2:50pm Sunday 22 August 2010 Philippine Stock Exchange Index 3593.60 (Friday close)
The DJIA appears to be sagging as global investors are looking less at the stock prices which benefited from strong 2Q2010 earnings report to recent economic figures indicating weakness ahead for the economy. One insight I got while reading the weak US jobless figures and an article on new US healthcare legislation is the disincentive for employers to hire new employees because of the burden of healthcare on employee cost. It is not surprising that companies whose earnings are very strong are not tapping the job market fast enough. The broader based S&P 500 is showing the same weakness and looks to be headed for further weakness if one considers technical indicators.
The PSEi on the other hand paints a different picture. The technical indicators are showing underlying strength supported by positive macroeconomic fundamentals. The latest OFW remittance report was an increase of 8.3%. Remittances are a leading indicator because it presages a growth in consumer spending in coming months. The aggregate of beneficiaries effectively have effectively 8.3% more money to pump into the economy. Of course, there is also the seasonal harvest in rice producing areas which bring more purchasing power into the countryside. The GDP growth rate to be released on Thursday, the 26th, will likely reflect the underlying economic strength. The scuttlebutt from brokers covering foreign funds is that appetite for Philippine stocks have grown bigger. This is but natural since asset allocation into Asia ex-Japan has grown in leaps and bounds. Even if only 1% gets allocated into Philippine shares, that could be around US$1 billion coming into local stocks. Value turnover has straddled the Php5 billion mark over the past week giving hint of added foreign money.
If you compare the PSEi to the MSCI Asia ex Japan, we have been outperforming the rest of Asia in the current quarter. It is not unreasonable to think that more foreign and local capital will flow this way in the current quarter. The large blue chips will be the most likely targets of foreign buyers. This to me explains why in spite of JFC being expensive, had outperformed the PSEi for most of the current quarter. JFC is a pure consumer play which reflects discretionary spending in the economy. It also partly explains the strength of URC earnings as well as sustained revenue stream for TEL. My take is that for the coming weeks URC and TEL will likely have strong buying support.
There have been questions about JGS, whether or not it is a good stock to buy. Fundamentally, I would say categorically that it is an excellent company which has excellent companies in its portfolio, namely, URC, RLC, unlisted Cebu Pacific and Robinson Savings Bank, as well as companies obscure to many of us. It also owns DGTL which has taken more than 15 years to turn around, but the recovery of the company already looks imminent. The only problem of JGS is the stigma in the market that Big John, all these years, has not shown any concern for shareholders. My opinion, however, is with what has gone about in RLC and URC over the past 18 months, the impression about Big John may be worth changing. JGS should be able to trade properly in the months ahead due to good fortune in URC and RLC and possibly the favorable conditions for DGTL and an IPO for Cebu Pacific. Will one lose money in trading JGS? It would really depend on your timing. Don’t forget GLO was such a good story last year, but look at where it is now.
In spite of the bad fortunes in GLO, AC looks to be a stock that foreign funds are buying simply because it gives them simultaneous exposure to the banking, communications and property sector in one go. Such a psychology will bode well for stocks like AEV, DMC and MPI all of which have exposure to more than one industry sector. That should also be good for MBT because of its universal bank status which has allowed it to have exposure in the power (Global Power), property (Federal land), insurance (AXA and Charter) and automotive (Toyota) industries.
The main story that investors are seeing is the strength of the underlying economy which is very different from the double dipping US situation. Are we decoupling again? Compare both indices from the beginning of July and see for yourself.
6:35 pm Wednesday 18 August 2010 Philippine Stock Exchange Index 3534.80
What is useful to note at this point in time is that the rises in the market in the past three days have gone higher. It was around 10 points on Monday, 22 points on Tuesday, and 32 points today. That is a sign of a strong trend. It comes quite unusually given that this is the ghost month. I guess the listless performance of prior weeks had manged to put investors fears into the price. Now that there is enough cash in investors hands, it seems that the fear is not to be invested in a market that is cheap.
