Philippine Stock Market Research

Tornadoes, Volcanoes and Bin Laden

May 25, 2011

After rallying to the high level of our PSEi Band in 2Q11, the PSEi has retreated coincidentally right after the death of the most wanted man on the planet, Osama Bin Laden.  This reminds us that unlike in previous decades, there are other factors now that affect world markets more than how they used to.  With the mention of Bin Laden, National Security is one, and 9-11 is the biggest example of this.  World markets in some level may have been spooked that Al Qaeda may retaliate on the death of their leader.  They did so in a naval base on Pakistan.  Another factor is Act of God or Force Majeure.  Twisters in the US heartland, the ash-spewing Iceland volcano and the tsunami that struck Fukushima are all recent examples.  The latter of course has affected the world’s third biggest economy with ripples felt in the global supply chain.  Aside from economic performance, company projections and the country’s political situation, we have to watch out for these other factors also to provide our equity investments a firmer margin of safety.

In our global monitor of 18 developed and emerging markets, the PSEi is currently the sixth least favorable market to invest in.  It is expensive and risky especially with the rise of the ten-year T-note to 6.50% in April from 6.13%.  Russia, UK, France, South Korea, Germany and Hong Kong are the top five equity markets in terms of value and margin of safety.  Brazil has become a little expensive and risky, and Japan is still coping with the aftermath of the tsunami that struck it.  So what do we do now?  Looking at the PSEi in a local level, it is at the high end of our PSEi Band indicating a Hold or Sell (if need be).  Our investment methodology actually does not promote Selling equities but Accumulating them at bargain levels.  Selling is an exercise in cases when funds are highly needed.  In this period, it is better to hold on our positions and get the liquid part of our funds ready for future buying opportunities.  Our investment methodology also recommends keeping 30% of investible funds as cash for attractive buying opportunities that may arise.  So what do we buy?  Bargain stocks, of course, but let us be reminded of sectors’ 1Q11 performance for firmer investor confidence.

Banks – hounded by lower trading opportunities.  UBP has the most hit here with the rest like CHIB and SECB giving early advise that the performance in 2010 cannot be replicated this year.  We still like UBP especially its efforts in keeping cost of funds down and RCB, CHIB, SECB and PNB in that order.  Loan growth in the whole banking sector is also double-digits in the first two months of 2011.

Food and Beverages – hounded by higher raw material costs.  They’re mostly down in 1Q11/1H11.  AMC, URC, RFM have big hits.  JFC has a hit but not as much as the first three.  SMB, PF and GSMI, however, are not that affected.  GSMI enjoys lower molasses costs, while PF and SMB must have exercised price hikes earlier.  We still like RFM, SMC and AMC.  Food and beverage stocks this year though should be accumulated at lower levels.

Power and Utilities – hounded by higher coal costs and the drop in WESM prices.  AP is affected with higher coal costs arising from the drop in world supply due to the floods that covered Australian coal mines.  AP’s earnings are also “normal” this year as WESM prices and national power supply have stabilized.  MWC had a tariff adjustment and MER will get its own in July.  MER, however, may have decreasing MAPs (Maximum Allowable Prices) in 2012 onwards.  EDC is still rehabilitating its main power assets and FGEN has a golden opportunity of acquiring 100% of its main power assets.  We like MWC, SPC and FGEN.  FGEN is probably the star performer in 1H11 from the stocks we promote.

Property – Strong Sales.  Part admirable, part mind-boggling but sales take-up are up and up from FLI to ALI.  OFW sales and property as an investment haven are probably the main reasons for this.  IFRIC 15, however, is coming.  ‘better know which are less-affected and ready for the completed-contracts method of booking real estate sales.  To save you time and in the order of being less-affected, they are SMPH, FLI, VLL, RLC, ALI, CHI, SMDC, ETON, HP and MEG.  We like VLL, FLI, CHI, RLC, AC (in place of ALI) and ETON.  For MEG, we’re pretty concerned about its IFRIC 15 issue.  For a vertical developer, we’re pretty amazed of SMDC’s growth.  Even with IFRIC 15, it runs well up to 2016.

Telecoms – We don’t like this.  Check out our article below on PLDT acquiring Sun Cellular

Broadcasting – We like this sector because it has defensive properties like Power and is a less-cyclical business rain or shine.  GMA7 and ABS are Strong Buys.  GMA7, however, has more value and is the better investment over ABS.  The former is more efficient, already has proven pricing power and has residual value.  Its fair value is PHP15.13 per share, and it gives hefty cash dividends.

Other Stocks we like are PHN (strong balance sheet and affiliate TA has a rights offer), FPH (a recipient of the EDC rehab and FGEN golden opportunity) and COAT (BIG value).  Meanwhile, ICT may encounter weaker TEU throughput globally triggered by the Japan tsunami, and CEB is pretty expensive though its financial performance is quite favorable.


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