WITH the Philippine stock market trading at record highs, which stocks still offer the best upside potential? The Inquirer’s Doris Dumlao asked four stock experts what their three most compelling stock picks are at this point in time and whether their selection is based on attractive valuation or growth play (or both), two sectors emerge as clear favorites—infrastructure and tourism/gaming. This is quite unlike our previous quarterly survey where holding firms, power and mining themes dominated.
By the sheer backlog in Philippine infrastructure and this area being the focus of the government’s much-awaited pump-priming efforts and public-private partnership program, most of the stock experts interviewed had an infrastructure-oriented stock in their respective shortlist. Tourism/gaming is another sector that has drawn strong interest based on this quarter’s poll. Also cited were industries that may benefit from the country’s resilient consumer sectors like banking and retailing. These are the views shared by this quarter’s respondents:
April Lynn Tan, CFA
Head of research
CitisecOnline
1. Metropolitan Bank and Trust Co. (MBT)
“It is a beneficiary of the expected pick up in public-private partnership (PPP) projects and investment spending as this would lead to higher demand for loans. Its size will be an advantage both in lending capability and access to low cost deposits. It has an attractive valuation—trading at a discount relative to Banco de Oro Unibank despite similar level of profitability, and a significant discount to our fair value estimate of P108 per share.”
2. Metro Pacific Investments Corp. (MPI)
“The launch of PPP projects will provide numerous growth opportunities since MPI is expected to be among the major bidders for the said projects. It has an attractive valuation, with the stock trading at a steep discount to our fair value estimate of P4.70 per share.”
2. Alliance Global Group Inc. (AGI)
“Its gaming subsidiary, Travellers International Hotel Group Inc., will be a major beneficiary of the expected growth of the tourism industry in the Philippines given its Resorts World Manila project and a plan to invest in Resort World Bayshore, its second integrated tourism estate. Even with intensifying competition, property subsidiary Megaworld Corp. (MEG) is expected to benefit from secular growth in housing demand given its huge landbank in attractive locations (including Bonifacio Global City) and strong cash position. Its growing office and retail leasing portfolio further strengthens its ability to generate cash flow over the longer term. It has an attractive valuation, with the stock trading at only 10.4x expected earnings for 2012 P/E ratio and a steep discount to our fair value estimate of P14.80 per share.”
Wilson Sy
Director, Philequity Management Inc.; former chair, Philippines Stock Exchange and Manila Stock Exchange
1. DMCI Holdings Inc. (DMC)
“Our theme is really the thrust of the PPP structure so in infrastructure, whether it’s San Miguel or Metro Pacific doing it, the beneficiary will be DMCI. It is quite cheap. The P/E* is still below 10x compared to other conglomerates which are trading at higher than 10x P/E. Its EPS (earnings per share) growth is about 10 percent so your PEG (price/earnings to growth) ratio is about 1x. Then by buying into DMCI, you’ll get into their housing and construction concerns, Semirara (Mining Corp.) and Maynilad (Water Services Inc.). DMCI is the biggest in construction. Semirara is also cheap and it is now getting (power supply) contracts from Meralco (Manila Electric Co.).”
2. Metropolitan Bank and Trust Co. (MBT)
“Metrobank has undergone transition in the past several years. Since he was appointed president of Metrobank in 2006, Arthur Ty—son of taipan George Ty—has focused on cleaning the house. After years of house cleaning, the bank is now ready to grow. It is priced at 1.5x price to book (P/B). I like the big three banks but this (Metrobank) is quite liquid so it should benefit from consumer growth.”
3. International Container Terminal Services Inc. (ICT)
“ICT is all over the world and when the economy turns, looking outside, it’s good for ICT. Right now, there’s slow growth in the global economy with the European Union problem, but when it turns, ICT will be big beneficiary. Right now, ICT finds a safe haven in the Philippines, but when the world economy turns, I want to be invested in ICT. It’s not cheap, with its P/E* ratio at 17x, but I’m looking at it as a recovery play for the world economy.”