Notice also that even if there had been marked daily declines the major markets, our market remains resilient giving further credence to the values that investors can find in local equities. Today, stock like EDC and MPI were solidly being bought. The Lopez suite continued to attract money as volume and prices were all up. I am happy that EDC is starting to outperform because I still see it as the growth driver for the remaining Lopez power business. Of course FGEN will be a big beneficiary of EDC’s fortunes and so will FPH be. People are asking whether or not EDC will break the 5 peso level. My hunch is that it will since my valuation of the stock is at least 5.60.
MPI is probably the main infrastructure play in the Philippines given the breadth of its portfolio. I am not surprised that it is forging ahead. It will likely continue into the rest of the week. I was suggesting that people take positions on the stock after I attended their investors briefing 2 weeks ago. I believe in trading on sound information and I think we received a very good picture during that briefing. Will we eventually be moving towards 4 in this stock? I believe so.
PNB finally hit 45 today on strong institutional buying after an announcement of Allied Bank’s 10% increase in 1H2010 profits. People should be reminded about what the score is. PNB is worth at least 48, and some even hold the view that the dynamic valuation should go as high as 55. Anyway, the long and short of it is that PNB is still undervalued given the emerging strength of its operations.
UBP also sae a big jump while MBT and BDO have kept the momentum received from the beginning of the week. This solidifies the view that the banking sector would be a strong beneficiary of the good GDP figures for the 2nd quarter that is due to be announced on the 26 August. I will suggest additional weighting in your favorite banking stock given this outlook.
GLO is gathering some support below 770. I will continue to be wary of GLO until they present figures that show a reversal of business trend. DGTL appears to be facing some hurdles as the total telco picture has become to look crowded. My only take on this stock is that it is one that is gathering support at the 1.40 level. I need to look deeper into what the company is doing but I believe taking a small position in the stock may be rewarding.
Overall, I think we have a market that seems to be defying common notions. We are not that sensitive to the U.S. We have stocks that are bargains by any textbook analysis. There is a lot of money sloshing around the economy. Consumer and business spending continues to grow. Government is trying to put its act together. No wonder common notions are being defied; things are actually changing in this country. I’m keeping my fingers crossed (and my prayers silent).
6:40pm Tuesday 17 August 2010 Philippine Stock Exchange Index 3502.25 (+0.65%)
Earlier today on Bloomberg Television, Mark Mobius, the Singapore-based executive chairman of Templeton Asset Management Ltd.’s emerging markets group, said that he thought the global economic recovery is well in place and may accelerate as growth in developing nations counters a slowing pickup in Japan and the U.S. He believed that “Going forward, the numbers will get better and better.” Why is his view important to investors? That is because he is one with very good track record in emerging markets and he understands smaller markets such as the Philippines.
Looking at the PSEi movement in comparison to the DJIA, I notice that when the U.S. index is positive, the PSEi is positive. When it is negative, the local index may be negative but not as much, percentage-wise. In some cases, it even goes positive. When I look back at the quarterly moves, the local index was correlated to the Dow in the first quarter when the direction had been generally up. It was not correlated when the DJIA was dropping in the second quarter. In the beginning of the third quarter, when the U.S. index was rising, the PSEi was correlated. Approaching the first week of August into the second week, as the U.S. softened, the local market eased but has recovered which cannot yet be said of the DJIA.
The observation and outlook of Mobius makes sense. I have been thinking all along that there would be some divergence in views between the U.S. and Asia ex-Japan. I believe that smaller markets such as Indonesia and the Philippines will follow the mode which emerging markets investors are expecting – an outperformance compared to the west.
Today, our market surged again with an even bigger gain than yesterday. Investors, however, are still being very deliberate and are accumulating strong issues into their portfolios. If you look at the most active list, four banks are there – MBT, BDO, UBP and PNB. I think the sector move in banking is taking firmer hold. I will not be surprised if we see more banks coming into the most active list in days to come. Banks have been traditional beneficiaries of strong economic growth and the aggregate banking numbers recently released by the BSP provide indication that indeed the underlying economy is strong. I would suggest that investors start adding to some banks to their portfolio. I realize that many followers of this blog have been in and out of PNB. It may be a time to give the others a try although PNB should benefit as well to the buying wave into the banking sector. MBT is potentially worth 70 and I read someone call BDO close to 55. The views that I’ve read on BPI is not so enthusiastic simply because MBT and BDO are outpacing BPI in loan growth.
