Reasons to Buy FPH
(June 14, 2010)
After a round of review and assessment, power holding company FPH looks like a keeper. 80% of FPH’s revenues comes from 54.8%-owned FGEN. The rest comes from industrial lot sales from First Philippine Industrial Park, Inc., power equipment sales from First Philec and project and contracts revenues from First Balfour, Inc. In addition, FPH gets equity earnings from 49-owned Rockwell Land Corp. This earnings stream with power as its firm base is a good shield against cyclical economic factors.
FPH also realized PHP22.41 bn from the sale of its MER stake. It still has a 6.6% stake in MER classified as available for sale financial assets. The sale significantly strengthened its balance sheet. However, FPH still has a negative net working capital (current assets minus total liabilities) as it is still saddled with a high debt level. Though revenue and net profit growth still lacks consistency after some divestments, EBITDA margin has been stable and hefty averaging at 29.3% in the last five years.
Lastly, FPH has a 48.6% discount to its estimated liquidation value as of its share price last Friday of PHP55. To illustrate how huge this discount is, FPH’s cash alone as of 1Q10 of PHP41.9 bn is bigger than its market cap of PHP32.1 bn. This is brought about by the sale of MER shares. However, looking at FPH’s 2009 balance sheet before realizing the MER shares sale, the company’s cash and receivables of PHP33.4 bn is still even bigger than its market cap as of last Friday’s share price.
With these three main reasons, FPH is good for accumulation. Target price based on estimated liquidation value is PHP107. Based on our blended multiplier limit of 20.7x, target price is PHP122 translating to a 121.8% upside in the long term.
Following last week’s advisory, one can average the bargain stocks with premium stocks and still be within the blended multiplier limit. This week’s limit is 20.7x, and BDO can be a good purchase averaged with VLL. Stocks beyond BDO are very expensive.
After a round of review and assessment, MEG is now included in our bargain list of stocks. In computing MEG’s PER and PBV, we assumed the additional listing of 4,102,045,380 common shares from the eventual conversion of its entire warrants (MEGW1) before their maturity on December 14, 2014. This discounts the dilution effect of MEGW1.
A link to the PSE website is now located at the right of our advisory.
Pymwymi Fund Performance
The Pymwymi Fund is up 19.3% and the PSEi is up 8.7% from the start of 2010.
Note: Philippine Stock Market Trading Advisory Disclaimer and Pymwymi Fund Background Below.