Philippine Stock Market Research

Brace for Impact!  PSEi Loses Ground at 4,000

January 22, 2011

Same as the start of 2010, the PSEi has come under fire, has fallen and has broken the 4,000 level.  Below are the factors affecting it.

Rising Interest Rates

Interest rates have fallen most of 2010 and as observed earlier have reached rock-bottom already.  Inflationary pressures may cause interest rates to rise again making fixed-income securities such as bonds favorable again.  We’ve read raw material prices seen to increase this year such as skimmed milk supporting the foreseen inflationary pressures this year.  The BSP and other financial institutions forecast inflation rate at 4% to 4.5% in 2011, up from 3.8% in 2010.

No Juicy Bargains

The list of bargain and reasonably-priced premium stocks have been stagnant for so long that the buying of value investors have dried up.  The PSEi’s correction is welcome, and we see good stocks to buy coming within sight to become reasonably-priced premium stocks such as SM, URC and AMC.  Meanwhile, RFM has already become a bargain stock coming from last week and ETON and PNB have already become reasonably-priced premium stocks coming from last week.

Decreasing MER MAPs

ERC’s decreasing MER Maximum Allowable Price (MAP) projections triggered the sell-off of MER.  This caps and minimizes MER’s net income growth from the power distribution business in the long term.  On a positive note, this also gives importance to MER’s plans of going to into power generation with coal plants with a capacity of 1,500 MWs.  The construction and start of operations of the coal plants offsets the negative impact of MER’s decreasing MAPs in the long term.

Freaky IFRIC 15

This is the phantom and probably the most significant factor affecting the PSEi nowadays.  Strange enough, we have not seen this mentioned in PSEi commentaries even since 4Q10.  From the percentage of completion method, property firms will adhere to the completed contract method starting January 1, 2012.  This means no completed project transferred to buyers for the year, no net income.

IFRIC 15 was supposed to take effect on 2009, but the severe impact of this on the property sector (and indirectly to banks, the creditors of property companies) prompted it to be postponed to 2012.  This means property companies have had enough time to get ready for this.  But are they really ready?

Listed property companies have the responsibility of presenting data that they have projects for completion lined up from 2012 to 2013 at least for them to show investors steady growing profitability on the basis of IFRIC 15.  Take note that this not only affects property stocks but holding companies with property companies as well (AC, AGI, SM, JGS).

Given the existing project completion schedules from listed property companies, investors can already assess if some property companies are already ready for IFRIC 15.  MEG is one.  SMDC needs to show some more future projects.  ALI/AC and RLC/JGS still needs to show more data that they are IFRIC 15-ready, lots of it.  This is the time for these companies or the property sector to hand-hold their investors and creditors also.  Major hand-holding or assurance must come ASAP.

Only two property stocks come to mind instantly that are somewhat immune by IFRIC 15, FLI and VLL.  These two sell and complete horizontal projects within the year.  FLI sells and constructs its Medium-Rise Buildings (MRBs) in just five to six months.  VLL vertical projects take longer but are not much and lined up already.  Despite this, FLI and VLL share prices have dropped as well.  Both are bargain stocks with VLL ridiculously trading below its Estimated Liquidation Value.

The fear of this is like the fear from the millennium bug of 1999.  However, this accounting method is sure to hit the property sector next year.  The tide of fear in this sell-off is very, very strong.  It is up for investors to take good position in value stocks in this sell-off.

Pymwymi Fund Performance

The Pymwymi Fund is down 5.9% while the PSEi is down 6.3% from the start of the year to January 21, 2011.

The Pymwymi Fund is up 69.1% while the PSEi is up 31.5% from inception date of January 5, 2010.


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