2012 nov. 7 volume 1 no. 13 first metro investment...

2012 Nov. 7

MWC’S INDONESIAN THRUST TO CONTRIBUTE 12% OF EARNINGS

Inflation Expected to Rise by End-December The shortened trading week which ended last Wednesday (October 31, 2012) had government securities’ yields fall-ing by an average of 9.11 basis points (bps) in line with lower inflation expectation. Indeed, the October inflation rate went down to a four-month low of 3.1% from last Sep-tember’s 3.6%, but with a market view for a yearend re-bound largely due to base effect. Inflation may revert back to the high side of close to 4% yet monetary regulators continue to look for innovative tools to further ease system liquidity. Recall that the BSP had cut its key policy rate for the fourth time last October 25, 2012 by another 25 bps causing overnight borrowing and lending rates to slide to 3.5% and 5.5%, respectively. That spurred a rally in the short-end of the yield curve led by the 364-day bills which shed 53.29 bps to 0.52%. With the benchmark 91-day T-bill slipping 32.50 bps to 0.30% against a rising long-end, with the ten-year and 25-year bonds up by 1.69 bps and 16.28 bps, respectively to 4.70% and 5.97%, the peso yield curve had, in effect, steepened. Still, interest rates will remain soft and downbeat by the time the year is out.

F IRST METRO INVESTME NT CORPORAT ION

Bellwether Market Stats

Continuation on Page 2

Volume 1 No. 13

Fortnightly on Market Action and Outlook

Manila Water Company’s (MWC)

Indonesian Thrust to Contribute

12% of Earnings

he

Indonesia Water Venture is the Single Biggest

Earnings Impact from Offshore Expansion in 2013.

Manila Water's Indonesian acquisition, 51% of equity in

PT PAM Lyonnaise Jaya (Palyja), will contribute 12%

of next year's bottomline, likely to be booked in

2Q2012. Palyja has been operating the water supply

concession contract of Western Jakarta since 1997

under a 25-year deal with the government-owned PAM

Jaya. The incremental earnings we estimate to be

Php600mn, almost doubling the current earnings of

Php350mn outside of the concession area--the East

Zone--; the latter represents 5% of total earnings.

Please see table below for the other water businesses

outside of the East Zone.

Consensus is in Agreement with Profit Guidance.

Consensus earnings estimate next year is a growth of

5% to Php5bn from this year's estimate of Php4.7bn.

There is no profit guidance but the company's internal

view agrees with the abovementioned growth.

PSEi Value % w-o-w Change

Closing 5,405.16 -0.50%

High 5,442.94 -0.33%

Low 5,383.90 0.43%

Value T/O (in mn Php) 20,597.97 -30.06%

Foreign Activity (mn USD) 55.50 -1,090.08%

Top Gainers Top Losers

Stock Price % w-o-w change

Stock Price % w-o-w change

BEL 5.39 4.46% AGI 14.20 -6.21%

FGEN 21.35 2.64% JFC 102.00 -2.86%

AC 439.00 2.62% SMPH 14.24 -2.47%

ICT 71.00 1.50% MER 278.00 -2.46%

ALI 23.50 1.29% MEG 2.40 -2.44%

For the week ending October 25, 2012

GSM PM CLOSE October 25, 2012

23.19yr 5.815% (0.01 bps down)

Dealt @ 5.8125% to 5.80% for Php805Mn

24.86yr 5.95% unchanged

RTB Trades October 25, 2012

16: 25yr 5.915% (0.035 bps down) Dealt @ 5.92% to 5.90% for Php8.870Bn

GSM PM CLOSE October 25, 2012


3.90yr 4.125% (-0.07) Dealt @ 4.125% to 4.10% for Php220Mn








Note: GSM is Government Securities Market

MER LIKELY TO BEAT 2012

PHP15.5BN PROFIT GUIDANCE

BC TAKES OVER NICKEL

MINING

(Manila Water Company...continued from page 1)

Recall that 1H2012 earnings rose 30% to Php2.6bn on

a 14% tariff adjustment to the all-in water charge of

Php31.95/cubic meter (m3) and rise in billed volume to

283m m3, inclusive of the expansion areas--Laguna,

Boracay, Clark ecozone and Vietnam's Thu Duc. Three

quarters of billed volume is accounted for by domestic

residential and semi-industrials, the rest by commercial

and industrial accounts. Billed volume in the platform

business (East Zone) remained flat such that the real

volume drivers (now and going forward) are the expan-

sion areas. See billed volume growth on table next

page (page 3).