Over all, I think our market is in good shape. If there is in fact a double dip in the U.S., it is not as if it is an unknown quantity. My take is that it is already in the prices of local stocks. Fortunately, we have companies with very good fundamentals which can carry out rises in prices for sometime to come.
I’m glad that in the past few weeks there were a lot of skepticism over the ghost month and double-dip. This had allowed investors to be more deliberate in their stock picks and position and cash management. Most portfolios have their cash allocations still at comfortable levels. There is a lot of buying power out there such that if this market goes through a slump, there would enough ice cream to scoop out of the can. When I was a kid, we were happier with double-dips than people are these days. Maybe because in those days only ice cream cones came in double-dips.
7:05 pm Monday 16 August 2010 Philippine Stock exchange Index 3479.67 (+0.29%)
Last week, the BSP published loan growth data which showing its fastest pace in June at 9.6%YoY. Loan growth in May was 8.1%YoY marking some acceleration in the pace of loan production. Some analysts were nurturing a bullish view on bank earnings and the data supports favoring the sector in the next 12 months.
Earlier today, MBT reported that 2Q2010 profit rose 43% to Php 1.7 billion from improvement in operating income improved and declines in non-performing loans. Net income for 1H2010 rose 36% to Php 4.2 billion. Operating profits for the period before provisions rose 15% to Php 9.8 billion. Net interest income reached Php 13.1 billion in 1H2010, while other earnings( including treasury and investments) rose 43 percent to 10.3 billion pesos. NPLs in the six-month period were reduced by 4.5 billion pesos, and the bad debt ratio dropped to 3.2 percent from 4.8 percent a year ago. MBT set aside Php3.8 billion additional provisions for doubtful accounts. Capital adequacy ratio came to 15.5percent following the Php 5 billion share Placement in May. Tier 1 ratio rose to 11 percent. The MBT disclosure follows positive disclosure from BDO and BPI last week confirming analysts positive recommendation of the sector.
I think that MBT is the most appropriate surrogate for the sector as a whole. There were more positive news as remittances in June grew at the fastest pace in five months increasing 8.3% to $1.62 billion. Growth in May was 6.5% indicating some acceleration. A Singapore based economics think tank forecasts up to 10% growth in succeeding months.
I was thinking that stock prices would slip a little in today’s session. They were actually quite strong. MBT, for instance, saw huge value turnover as the big foreign brokers line up a lot of crosses indicating that placements among large institutions are going on. It does not surprise me since the macroeconomic outlook has somehow improved given the strength of remittances. I had mentioned a while back that the banking sector was a buy and that MBT should be worth at least 70. I still maintain that view.
The Lopez shares have moved quite strongly in the past few day led by LPZ. Some of the companies in the group have announced buy backs – FPH, FGEN and ABS. I guess investors continue to move up to LPZ which is the parent of them all. My only problem with share buy-backs is what happens when the company stops buying; who will be doing the subsequent buying to hold up prices. They cannot keep buying back indefinitely so enjoy the ride while it lasts. Fundamentally speaking, I think EDC will be the best performer of the lot due to the strength of its geothermal business. FGEN should also do better though my money is on EDC.
For DGTL followers, I do not think that it is not a short-term play. In buying DGTL, you are taking a view that its value will emerge due to its turn around in business results and possibly sustained earnings from here going forward. That is a view that I am willing to take. It make take a bit of a wait, but it is a wait worth doing if I see at least a 40% move. It is like my view on PNB last year. I have the same sentiment for MPI. For this reason, my strategy for both these stocks is to accumulate rather than buy my position all at once. I am willing to be patient and even peso-cost average until returns are substantial.
Generally, I am still wary about being fully invested. I don’t really mind the market moving higher. I just do not want to be without cash if the market tanks on account of external forces. The big day for our market is actually August 26 when they release 2QGDP. If that is a good number, I will not mind being close to fully invested.
