Feb 2015: COLing the Shots “Smooth Sailing”

Key Highlights

  • Philippine-Economy1Since we last came out with our COLing the Shots report in January 21, the PSEi has risen
    by 4.4% to 7,803.45. So far, fundamentals continue to support our positive view towards the
    market. A few weeks ago, the government announced that 4Q14 GDP growth reached 6.9%,
    outperforming consensus growth forecast of 5.9%. More importantly, economic growth drivers
    were very encouraging, making us more confident regarding the sustainability of the country’s
    economic growth.
  • Global liquidity also continues to increase, which is favorable for the stock market. On
    February 4, People’s Bank of China cut the reserve ratio or the amount of cash that banks
    must set aside with them by 50 basis points to 19.5%. On January 22, The European Central
    Bank announced the launch of a €60 Bil monthly bond buying program as a means to boost
    economic growth and to fight deflation in Europe. Although the U.S. is expected to be one of
    the first economies to begin raising interest rates, minutes of the Fed meeting released last
    February 18 showed that many Fed officials expressed concerns that economic growth in
    the US remained fragile and that raising interest rates prematurely would hurt the ongoing
    recovery. Domestically, the BSP kept the benchmark interest rate unchanged during its
    February meeting, and said that it is not obligated to increase interest rates even if the U.S.
    Fed does increase interest rates later this year.
  • Companies are also starting to release earnings results for the full year of 2014. We wouldn’t be
    surprised if some companies disclosed better than expected profits brought about by stronger
    sales and higher margins. For example, URC recently disclosed that 1QFY15 operating profits
    jumped by 32.5% to Php4.4 Bil. The said amount is already equivalent to 28.1% of our full
    year forecast. URC’s performance beat expectations as it benefited from the strength of its
    domestic branded consumer foods business (sales up 16.9%), lower commodity prices and
    larger scale (operating margin +290 basis points).
  • We are not discounting the possibility that the PSEi could suffer from a correction soon as the
    market is already overbought according to technical indicators. However, we continue to view
    corrections as an opportunity to buy for those that have not yet entered the market.

February 2015 Stock Picks

COling

Metrobank disclosed that it plans to launch a Php32 Bil stock rights offering to boost is Tier 1 capital
adequacy ratio to a more comfortable level of 13% vs. the minimum requirement of 8.5%. We believe
that the news was viewed favorably by investors. In fact, it acted as a catalyst for MBT’s share price
to go up as it removed concerns that prices would drop once the bank announces a share placement.
MBT’s parent company GTCAP also did a share placement at Php1,130/sh amounting to Php10 Bil.
Nevertheless, the placement will not lead to any dilution since all the shares sold were secondary
shares owned by the Ty family. The Ty family sold shares in GTCAP so that they would have enough
funds to participate in MBT’s rights offering. (The Ty family owns 26% of MBT outside of GTCAP)
We increased our FV estimate for SMPH slightly by 6.3% to Php23.60/sh after we factored in the
company’s more aggressive mall expansion plan this year and additional expansion plans until 2018.
Note that SMPH plans to double its total mall leasing portfolio by 2018 from 6.95 Mil sqm in 2013.
Nevertheless, we don’t think that we are being too aggressive in our forecasts as we have yet to
factor in the potential impact of its recent acquisition of a 40% stake in Ortigas and Company.
SMPH’s share price has increased quite a bit since it’s weighting in the MSCI index will be increased
effective end February and fund managers who track the performance of the MSCi Index are
rebalancing their portfolios to reflect the change. Nevertheless, SMPH’s share price will most likely
correct once the deadline of the rebalancing period ends, providing investors with an opportunity to
buy the stock at a cheaper price.

Aside from SMPH, we also increased our FV estimate for AP by 3.2% to Php47.60 after factoring in
the significant increase in capacity of its Davao and Cebu coal plants. Due to the higher capacity, we
forecast the earnings contribution of the two plants to rise by 21.6% in 2018E and by 45.1% in 2019E.
CIC was the best performing stocks in our list, rising by 33.9% to Php58.00/sh during the period in
review. However, there may be concerns as CIC recently disclosed that 2014 profits rose by a slower
than expected pace of 23% to Php628 Mil.
CIC’s management clarified that 2014 profits disappointed as it was negatively affected by the port
congestion. Shipments were delayed, causing it to forgo the booking of sales for certain products.
Transport costs also went up, and stayed high despite the drop in oil prices. Nevertheless, CIC said
that demand for its products remains strong, and that it is still targeting to grow sales and profits by
15% in 2015, in line with our expectations.
Because of this, any correction in CIC stock resulting from its weaker than expected 2014 earnings
result should be viewed as an opportunity to buy the stock.

Although CEB’s share price has increased by 3.9% compared to its January 21 close of Php86.50/sh,
some investors might feel disappointed as it reached a high of Php99.10/sh before correcting to its
current level of Php89.90/sh. CEB’s shares corrected in response to the rebound in oil prices. From a
low of US$43.58/barrel on January 29, oil has rebounded to US$55.00/barrel recently. Nevertheless,
we are not worried and believe that the ongoing correction is an opportunity for investors to buy
more shares of CEB. Note that our FV estimate for CEB of Php156.00/sh is based on an oil price of
US$86-91/barrel. This is still way above oil’s current price of US$49.45/barrel. Moreover, although
oil prices may not go back to its previous low, we also doubt whether it will return to its 2014 high of
US$107.73/barrel as demand will most likely remain soft given the disappointing economic indicators
disclosed by the US (4Q14 GDP grew by a slower than expected 2.6%) and China (Manufacturing
activity contracted in December as implied by the PMI).

Released by COL Financial, Philippine Equity Research,  TUESDAY, 24 FEBRUARY 2015

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