The Fourth Quarter 2010 Philippine Stock Market Report

The PSEi Takes a Breather in Fourth Quarter 2010 and Prepares for 2011

After the September Rally, the PSEi simmered down in the fourth quarter as most investors locked on to favorable gains early to close out the year.  The PSEi has found a support in the lower 4,000 level during the bearish fourth quarter.  We are bullish on 2011 and have seen the fourth quarter as an early opportunity to position for 2011.  The share prices of a host of high-flying stocks have rationalized during the quarter.  Though still at high market value levels, notable stocks that have increased their discounts to their intrinsic values in the quarter were SM, SMDC, SMPH, URC, AP and AEV.  There are nine bargain stocks and ten reasonably-priced premium stocks (according to our Law of Averages) as of the end of fourth quarter 2010.  That is equivalent to 40% of 48 stocks covered.  After falling most of the year, corporate bond yields’ decrease have likewise decelerated just below 6% indicating that it has reached rock-bottom.  Equities will still be favored against bonds at these levels.

2010 Philippine Stock Market Wrap-up and 2011 Prospects

Winning Stocks of 2010 (Claiming Their Rightful Place)

Coming from 4Q09, the tail-end of the aftermath of the Global Financial/Sub-prime Crisis, stocks SMDC, SM, AEV, AP and URC just claimed their proper market valuation and more in 2010.  These stocks had good prospects in 2010 and came from below their ELV (Estimated Liquidation Value) in 2009.  They were also generally ignored in the past, and now, they are winners.  These stocks just enriched investors’ portfolios in 2010.

Biggest Disappointments in 2010

TEL, DGTL and GLO’s decreasing ARPU (Average Revenue Per User) from stiff competition in the telecom industry just bursts the bubble of a happy 2010.  The “war” between the Big Three on capturing the most subscribers has taken its toll on revenues from the bucket and low-priced plans that they offer.  This entails the Big Three to borrow more for capex thus increasing interest expenses.  Still, TEL and GLO pay high cash dividends which they could have valuably use for capex.  The telecom industry reminds us of the “high-tech” stocks of the fifties such as TV manufacturers and airline operators.  No one made favorable gains from those two sectors in stocks investment history.  The PSEi has also beaten the Big Three in 2010 with investors incurring losses at the end of 2010 from TEL and GLO if they have invested in the two stocks at the start of the year.

That Winning Sector in 2010

The Food and Beverages Sector is the fundamentally strongest sector in the PSEi.  It has the most solid balance sheet with AMC, JFC, URC, RFM, SMC, SMB, GSMI and PF having a high liquidity position and a low-leveraged position.  Revenue growth and EBITDA margins are likewise consistent and favorable, and the sector has benefitted from low raw material costs in 2010.

Diamonds Still in the Rough in 2010 and Set to Shine in 2011

COAT and GMA7 have textbook-strong and clean profitability and financial conditions.  Both also have residual values achieving them not in 2010 but even five years back.  However, if one invested on these companies in the start of 2010, the PSEi would have been a better investment instead.  Nevertheless, we like COAT and GMA7.  These stocks remind us of URC whose real value was only discovered at the end of its fiscal year ending September 2009.  COAT dominates bio-diesel and resins and GMA7 dominates TV broadcasting in Mega-Manila.  The two are Strong Buys, have resilience and are investment portfolio afterburners.

Biggest Deals of 2010

We start off with JFC’s PHP3 bn Mang Inasal acquisition.  Instead of it being a major competitor in the chicken segment of the fast-food sector, JFC made it an ally acquiring 70% of the expanding chicken restaurant.  JFC’s presence in the Philippine fast-food sector just got bigger with this deal.

The other biggest deal of 2010 is AEV’s divestment in ATS.  This gives AEV an identity as a power, banking and food stock.  AEV has also let go of a cyclical business and 2010 under-performer.  With the sale, AEV has PHP3.55 bn to pursue more power plants for AP.  Nenaco, on the other hand, acquired ATS near its ELV and acquired it right after its fleet underwent major dry-docking maintenance in 2010.  Not a bad way to become the dominant shipping company in the Philippines.

Forward-Looking Companies in 2010

From Local to Global

Watch out for JFC, SM/SMDC/SMPH, EDC, URC as they expand worldwide.  JFC’s expansion in China became serious with its first commissary in the country of 1 bn people.  SM/SMDC/SMPH presence in China will also become popular with the massive 530,000 sqm SM Tianjin which will be 30% bigger than SM Mall of Asia.  SMDC will be establishing residential condominiums in China near SM malls as well.  URC likewise is slowly becoming a major Asian food and beverage company with solid market shares and sales volume growth in Malaysia, Vietnam, Thailand and other Asian countries.  Meanwhile, EDC is something to watch out for as it eyes Chile, Kenya and Indonesia for geothermal projects.  Balance sheet strength though is what EDC has to remedy for its huge undertakings.

Diversifying Giants

SMC is becoming a holding company and MER is becoming a power generation company.  Yes, these diversifying companies have the funds and capability to do so.  After battling costs and expenses in manufacturing food and beverages for 100 years, SMC is now going into less-cyclical infrastructure businesses such as the Caticlan International Airport and MRT 7.  MER will likewise have an estimated 60-40 revenue mix of power distribution and power generation once its coal plants are all completed in the long term.  We favor these moves as it solidifies the two companies’ revenue stream.

2011 Stocks That Can Mirror 2010 Winners

If there was an AP and AEV combo in 2010, there will be an FGEN and FPH combo in 2011. The two stocks have huge discounts to market value and are sitting on piles of cash same as when AP and AEV started their meteoric rise in 2010.  FGEN and FPH were hounded by the West Tower pipeline leak in 2010.  However, this is a minute source of revenue for FPH (not even a main business).  With demand for more power plants high, FGEN and FPH have the capability to benefit from this country-wide need.

If there was an SMDC in 2010, there is an ETON in 2011. Yes, the free float is small (6%), but so does SMDC (16%) compared to its sister companies in 2010.  Like SMDC, ETON is still in that high-growth stage.  It also finances its projects not with income-eroding debt but accounts payables.  From PHP700 mn in net income expected in 2010, ETON is looking at PHP1 bn in 2011.  This deserves exposure in a winning investment portfolio.

If there was URC in 2010, there’s RFM in 2011. URC just went up to its rightful valuation 2010.  RFM is set to do so with domination of the ice-cream and spaghetti markets and a solid balance sheet.  RFM is also in that winning sector, food and beverages.

Pymwymi Fund Performance

The Pymwymi Fund is up 77.3% while the PSEi is up 39.8% in 2010. The Pymwymi Fund is a basket of 15 stocks assessed by Corpecon Research to have the best resiliency to downturns and sustainable growth for best value.  The top five stocks have a 50% share of the total fund.  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, Inc. (up 62.51% from the start of the year) and the Philam Strategic Growth Fund, Inc. (up 55.91% from the start of the year).

Disclaimer

The Philippine Stock Market Research report is solely for information. It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned. The information herein has been obtained from sources believed to be reliable. Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report. All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice. No liability can be expected for any loss arising from the use of this report or its contents. As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.