7:00 pm Sunday 115 August 2010 Philippine Stock Exchange Index 3469.52 (Friday close)
Weak economic data and a gloomy Federal Reserve statement sent the DJIA falling by 3.3% this week on fears that the flagging economic recovery could turn into a double-dip recession. As usual, markets across the globe put on a similar bearish sentiment. The low volume of trading also reflects the generally quiet summer and investors anxiety over the market’s direction. In New York, about 3.4 billion shares traded on the NYSE Composite volume, well below the average 5.4 billion shares normally traded.
Meanwhile, Germany reported that its economy grew by 2.2% in the 2nd quarter compared to the 1st quarter well above market expectations of 1.4% growth. Such a quarter-on-quarter growth has never been recorded before in reunified Germany which should be welcome news since Germany provides the engine for Europe a sa whole.
The rest of the capital market saw the volume of U.S. junk bonds exceed $155 billion, 80% higher than in the year-ago period. Second and third tier companies are refinancing their debt at lower costs and investor demand has been quite robust.
These information taken together tells me that while there is reason to be cautious in the broad market, there are some spots where investors find value. The Philippine market may just be one of them since in spite of a 15% rise in the PSEi YTD, constituent stocks remain relatively inexpensive. While the global economic recovery is in question, recent history has shown that our economy has been relatively unscathed.
For particular stocks, GLO has declined further and while technical indicators show it as oversold, I think it would be dangerous to own this stock. I would use any bounce on this issue to be an opportunity to sell. GLO was emblazoned all over Bloomberg television Thursday morning as causing earnings decline for Singapore’s Singtel. Globe’s showing was described by Bloomberg as “devastating” and such a statement leaves a scar in investors’ minds.
In contrast, the competitor that is gaining market share at GLO’s expense – DGTL – is seeing such a good earnings recovery. Revenues for 1H2010 was Php 7,975.3 million, up 19.1% from 1H2009 of Php 6,693.5 million driven by the 30.6% growth in the wireless segment. While operating expenses grew by 14.6% to Php 5,228.0 million from 1H2009 Php 4,562.4 million, EBITDA for the period was Php 2,747.2 million, up 28.9% from P2,131.1 million in 1H2009 due primarily to the higher service and non-service revenues generated by the wireless business. Net income for the period was Php 145.4 million – a great recovery from the net loss of Php 638.0 million in 1H2009. DGTL is a definite recovery story and even if telcos are not currently in fashion, these numbers tell a story of undervaluation in my mind which I will be willing to place a bet on.
MEG net income in 1H10 ended 10% higher YoY at Php 2.21 billion but some analysts were disappointed because consensus was for a 17% rise in earnings. AGI, net income on the other hand, increased by 43% Y/Y in 1H2010 to Php3.69 billion paced by a 22% Y/Y jump in revenues to Php21.26 billion. AGI is generating earnings of Php595 million in 1H10 from strong growth of its Newport City . AGI beat expectations due to better-than-expected results of its liquor and quick service restaurant unit which showed 47% % and 12% topline growth. The Newport City enterprise could generate attributable profits of Php2 billion. AGI is MEG’s parent and it looks to be a better play for me.
Remember when trading this week that emotion is a trader’s enemy. One should not be trigger happy nor too gun shy in time as these. The sentiment globally is negative, but local companies are doing well. Investors everywhere are also looking for bright spots to put cash into whether in their domestic markets or overseas. Keep in mind that cash is still abundant and investors will have to put it all to work eventually. Seize the opportunity when it comes.
9:25 Thursday 12 August 2010 Philippine Stock Exchange Index 3522.72 (yesterday’s close)
The U.S.market took a terrible beating overnight sparked by a larger-than-anticipated trade gap of $49.9 billion in June. Usually, when the U.S. trade deficit widens, it is because consumers are spending a lot. The dilemma arises when consumers are not spending, yet the drag on production intensifies due to greater spending on goods produced abroad. What has exacerbated the negative sentiment were corresponding weak economic figures reported in China and Japan.
