‘Pick up blue chips at a bargain’
Be fearful when others are greedy” and “be greedy only when others are fearful,” legendary American investor Warren Buffet says. Now is a time when investors are mostly unwilling to touch equities with a ten-foot pole. But with equities trading at dirt-cheap prices, stock market experts say there’s ample opportunity for bargain hunters this fourth quarter. Selective picking is the way to go.
We polled seven brokerage houses and, as expected, index names dominated their top 3 fourth quarter stock picks.
Raymond Neil Franco
Abacus Securities, vice president/head of research
Raymond Neil Franco
SM Investments Corp.
One of the stocks most affected by the drawn-out sell-off by foreigners is SM. Not because it is a bad company but because of its proxy status for the Philippines. When foreign funds want to get out of the country, they will most likely have SM. This is an opportunity for local investors given how cheap it is relative to historical levels.
SM is the only conglomerate, and among the few companies that are trading lower than they did at the pandemic low (March 19, 2020) in terms of valuations. With its exposure to malls, the Sy holding company is also a hedge against inflation. Rent revenue goes up because it is largely computed as a percentage of tenants’ sales. Lastly, SM is a good play on the long-term growth of Filipinos’ consumer spending.
D&L Industries
The company’s recently commissioned plant won’t immediately pay dividends. Ramping up takes time and economies of scale need to be built up. But for those with a long-term view, DNL should be a good portfolio addition. It is an indispensable supplier to many industries, but is primarily an indirect play on the Philippine consumption.
DNL is also a net exporter and is therefore a hedge against a weaker peso. We like it, most of all, because the new plant will, in medium to long term, underpin its exports business and significantly enhance margins because it is largely dedicated to producing higher value products. The stock’s weakness over the last six months or so, therefore, is an opportunity to buy.
Bloomberry Resorts Corp.
Gaming is back. Regulatory concerns and the pandemic sapped investor sentiment in the previous administration. It didn’t help either when Resorts World and Melco delisted from the exchange in quick succession four years ago. But the industry is in revival.
Solaire’s net income has surged over the past 12 months to well above prepandemic levels. First half recurring profit of P6.1 billion was 30 percent higher versus the same period in 2019 and was well ahead of consensus. With the imminent opening of its Quezon City casino (Solaire North), another one south of Metro Manila planned, and the possibility of a foray into online gaming, future growth looks secured.
Its stock is also the third cheapest in the region despite having a longer runway growth, at least in our view. The recent drop in the share price, because of its post-PSEi inclusion hangover and recent share issuance, is an excellent entry point for those who are initiating positions or wanting to add to existing ones.
Francis Ferdinand Subido, Alfred Benjamin Garcia
and Jose Antonio Cipres
AP Securities
Francis Ferdinand Subido
SM Investments Corp.
For the fourth quarter, we believe that SM is a solid pick given its exposure to both consumption and banking, therefore allowing investors to hit multiple birds with one stone. For its banking arm, both BDO and China Bank should benefit from continued steepness in rates, which may be sustained until first half 2024. Additionally, Bangko Sentral ng Pilipinas’ recent moves to increase the efficiency of monetary policy transmission could also further benefit net interest margins, as a result of rationalization in time deposit rates.
Meanwhile, Q4 will likely bring strong seasonal sales for the company’s retail segment and even its mall revenues. Overseas Filipino remittances also tend to see their peak come December, and this would likely further stimulate consumer spending in SM malls. Based on some back-of-the-envelope calculations, we reckon that SM should be trading at around P921 per share.
Metropolitan Bank & Trust
MBT is our top value pick for banking in Q4, as its valuation gap with its “Big Three” peers is too wide to ignore at this point. We may see a reversion to mean play in MBT during the last quarter of the year, which could drive MBT to our target price of P64.10 per share. Q4 dividends also offer additional value to shareholders, which we expect to be P0.75 per share. While MBT’s return ratios tend to trail its peers, we expect it to weather margin compression better once rates start to come down next year.
Ayala Land Inc.
We see ALI as our top pick for property in Q4 as its residential segment has shown resiliency despite high rates. The rate cuts that will be likely implemented starting first half of 2024 alongside return of demand further boost growth prospects for this property company. Their mall segment has also experienced an increase in occupancy, foot traffic, lease rates and continued mall expansion.
Hotel and resorts have also experienced traveler resurgence amid easing pandemic restrictions. Q4 would be a good time to start positioning while the stock is still trading at a steep discount. We see a potential 42.7-percent upside to our target price of P41.54.
Rastine Mackie Mercado
China Bank Securities Corp. Research director
RMD Mercado
Converge ICT Solutions
There’s growing revenue accretion from its prepaid broadband business, which addresses affordability concerns among consumers as they rationalize their spending. Looking ahead, CNVRG is also looking to expand its enterprise service offering in Singapore in the coming years, which could further support its revenue stream. Apart from these, there remain prospects of continued price and valuation recovery after the selldown in the year to September, especially given prospects of dividends in full year 2024.
Bloomberry Resorts Corp.
Gross gaming revenues have continued to expand beyond prepandemic levels despite the sluggish recovery in tourist arrivals. Furthermore, the upcoming opening of Solaire North in 2024 should provide further windfall to long-term profitability. Apart from these, we think that the recent sell-off borne by the recent top-up placement provides an attractive entry opportunity.
