“There’s Lots of Geniuses Nowadays.”
September 21, 2010
That’s one popular quote heard from Fund Managers whenever the stock market’s up. It was said to us by one three weeks ago, and it gave us a chuckle and then a grave face. It’s because it’s one of the signs that the stock market may be peaking already. Anyone can recommend any stock and may still have a 90% chance that it will go up. Even those who recommended Buys on ALI at PHP17 and JFC at PHP70 are looking like Edisons and Einsteins now.
Another sign is a string of IPOs. We have Cebu Pacific coming next month and then Globe Asiatique withdrawing its listing plans. So there really is no string yet.
Another sign with more weight than the first two signs is that stock prices have gone absurdly high. In the mid-1990s, we saw mining companies with no or minimal operations trading at stratospheric PERs because of prospects of them becoming property companies with golf club projects. This sign does not only include speculative stocks but even blue chips with prices that the companies just cannot justify this or in the next year.
Let us review the prices of our expensive premium stocks to see if they have gone overboard. Now of course at market valuations (or PER, PBV, PCF and blended multiplier), these stocks are considered expensive. However, at other valuations, they may be just right or still has some upside. The length and optimism of the company comment reflects potential upside or downside the company has based on our valuations.
To take note on how expensive these stocks are, the PBV standard limit is 1.5x and the PER limit this week is 16x.
JFC at PHP86.80. That’s 7x 1H10 PBV, 40x five-year average historical PER and 25x estimated 2010 PER. JFC is such a great company, and great and popular companies oftentimes comes at a high price. JFC was an example in our series on Fair Value. The net income projections used there were actually growth based on WACC or the minimum return an investor can expect from the company. Thus, it is pretty conservative and may be considered a floor price but not up to speed with what JFC has actually generated in 1H10. JFC’s share price rallied after news of its planned commissary in China. This reflects an aggressive thrust in an overseas market . This is also a good direction after dominating the Philippine market. JFC must have gotten tired surrounding McDonald’s outlets with two of their own so it is now looking at China. At PHP86.80, JFC is still trading at acceptable levels.
ALI at PHP17. That’s 4x 1H10 PBV and 54x five-year average historical PER. Their new captain is taking them to new heights, and ALI is now the aggressor than the gentle giant from before. We’re not firm on how much ALI will earn this year because its biggest riddle to those forecasting its earnings is how much its other expenses will be at year-end. In its annual reports, other expenses is oftentimes write-offs which may swing the bottom-line up or down throwing forecasts off the actual. Being the biggest property company and a major player in all market segments, ALI anyway is valued at NAV so at PHP17, it is still trading at acceptable levels.
MER at PHP200. That’s 4x 1H10 PBV, 44x five-year average historical PER and 33x estimated 2010 PER. The Performance-based Regulation (PBR) rate scheme has propelled MER’s earnings and buoyed its share price to this price level. There is also some speculation on what or how high the Maximum Average Prices (MAP) for July 2011 to June 2015 will be. Based on Fair Value, at PHP200, MER is still trading at acceptable levels.
AP at PHP21. That’s 4x 1H10 PBV, 42x five-year average historical PER and 7x estimated 2010 PER. Wholesale Electricity Spot Market (WESM) prices have propelled our former bargain stock just below three of the biggest Philippine companies in our value table. 24% of its energy sales is sold to the spot market, while 57% is contracted energy from customers. It has a solid balance sheet for a power and utilities company and strong earnings generation capacity. Like MER, VECO, DLP and CLP earnings will benefit from the PBR scheme this and next year. Full-year effects also of the 3×82 MW Toledo coal plant AP owns 26% of and Hedcor Sibulan’s 42.5 MW hydro-power plant will be felt next year. There is a big gap in AP’s five-year average historical and estimated 2010 PERs because of all these. AP’s earnings level is just now on higher ground. AP also has what we call residual value just like JFC and SMDC (up next). Based on Fair Value, at PHP21, AP is still trading at acceptable levels.
SMDC at PHP8.64. That’s 3x 1H10 PBV, 50x five-year average historical PER and 21x estimated 2010 PER. Minus the prospective earnings from the proceeds of its PHP11.7 bn rights offer, SMDC is very pricey at its current share price. SMDC, along with AP, are notably our former bargain stocks.
ABS at PHP55? That’s 3x 1H10 PBV, 40x five-year average historical PER and 16x estimated 2010 PER. The share buy-back program backed up by PHP2.5 bn in funds have propelled ABS’ share price. JFC, ALI and MER’s sheer market dominance justify their presence at the top of the value table; however ABS being there seems pretty doubtful. High expenses and debt levels still persist and it is constantly and successfully challenged by the cheaper and cash-efficient GMA7 and non-listed new and aggressive player ABC-5. These somehow have negated the firmness of its fair value so ABS at PHP55 is just about the right level.
Overall, the expensive premium stocks in our coverage generally still have some upside so expect more geniuses in the days to come.
Pymwymi Fund Performance
The Pymwymi Fund is up 53.1% while the PSEi is up 34.9% from the start of the year to September 21, 2010. The Pymwymi Fund’s performance notably bests two ICAP Stock Funds with the highest year-to-date yields. They are the First Metro Save and Learn Equity Fund (up 49.67% from the start of the year) and the Philam Strategic Growth Fund, Inc. (up 46.68% from the start of the year).
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