First Metro Asset Management Inc

Do we need a diamond ring? by Gus Cosio

7:00pm Wednesday 3 August 2011

With cracks showing further in the U.S., our markets should probably brace up for some more of the blood-letting we saw today. In my view, much of the injury will be felt among the stronger stocks that performed the past year.

I read a research note on AP and it said that the company reported a very disappointing 1H2011 core earnings at Php 9.9 bln, 23% lower y-o-y. Power generation represents 95% of core earnings. Analysts were predicting full year Php 23 bln for 2011. Overall EBITDA -13% down to Php 16.4 bln. The company was hit hard by Pagbilao’s sharply lower prices and volume. Spot electricity prices fell 53% and average contracted price was also lower by 11 centavos/kwh. Electricity sales were lower by 6%. The 700MW Pagbilao plant is significant because it contributed half of AP’s Php 36 bln 2010 full year EBITDA. Similarly, their 467MW Tiwi-Macban operations was also dragged down by spot prices 59% below last year’ while sales volume declined by 4%. At Php2.76/kwh, average selling price was only a third of what they were a year ago leading to a lower geothermal EBITDA of Php 4.8 bln, 13% below last year. Tiwi-Macban was the 2nd largest EBITDA contributor to AP.

AP was one of the best performing stocks last year, but it has languished for most of 2011. It closed at 31.95 today, but I think it could ease a bit more. Its parent – AEV – was also stellar in its performance last year, but it does not seem to be going anywhere as of the moment. I am still waiting for the results of EDC to be published since this is a stock that has a lot of potential. EDC was the most actively traded stock today. It closed 6.66 today which may not be such a bad price to pay for a stock that is expected to see earnings grow over 40% next year.

Banking stocks MBT, BDO and BPI took it in the chin today pulling back quite a few points. While I do not believe in a quick recovery, I am still a believer that loan growth will carry the day for these three. I think that the market slowdown over the next few weeks should be used to accumulate strong banking stocks.

I remain cautiously constructive in the market but over the coming weeks a couple of things would bring it down. The decline in prices in Wall Street may present Philippine stocks as rich P/E wise since we are already trading around 14.8 times 2011 earnings based on existing figures. Superstition among Asian investors due to the Hungry Ghost month may limit putting more money at risk by some players reducing liquidity in our own market. Of course, there are some profits to take since we have recently broke into new highs. Consolidation will always be expected.

Nevertheless, there will always be special situations and mining plays appear to be what is special as of the moment. LC/B has not yet run out of steam. Frankly, I am more afraid of missing the train on LC rather than lose money in a correction. LC was the second most actively traded stock today and it went against the grain closing up 1.67%. MA/B may have been unchanged for the day, but buying action on the stock is undoubtedly very strong. ORE again was a spectacle on the board moving up 6.52% for the day. A careful scrutiny of the activity on the stock will show that foreign funds are indeed nibbling on ORE already. The PSE Quotation reports, which can easily be downloaded, show a net foreign buying of Php 41 million yesterday and Php 22.5 million today for a total of P63.5 million in two days. It is nothing to write home about except that ORE has now been noticed by a foreign fund.

When I saw AT gaining some support at 22.50, I felt it was not bad to put in some money at that level. I think it is a decent price to pay for a profitable mining company. I am looking to buy more either at the same level or lower since I am a believer in the sector. I reckon that if other mining stocks are heading north, AT should be turning to the same direction soon.

Anyway, I am of the opinion that the mining story is an advantage that the PSE has over other exchanges in the region, save Australia. We could see more action coming our way especially if more foreign players get attracted even to the likes of ORE, LC, MA and AT . I guess the message is to be engaged in the sector because the alternative is to lose out on many opportunities.

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First Metro Asset Management Inc