SM Investments Corp.
We like its exposure to businesses that we think will continue to be resilient in the coming year (e.g., banking and retail)—all while having new growth drivers (e.g., logistics and renewables). Furthermore, we think that SM is a strong beneficiary of improving equity market fund inflows given the outlook for eventual policy rate cuts in the coming year.
Estella Dhel Villamiel
First Metro Securities Head (institutional), equity research
Estella Dhel Villamiel
Converge ICT Solutions
Buy: target price (TP) at P13.30. We think CNVRG has more to gain with the introduction of prepaid fiber broadband. With none of the weakness of mobile, CNVRG can benefit from prepaid fiber in two ways: on one hand, prepaid plans should enable CNVRG to grow its addressable market as the products are more affordable to a wider range of households. We do not discount prepaid fiber’s potential to capture the wallet share of subscribers in the prepaid wireless broadband and prepaid mobile space—both of which are offered by CNVRG’s competitors.
Moreover, dividend is a rerating catalyst. Our discounted cash flow (DCF)-based TP implies valuations will expand closer to peers, at 5.7x full-year 2024f (forecast) EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortization). We think CNVRG can deliver a healthy Ebitda compounded annual growth rate (CAGR) of 6.4 percent in the next three years—undemanding vis-à-vis regional and local peer average of 7 percent and 3.4 percent, respectively.
Universal Robina Corp.
Buy, TP at P155. With news of the House of Representatives not pursuing excise tax on salty food and sugary drinks, we are doubling-down on our positive view on URC as we believe that the regulatory risks on URC should be lifted soon. We think the regulatory risk was overestimated, given: (1) single-use plastic tax will not impact URC; (2) there were no official proposals for junk food and sugar-sweetened beverage taxes in Congress, and (3) we had anticipated the impact would be lower than expected as policymakers would consider concerns of various stakeholders.
More importantly, valuations are attractive, trading at 17x FY24F price to earnings (P/E)—below -1 standard deviation (SD) of mean. Our TP of P155 is based on 22.3x FY24F earnings, undemanding relative to historical levels, supported by robust operating income growth outlook (estimated at FY22-24F EBIT CAGR of 13.9 percent), improving return on equity (12.3 percent by FY24f) and strong balance sheet. The latter enables URC to be on the lookout for merger and acquisition opportunities, which had been a share price catalyst in the past.
Century Pacific Food Inc.
Buy, TP at P34.50. We see visible earnings drivers for the next three to five years, as follows: (1) tuna prices have peaked and have now started to decline – thus allowing for sustainably elevated margins; (2) Coco Mama as CNPF’s up-and-coming flagship brand – capitalizing on changing consumer behavior post-COVID; and (3) new product launches in adjacent categories provide exposure to small but fast-growing segments – such as meat alternatives and pet food – providing room for CNPF to explore and, eventually, build its next growth pillar.
Our DCF-based TP and implies 19.7x FY24F earnings per share – at 2SD of the counter’s historical mean valuation. We believe this is justifiable following the stock’s inclusion in the PSEi, where we expect higher multiples on better investability as well as trading liquidity.
Alex Dauz
Maybank Securities president
Alex Dauz
SM Investments Corp.
As the biggest retailer, mall operator and bank, SM offers the best exposure to the Philippines’ domestic consumption story. SM’s predominantly essential consumption-based exposure, the cost-plus pricing model of its retail segment, the sizable earnings contribution from BDO and China Bank (beneficiaries in a high interest rate environment) and its under-leveraged balance sheet keep it resilient against oil-driven inflation and foreign exchange pressures and an elevated interest rate environment. Its potential re-inclusion to the FTSE Global Index in 1Q24 should also provide a flow-driven catalyst to the stock.
BDO UnibankBDO is a net beneficiary of a high interest rate environment, which we expect to persist until first half of 2024. Further, its more aggressive growth strategy in the consumer lending space, along with its high current account/savings account (low-cost deposit) base (75 percent), should also partially offset the potential drags from prospective policy rate cuts in the latter part of 2024.
Jollibee Foods Corp.We expect JFC, which offers a direct play into domestic consumption, to outperform in second half on the back of its strong domestic positioning, which should be further boosted by holiday-induced spending.
Abi Chiw
BDO Securities head of research
Abigail Chiw
Aboitiz Power Corp., Bank of the Philippine Islands and GT Capital Holdings
Considering the challenging macroeconomic backdrop, we suggest investors look at quality names that are trading at undemanding valuations (i.e. trading at below 10 times full year 2024 price to earnings ratio) and can sustain double-digit earnings growth and return on equity given competitive advantages in their respective sectors.
Gabryle Aguila
Unicapital Securities head of equity research
PLDT Inc. and Globe Telecom
We like PLDT (TP at P1,710) and Globe ( TP at P2,275) as current prices are attractive to accumulate amid later beneficiaries of the slower inflation view on its average revenue per user and lower interest rates for its capital expenditures.
Ayala Land Inc.
We also like Ayala Land (TP at P38.20) as the prospect of lower interest rates would revitalize demand for property and as office occupancy rates are expected to improve in 2024.
