Conglomerates top picks for 4th quarter
The higher the stock market index goes, the more challenging it is to scout for bargains. But as interest rates continue to fall and investors remain awash in cash, the stock market continues to explore uncharted territory. Indeed, a lot of investors have made money from the stock market this year, and as prospects for the Philippines remain bright, investing in growth stocks seems to be the overriding theme.
Based on a quarterly poll of stock experts by The Inquirer’s Doris Dumlao, conglomerates—deemed as a good proxy to the Philippine economic growth story—and consumer-oriented stocks emerged as the favorites for the fourth quarter.
These are the top three most compelling stock picks from the perspective of our four respondents:
Paul Joseph Garcia
Senior vice president, head of Odyssey Funds
Bank of the Philippine Islands
1. Ayala Corp. (AC)
“Ayala continues to enjoy strong performance from its core subsidiaries, with consolidated earnings of P6.1 billion in the first half of 2012, a 23-percent rise year-on-year. AC’s property businesses should profit from the prevailing low interest rate environment, while banking operations benefit from intermediation opportunities as private and public capital spending continues over the next few years.
Ayala Land’s first half pre-sales grew by 50 percent, as revenue rose by 18 percent to P25 billion and net income hit P4.3 billion, up 28 percent year-on-year. BPI’s first-half net income grew by 52 percent year-on-year to P9.4 billion on a 9-percent growth in net interest income and a 51-percent rise in non-interest income. The bank’s total loan book expanded by 17 percent in the first semester, on a 19-percent improvement in small and medium enterprise borrowing, while consumer lending and top-tier accounts rose by 17 percent and 15 percent, respectively. Globe Telecom’s first half core net income rose by 2 percent to P5.7 billion, with total subscriber base growing 12 percent to 31.7 million. The company is currently undertaking a $790-million network upgrade to bolster its 3G and 4G capabilities.
AC remains one of the largest conglomerates in the country, with market capitalization of P258.7 billion and P399 billion in assets. It has embarked on an aggressive expansion mode, with $1 billion allocated for various power and infrastructure projects. We consider it a strong contender for big-ticket PPP (public-private partnership) projects such as the P60 billion LRT-1 extension and the P20 billion Cavite-Laguna Expressway. It has entered into partnership agreements with Metro Pacific Investments, Aboitiz Equity Ventures, A. Brown & Co. and the Ortigas family. The company’s 4.3 percent index weight instantly puts it on the radar screen for foreign funds wanting exposure to the Philippine growth story.”
2. Puregold Price Club
“Puregold stands to benefit from the steady growth in GDP (gross domestic product) per capita, as the second largest grocery retailer in the country with sales of P38.9 billion in 2011 and 134 stores across 35 cities and 28 municipalities. Membership in the company’s “Tindahan ni Aling Puring” (TNAP) loyalty program has risen from 30,000 in 2005 to 170,000 in 2011. About 93 percent of TNAP members have their own sari-sari stores, accounting for 16 percent of the total sari-sari stores nationwide.
Same store sales growth for 2012 is seen at 4 percent for PGOLD and 15 percent for S&R Membership Shopping. The company will roll out 31 new stores this year, followed by 25 outlets in 2013. Management has guided toward a 50-percent sales growth, which we expect to result in a 16-percent rise in earnings per share. The Philippines presents significant upside moving forward, with ‘modern trade’ accounting for only 21 percent of the $95-billion retail industry. Studies have shown that the bulk of the transactions still take place at wet markets and neighborhood sari-sari stores. In comparison, more mature economies such as Thailand have a 40:60 modern-traditional retail ratio, suggesting further upside for the company. Positive earnings revisions and its inclusion in the MSCI Small Cap Index helped the stock outperform the Philippine composite index at an increase of 67.5 percent year-to-date.”
3. Megaworld Corp. (MEG)
“Megaworld is a real estate firm with a market capitalization of P62 billion. It trades at an attractive valuation of 9.5x P/E* compared to Ayala Land, Robinsons Land and SM Development Corp., which trade at 38x, 17x, and 11x, respectively. MEG has launched five residential projects this year and plans to expand its gross office leasable area to 500,000 square meters to keep pace with the steady BPO (business process outsourcing) sector growth. Among listed property firms, it arguably has the largest exposure to the outsourcing sector, which is expected to generate $25 billion in revenue by 2016. The Business Process Association of the Philippines expects the industry to grow by 20 percent yearly.
MEG is trading at a 30-percent discount to net asset value with price target of P2.75 per share. It was one of the top foreign buys in the third quarter with some $19 million in net foreign buying.”
Reuben Mark Angeles
Head of research
First Metro Securities Brokerage Corp.
“Our theme is ‘go cyclical.’ Given the robust economic growth outlook in the Philippines, we like stocks that can leverage the ‘local growth’ scene. Ayala Corp., GT Capital Holdings and SM Investments are our top picks for the fourth quarter. In our view, the components of these firms have direct and indirect exposure to the country’s growth areas.”
1. Ayala Corp. (AC)
“The increase in its stake in BPI should improve the company’s net asset value. But in the near-term, the uncertainty of funding the acquisition will result in downward price pressures. We view this as an opportunity to increase stake in AC. Its main income contributors—Ayala Land Inc., Bank of the Philippine Islands and Manila Water—are seen posting healthy earnings in the second half of 2012.”
