faces massive regulatory risk as virtually all of its businesses belong to regulated industries. Nevertheless, at P5.20 a share, MPI is too cheap to ignore, especially with all the downside risks already priced in but none of the upside potential. Moreover, the likelihood for things to get worse resulting in a much lower valuation for the stock seems minimal at this point.