These reports come at a time when the mindset of most people in Asia is that stock prices should be coming off for seasonality reason – notably the ghost month. Surely, the impact will be negative for the next few days. Some traders have been selling into the recent strength of selected stocks. For example, strong issues like AEV and AP recently lost momentum as profit takers chose to sell and raise cash. I think that is good because as these two stocks decline further, we can expect support building up. AP has very good earnings momentum and the prospects for the rest of the year are excellent. AEV may not be as brilliant as UBP’s earnings are not as formidable based on their 1st half disclosures.
Some good news for followers of PNB. We observed a lot of buying of the stock at prices ranging from 43.25 to 44.30 by foreign brokers. Although it closed at 43.50, during the run-off, a large foreign broker cleaned up th board. This tells me that there is strong institutional buying at this level which is a sign that the stock has more upside. An analyst pointed out a decline in the bank’s net worth by around Php 2 billion for the second quarter. I reckon that this was part of the balance sheet clean up which banks usually do prior to a merger. The good news is that buyers with real money are looking possibly at another 20 to 30 percent move on the issue.
I am anticipating that the slide in prices for the ghost month has started and will likely intensify. This downturn should be a welcome development for those who are watching stocks like DGTL but not for those who hold GLO. My view is that GLO will move towards 600 while DGTL, if it gets past this fearful month, will likely head towards 2.00 and perhaps a few centavos beyond.
As sentiment turns negative in the coming days, I think opportunities will start to emerge. I would not be in a hurry to buy though for fear of catching a falling knife. If fear heightens in around two weeks time, then that would be the signal that stocks have reached their cheapest level for this cycle. I think the smart money anticipated this downturn anyway. I read a n item that in the U.S., the hedge fund community believes the fundamentals for the S&P remain in tact. US companies have a lot of cash on their books and management teams that have become impressively more efficient. “I don’t think we’re looking at a long-term train wreck,” says a hedge fund manager.
That looks to be the case for those companies in the PSE that we follow. MPI for instance raised a lot of cash from both the equity and debt capital markets. Remember that they are an infrastructure company and debt loads are normal for businesses such as these. Do not forget, however, that the businesses have very strong cash flows – Meralco, Maynilad and the tollways. Cash is always king. The Gokongwei group is another cash producing cow. We can go down the corporate list and discover that the PLDTs, the Jollibees, the Meralcos, the GMA7s, even the Splashes and the Tunas in this country are all running very good cash levels. That is why widespread fear of a market meltdown may be quite unwarranted.
In the 1986 movie “Wall Street,” Gordon Gekko (played by Michael Dougla) had a famous line – “greed is good”! In today’s market, given my outlook, I would say “fear is good.”
10:15 am Wednesday 11 August 2010 Philippine Stock Exchange Index – 3,532.62
A few things have been putting a damper in the market over th past few weeks. In spite of strong earnings reports among PSE listed companies, very few stocks have really moved far higher than they should have. The main stumbling block has been the fears arising from deteriorating economic conditions in the U.S. reflected by very little improvement in job creation. This has prompted the U.S. FED chairman to signal further easing in policy. Overnight, we saw most markets fall into the red in Asia, Europe and North America. In Asia, the culprit appears to be the onset of the “hungry ghost month.” Chinese astrological beliefs explain that this time of the year, the spirits of those that had gone to the other world return earth because they are hungry. With all these spirits running around, many mischiefs can result and a multitude of things could go wrong. That is why people become very cautious particularly with money matters. In places like Hong Kong and Singapore. It is not unusual to see people burning play money and incense while offering fruits to images of their relatives in order to appease the emotions of ghosts that are running around.
What this does to the market is it reduces liquidity and whatever liquidity premium that is attached to favored stocks disappear. Those that have low liquidity value deteriorates further because of lack of attention. The decline in trading volume is further exacerbated by the peak of the summer holiday season among western hemisphere fund managers. All these concerns accumulate into one seemingly bearish tone in most markets.
Should we be bearish in this market? Well, I’ve always believed that the trend is your friend. The short-term trend appears to be turning bearish, so I believe that I will ride that trend. That is not to say that I will wind down all my positions. That would be too risky. What I’ve been doing is top-slicing on my positions, i.e. selling to take some profits and raising my cash position without being flat or zero position in the stocks I like. Again, it is simply managing my cash and preserving some profits.