2. GT Capital (GTCAP)
“On a trailing P/E* perspective, GTCap looks undervalued compared to SM and AC. It trades below 16x, while SM and AC trade above 20x P/E. Its components—Metropolitan Bank and Trust Co., Toyota Philippines, Global Business Power, AXA and Federal Land—can leverage the growth in consumption, industry and services.”
3. SM Investments (SM)
“We expect SM Retail and SM Prime Holdings to fare well in the coming holiday season. Its components have good exposure to the Philippines’ strong growth sectors. Leverage to consumption and services are visible through SM Retail, Banco de Oro Unibank, SM Development Corp. and SM Prime.”
DA Market Securities
1. Semirara Mining (SCC)
“The commissioning of Calaca Unit 1 on Aug. 1 increases SCC’s capacity from 340 megawatts to 550 MW. A seven-year supply contract signed with Meralco ensures sales of 200 MW to 410 MW and the expansion of the energy business by another 300 MW by 2014 and another 300 MW within the next five years. Further exploration of coal reserves ensures sustainability and growth in earnings.
For 2012, net income is seen rising by 7 percent to P6.4 billion from P6 billion in 2011 and by 33 percent year-on-year to P8.5 billion in 2013 on better power and coal margins. We recommend a buy with a price target of P254. There’s a possible upgrade due to expansion plans.”
2. Puregold Price Club (PGOLD)
“PGOLD is termed as a pure retail play, particularly in an economy noted for its robust consumer spending. Earnings are driven further by faster-than-expected execution of management plans, which is seen to continue amid its aggressive and strategic expansion.
The firm revised its sales growth forecast for this year from 25 percent to 50 percent to P58.5 billion as it increased the number of stores it will open this year from 25 to 31. Faster-than-expected execution reflects the company’s aggressive stance and capability to achieve its target of 200 stores by 2015 (from 130 end-2012).
Proceeds from a corporate notes offer are in line with the company’s expansion plans, organically and through acquisitions. Following the recent consolidation of S&R stores and the acquisition of Parco supermarkets, the firm’s growth strategy is proving successful as it achieves economies of scale, ensuring margins and improving bottomline.
Its earnings are posting double-digit growth. For 2012, profit is seen rising by 79 percent to P2.7 billion from P1.54 billion in 2011. It is seen rising further by 42 percent to P3.9 billion in 2013. We recommend a buy with a price target of P34, with possible upgrade due to expansion plans.”
3. East West Bank (EW)
“East West Bank is on an aggressive expansion phase, growing its network organically and through acquisitions… Expansion will help it achieve economies of scale while it maintains its consumer and corporate mid-market focus.
Having won 105 restricted area branch licenses from the Bangko Sentral ng Pilipinas, the bank plans to set up 100 branches in 2012, 75 of which will be in restricted areas. In 2013, it will set up another 100, to bring the total to 350 by 2014, as it aims to be the fifth biggest bank in terms of network. As of the first half of the year, EW had 158 branches, with 60 percent of which located in Metro Manila and 40 percent in key provincial areas.
The bank recently completed a recapitalization program worth P820 million for two acquired banks—P700 million for Green Bank Inc. to be merged with EW and P120M for FinMan as its rural bank subsidiary, to be renamed EastWest Rural Bank.
In 2013, the bank is seen posting a 32-percent rise in net income to P2.27 billion from the projected P1.72 billion for 2012. In 2014, earnings are seen to grow by another 31 percent to P2.98 billion. We recommend a buy with a price target of P25, with possible upgrade due to expansion plans.”
* P/E ratio , also known as “price multiple” or “earning multiple,” values a company as a ratio of its current share price relative to its earnings per share. For instance, a P/E ratio of 10x means that an investor is paying 10 times the amount of money that company is making in a given year.
** cup and handle pattern – For technical analysts, this stock formation is a bullish continuation pattern that emerges when a stock breaks out of a consolidation period. The cup formation comes after an advance and as it name suggests, looks like a cup or rounding bottom. Once the cup is formed, a trading range develops on the right hand side and the handle emerges, any breakout from which signals a continuation of the upswing.
1. Century Properties Group Inc. (CPG)
“This company (CPG) is a beneficiary of current low interest rate and benign inflation for 2012. The 11,291 units launched as of the first half worth P25 billion (not yet recorded in books) will support revenue stream for the next two years years. Its 1.97-million square meter landbank will help cover a five-year operations stream worth P20 billion yearly. Its stocks are cheap at only 5x P/E* (price to earnings ratio as of Oct. 8 closing price) based on P2.36 billion earnings forecast for 2013 (P0.27 earnings per share). We recommend a trading buy with a target price of P2.27 per share.”
2. Manila Water Co.
“It’s a long-term play based on plans to expand outside of its east concession zone. Additional cash flow will come from, besides Clark Water & Thu Duc, the completion of its 47.35-percent planned acquisition of Kenh Don Water Supply JSC in Vietnam. There’s upside from higher tariff, with first-half average at P30.91 per cubic meter from P26.51. Earnings are seen to grow 17 percent year-on-year to P5.01 billion (EPS of P2.49) for 2012, P5.97 billion for 2013 (EPS of P2.97). It’s a long-term buy with a target price of P35 per share.”
3. First Philippine Holdings
“There was a 336-percent jump in first-half earnings to P6.7 billion, supported by units First Gen Corp. and Rockwell Land. It saw a breakout from its cup-and-handle pattern** after breaching P80.25 per share. The ascending momentum is likely to continue. Initial target is P95 per share.”
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