First Metro Asset Management Inc

Something in the way, by Gus Cosio

6:10 pm Monday 15 August 2011

Judging from today’s stock market action, it looks to me that local investors will have to carry the ball for the time being as Philippine stocks continue to see net foreign selling. Portfolio re-alignment will likely continue until there is a consensus on the risk-free status of the U.S. treasury market. The 10-year U.S. treasury bond has been the traditional measure of risk free interest rate upon which various valuation methods are performed. With the downgrade of U.S. debt, it can no longer be classified as risk-free, therefore, most market evaluation tools have to make some extrapolations to simulate a true risk-free yield. This is a discipline that professional analysts use arising from various theories learned from the top global business schools. Going forward, we will probably some academic research forwarding new theories on deriving risk free returns apart from U.S. benchmark.

The global market is in a state of flux as new tools of analysis replace traditional ones. We can expect large portfolios maintaining high cash levels or be in the process of building up cash. I cannot see a major wave of foreign buying developing soon in our market. Nevertheless, we must continue looking at the fundamentals because mean reversal theory compels us to hold on to the principle that earnings and valuations will eventually prevail when it comes to stock prices. It is just a matter of time.

Today, the BSP reported that OFW remittances rose 7 percent to $1.737 billion (y-o-y) in June. What is positive about this data is that the increase comes in spite of the difficulties being experienced by Europe, U.S. and the Middle East which are the major host countries to Philippine OFWs. While domestic demand may be quite tepid for 2Q-2011, it seems that the steady growth of income from abroad is managing to keep earnings of listed companies robust. A few companies have already reported impressive second quarter figures.

ALI 1H-2011 earnings rose 35% (y-o-y) to Php 3.38B. Income for 2Q-2011 rose 34% (y-o-y) to Php 1.76 Billion. Revenue growth of 16% (y-o-y) in 2Q-2011 came from strong gains in the residential (25%), leasing (19%), and hotel (36%) operations. 2Q-2011 sales take-up brought in to Php13.7Billion compared to previous high set in 1Q-2011of Php10.1Billion. Full year 2011 earnings consensus is at Php 6.4 Billion while NAV is estimated at Php 26 per share.

SMPH reported an increase of 14% (y-o-y) net income of Php 4.27billion in 1H11. This is in line with consensus estimate of PhP8.9bn for the full year 2011. Rental revenues registered faster growth of 16% (y-o-y) to Php 5.66bn in 2Q-2011 putting 1H-2011 rental revenues of Php 10.92billion, up 15% mainly due to same store sales growth which averaged 7% in 1H-2011 versus 6% in 1Q-2011. New mall opened in Tarlac, San Pablo , Calamba, and Novaliches likewise contributed to the rental growth which compensated for the decline in cinema sales. Some analysts place NAV around Php 15.

MPI showed 1H-2011 recurring profit up by 38% (y-o-y) to Php 2.65 billion. Earnings from Maynilad grew 21% (y-o-y) to Php1.5 billion while earnings from Beacon rose 64% (y-o-y) offsetting a 5% contraction of toll road operations. Earnings guidance is Php4.8 billion full year core income for 2011 with expectations of a Php 6 billion net profit of Maynilad and a Php14 billion core profit of Meralco. Analysts place MPI’s NAV at Php 4.80.

There should be more corporate good news to come, but it would most likely be overshadowed by anxiety coming from overseas investors.

One thing that continues to encourage me is the Australian stock market which has been a consistent performer during this global market catharsis. This is a resource oriented market with strong mining and materials sectors. The consistency of its recent performance is an encouragement to our local mining sector which has been predominantly bought by domestic investors both individual and institutional. I think that presently, mining will remain the safe haven of Philippine investors because it cannot be buffeted by the fickleness of foreign funds yet. It will just be a matter of time though before foreign funds recognize the value of stocks like LC/B, MA/B and ORE. I think PX, NIKL and AT are already in the MSCI Philippines, so we can assume that there have been some foreign portfolios already holding on to these stocks. On top of these, I believe more mining issues will come into play as more existing claims come to development.

Last Friday, in a corporate social responsibility global summit in Cebu, I met the exploration manager of on of the top 5 global mining companies in the world. I was glad to know that social responsibility in the form of sustainability of the environment is part of their operating processes. What I learned from him is that there is a number of mining projects that would be coming to stream soon which is but logical given that interest rates will remain low for the next two years. This means that metals stock piling by some governments will be business as usual.

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First Metro Asset Management Inc