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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.

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