The stocks that I am happy to keep are DMC, PNB, MPI, EDC and TEL. Although EDC has not been performing, I learned that producers of renewable energy have priority in selling into WESM which is the most profitable space in the power generation market. I believe the same is true for FGEN. These stocks including FPH have been quite weak lately, but I think that is happening because portfolios are switching our of these stocks and moving to LPZ. LPZ is the ultimate holding company of all these and the sum of the parts in LPZ has been way below the price of ultimate parent. This is a classic arbitrage move, a valuation adjustment that ought to happen in the market whenever valuation gaps go very wide.
My strategy is to keep my winning positions because the long-term trend is still headed north. That is not pure sentiment on my part. If one takes a close look at individual stocks, earnings are pretty strong and look to have sustained prospects due to a strong underlying economy. From a global point of view, I believe that global money continues to flow to emerging markets Asia. It will eventually flow at a faster rate into the PSE. I would use this ghost month to my advantage and try to accumulate large cap stock when they go weaker. After all, with the FED easing monetary policy further, all that liquidity will seek out the cheaper markets and ours is certainly inexpensive given present and forward earnings of Philippine listed companies.
1:45 pm Thursday 5 August 2010
I am finally back from taking some time off. I was actually in Cebu for some work related matters. I had a chance to explain mutual funds to some banking officers from the region. I personally think that people in Cebu have better absorption of free market ideas than people in Metro Manila. Those who live in proximity to the national government think that the government should do everything – from control the price of commodities to subsidizing everybody in sight. In contrast, I look at Cebu and see all those small and medium scale enterprises (SMEs) carry out their business solely on their wits and God-given talent. Somehow, it seems easier to articulate investment ideas to people who understand and want to play the game of markets.
Anyway, I am amazed, but not surprised, that our local market has remained strong. To take a global perspective, I looked again at the correlation of the PSEi to the DJIA. I did mention that in 1Q2010, the PSE was 0.93 correlated with the U.S. index; and that in 2Q2010, the correlation factor was 0.13 or practically no correlation. For the month of July, the correlation moved up to 0.94 reflecting strong correlation. On further analysis, I realize that the reason why correlation dropped in 2Q2010 was because the PSE did not want to drop when the U.S. indices plunged. I think that because of the inherent cheapness of local stocks relative to earnings and asset values, our market has kept itself on a growth track that may be difficult to suppress at this point in time.
Before I took a break, I had mentioned that I thought MPI, which at the time was trading around 2.60, was cheap. Yesterday, I attended the MPI investors briefing and I am more convinced that it is cheap – debt load and all. Their gross consolidated D/E ratio presently stands at 0.61X which is relatively low for an infrastructure company. When viewed from the strength of the cash flow of their two main subsidiaries – Meralco and Maynilad – any debt servicing burden does not appear heavy at all.
MER’s revenues were up 44% for the period to Php 23.92 billionand net income rose 51% to Php 4.85 billion. More importantly, efficiency measure have improved as system losses have been reduced from 9.05% to 7.93%, comfortably below the regulatory cap of 8.5%. there has also been a 26% improvement in system reliability and 21% in availability.
Maynilad, on the other hand, is a gem of a company. Revenues are up 24% to Php 5.86 billion and income by 5% to Php 2.43 billion on a 10% increase in billed volume. End period non-revenue water is down to 52.78% compared to the average of 55.05%. Revenue growth is well assured as the Putitan Treatment Plant is now producing 100 million liters a day and should be raised further. They are also fast tracking development of new sources of raw water such as Wawa Dam, the Pampanga River and the Sierra Madre. Incidentally, DMC is MPI’s minority partner in Maynilad.
In essence, if there is anything worth trading in the next few months, it should be MPI. It has excellent liquidity and the infrastructure story is something that many portfolio managers are looking for at this time. Of course, DMC would be another, and for those who have made the money on DMC already, I think there will be a lot more to be squeezed from both DMC and MPI. Given that DMC has almost doubled in value, I will not be surprised if MPI will experience the same.