Citi upbeat on PH conglomerates

Global banking group Citibank sees diversified Philippine conglomerates reaping the benefits of the government’s program to develop infrastructure and tourism projects that add another growth leg to the consumption-led domestic economy.

In a recent research titled “Philippine Conglomerizer,” Citi said it favored conglomerates that had either underperformed or traded at steep discounts but were well positioned to benefit from the country’s overriding macroeconomic themes.

Citi’s three most favored conglomerates are Ayala Corp., Alliance Global Group and Metro Pacific Investments Corp., based on the research dated April 13 written by stock analysts Ricardo Puig and Karisa Magpayo.

Citi’s target price for Ayala is P465 per share versus last Monday’s closing price of P430, while its target prices for AGI and MPI are P14 and P4.70, higher than their respective closing of P12.36 and P4.49 per share in the last session.

“We like groups that trade at steep NAV [net asset value] discounts and offer exposure to key Philippine macro-themes of domestic consumption and infrastructure,” the research said, noting that MPI and AGI had underperformed the market while Ayala Corp. had “a well-diversified asset portfolio and strong market position in key growth sectors.”

The research said infrastructure build-up in the Philippines was offering long-term opportunities for conglomerates as this would improve access to more regions in the country and spur opportunities in real estate and construction. It also pointed out that tourism and leisure businesses should get further boost from a more aggressive tourism campaign, alongside airport and road improvements.

“Our preferred conglomerates have successful records in building new businesses, backed by strong balance sheets and flexible fund-raising options. They have upside risks to earnings and valuations,” the research said.

MPI is pushing further into infrastructure, AGI has planned a second casino site and leisure investment in key tourist spots, while Ayala has real estate expansion/diversification strategies and is foraying into power and infrastructure.

Catalysts for conglomerates include positive news on infrastructure project awards, asset reflation due to better accessibility, earnings visibility from huge property pre-sales and valuation enhancement on any credit re-rating, the research said.

The research said risks included delayed implementation of infrastructure projects, lower returns due to aggressive bids, tight competition and share dilution from equity capital-raising.

In the case of MPI, the research said “much of the underperformance could be traced to concerns regarding its ability to expand its asset portfolio.”

However, the research said the market could be ignoring MPI’s strong earnings growth (17 percent average growth in earnings per share expected from 2011 to 2013), driven by the water and electric utility businesses. The research said there was also a possible 8 percent enhancement in NAV from potential new projects and acquisitions.

Despite its appreciation this year, the research said AGI shares still underperformed the market and Citi’s NAV estimate of P16.40 as concerns remained regarding potential competition to its successful gaming and leisure ventures from two more private gaming licensees (Bloomberry Resorts and Belle Corp.), which would start full operations next year.

But Citi report said the market could be ignoring the strong cash flow growth of Travellers group from the casino and entertainment complex. It added that the market might have overlooked that AGI had one of the highest returns on equity and dividend yields among Philippine conglomerates. The research noted AGI’s potential as a consumption play through its interests in integrated property development, alcoholic beverages manufacturing, fast-food operations and tourism venture.

Despite its strong performance, the report said Ayala was still trading below Citi’s NAV estimate of P544 per share. It said the market might also be ignoring cheaper access to one of the biggest and most diversified portfolios with strong market positions in real estate, banking, telecom, water utilities and electronics manufacturing. Citi also estimates a 7-percent potential value enhancement from possible acquisitions and planned investments while it also sees the potential increase in the value of the Ayala group’s huge landbank due to better accessibility.