Erico Claudio, strategist
PentaCapital Investments
“Essentially, this market will be driven largely by liquidity, low interest rates and a lot of foreign funds. But valuation is a concern. It is no ‘basement bargain’ cheap anymore, but not yet ‘irrational expectation’ level either. I am not too keen on placing an ‘overweight’ position with the blue chips, for performance. At least for this year, you will see the out-performances of smaller issues. The huge potential gains carry huge risks. If the global economy turns to be not as good as expected and when there is a sudden tightening of funds, these stocks’ prices may likely be hurt the most.”
1.Metro Pacific Investments Inc. (MPI)
“It’s into politically-correct industries—infrastructure and public service. MPI has interests in water, road, power distribution and hospitals. These are the areas where they are providing services that complement the limited funds of the government. I believe a good number of foreign funds like this theme. Should foreign funds flow in some more, the stock may likely be revalued higher.”
2.EEI Corp.
“EEI is benefiting from the rise of the construction industry, both locally and abroad, they also have investments in those industries. World economic recovery and a stronger Philippine government spending for infrastructure are good news for the company. In addition, the stock is a value find, trading cheaply even based on historical data. Fast growth in revenue is a bonus.”
3. Belle Corp.
“It’s more of a growth than a value stock. Current valuation measures are justified only by an expected rapid expansion of profitability. It benefits from the rising entertainment industry, including an expected rise in tourism, which in turn is banking on the help of the seemingly off-with-a-good-start ‘More fun in the Philippines’ ad campaign. Belle’s recent huge investments were put it in the position to deliver sharp revenue growth rates.”
Bede Lovell Gomez, AVP
First Metro Investment Corp.
1. Puregold Price Club Inc.
“I consider the stock as the pure retail play in the Philippine market supported by the country’s huge domestic-based demand. The company caters to the middle market and below (C,D and E markets), which represent about 75 percent of the consumer population. The company represents the true demographics of the Philippine consumer market. It is currently No. 2 in terms of sales against its competitor (SM), but it’s fast closing in to the top spot. The company can easily grow its revenue at 20-25 percent in the next five years due to its aggressive store expansions. Puregold expects to double its stores in the next three years from its current 100 stores. Most of its stores are located on its target market, which are mostly in a densely populated area. Majority of its shoppers buy on a cash basis as most of its customers are not credit card holders, allowing Puregold optimal utilization of its cash. The stock still trades at 16x P/E* against its regional peers which are trading at 21x. I expect the stock to trade at P24 by the end of the year.”
2. Alliance Global Group Inc. (AGI)
“AGI is a direct beneficiary of the growth of the tourism industry. It is currently two years ahead of its competitors in the gaming business. The Philippine gaming market is expected to remain robust and grow exponentially. Gaming revenues have the potential to grow at an average of 30 percent yearly, building on the strength of the Macau and Singapore gaming market. AGI is expected to grow its revenue by double-digit due to the opening of more hotels within the Newport City area and the development of its Resorts World Manila Bay. I expect the stock to trade at P14 by the end of the year. The Philippines will also eventually benefit from the Asian gaming growth.”
3. Semirara Mining Corp. (SCC)
“I expect coal demand to remain strong both globally and domestically. Demand from China and India will remain robust while the expected higher economic growth this year and the implementation of several PPP projects are seen to boost demand from power and cement sectors. Semirara trades at a P/E* of 10x and posts an annual dividend yield of about 5 percent. I expect the stock to trade at P290 by year-end. SCC’s power business will be a growth driver for the company as the country expects demand for power to grow further as the economy grows. If we are putting the Philippines on a growth path, then we have to bet on the demand for this sector
“To summarize, all of the stocks above have been my top picks since the last quarter of 2011 as part of my infrastructure/consumer/gaming/mining themes. I am looking at an average of 20-30 percent increase in the share price of these stocks.
*P/E (price to earnings) is a valuation ratio of a company’s current share price compared to its earnings per share. A P/E ratio of 10x, for instance, means that an investor is paying 10 times the amount of money the company is making or is expected to make in a given period.
P/B (price to book) compares the market value of a stock to its book value. It refers to the ratio of the latest closing price to the latest quarter’s book value per share. P/B, a useful metric for value investing, is usually used in evaluating asset-heavy companies like financial institutions where P/E valuation is not applicable.