One of Best Performing Stocks Year-to-Date is

Pricing in the Expansion. MWC ranked fifth as best

performing index stock this year with total return of

48.2% year-to-date (inclusive of dividends, 2.0% yield

worth Php0.60/share). The strong share showing

priced in prospects of rising billed volumes on onshore

bulk water supply contracts and equity participation in

existing offshore bulk water suppliers such as Thu Duc

and Kenh Dong Water Supply Joint Stock Co. The

latter two are Vietnamese water suppliers contracted

with the Vietnam state-owned Saigon Water Corp.

(SAWACO) serving Ho Chi Minh City.

12% Earnings Contribution from Indonesia. The

Indonesian concession adds 400 million liters per day

(L/d) of water supply/capacity, net of non-revenue

water (NRW) of 39%, the highest in MWC's portfolio.

That water supply/capacity is a quarter of the 1,600m

L/d of water supply allocated to MWC from the Angat

Dam under the concession agreement with govern-

ment and 36% of the 1,100m L/d of water supply actu-

ally delivered to the East Zone. Indonesia's Palyja will

be the single biggest addition to MWC's bottomline on

top of the 5% earnings contribution of Thu Doc and

bulk water supply contracts with Laguna, Boracay,

Clark. Another Vietnamese bulk water supply also with

Saigon Water, called Kenh Dong, will make its earn-

ings impact next year, starting in mid-1Q, adding to the

combined and existing 17% earnings contribution of all

water business outside of the East Zone, including

Indonesia.

Similar Regime. Since the regulatory environment in

Indonesia is similar to the Philippines with a guaran-

teed rate of return for a defined four-year regulatory

period for agreed network NRW reduction, expansion

and operating capex, we estimate net profit margin per

m3 worth Php12/m3 on projected water charge of

Php35/m3. That is the estimated water tariff under the

concession, which is 15% higher than the East Zone's

all-in water tariff of Php30.91/m3. MWC's guaranteed

return under the current regulatory period (ending this

year) is 14% for the East Zone concession with the

most efficient NRW of 11%. A new regulatory period

starts in 2013 as its first year.

Billed Volume Growth led by Domestic Expansion

Areas. Year-to-date billed volume as of 1H2012 in the

East Zone increased by 4% from 204.1m m3 in 2011 to

211.5m m3 for the same period in 2012. The increase

was driven by the growth in consumption of the semi-

commercial/semi-business and industrial customers,

and the additional new connections from the expansion

areas in the province of Rizal. But overall, inclusive of

the offshore expansion, billed volume increased by

36% to 282m m3, same period, led largely by Boracay,

Laguna and Clark as the Thu Duc's volume remained

on a contraction mode. SAWACO controlled water

supply due to the high NRW in the Ho Chi Minh City

area. See table on page 3.

Valuation Lags Broad Market Advance, Yet to Price

in Offshore Portfolio Potential. 3Q12 earnings is

expected to be seasonally lower than 2Q12, while the

full year results are seen to be slightly above last year's

Php4.3bn. PE at next year's earnings is 12.34x. Last

year's reported earnings were Php4.3bn on which

Php3.5bn were attributable to equity holders.

Leverage Better Than Year ago. On the balance

sheet, we note that net debt to equity has actually

improved to 0.63:1 in 1H2012 versus year ago from

0.70x.

Upside. The pay-offs to MWC lie in the realization of

the following in the expansion areas: NRW reduction

which we think MWC has the expertise to share with its

partners abroad, growth in water consumption, im-

provements in operating efficiencies and a stable regu-

latory framework.

In the shortened week ended October 25, 2012, the Philippine stock market moved sideways as US third quarter earnings results and central bank meet-ings weighed on sentiment. The PSE index lost 27.2 points (-0.50%) for the week to close at 5,405.16. Foreigners were net buyers by P2.298bn. In devel-oped markets, US equities got ham-mered on a slew of lackluster corporate earnings results. For the week, the Dow plunged 1.77%, the S&P tumbled 1.48%, and the Nasdaq dipped 0.59%. Moving forward this week, we expect the local bourse to hover above the 5,400-mark, barring negative news abroad, on the back of month-end window-dressing. Also, the BSP’s recent policy cut to a new all-time low of 3.5% should boost conglomerate and property stocks. We still maintain our stance to be buyers on dips. On the international front, attention will be focused on the upcoming US elections. US economic data to be re-leased this week include personal in-come outlays, consumer confidence, jobless claims and non-farm payrolls.

PSEi to Hover above the 5,400-mark

Stock Data

Price (Php) 29.55

Market Cap (Php Bn) 59.47

Outstanding shares (Bn) 2.01

PE 2013E (X) 2.33

Price to Book (X) 2.52

Source: Bloomberg

(Manila Water...continued from page 2)

Manila Electric Company (MER)

Likely to Beat 2012 Php15.5bn Profit Guidance

Outperformance. We expect 2012 MER net profits to

be above the Php15.5bn guidance. Nine-month earn-

ings was reported at Php12.9bn, above last year’s

same period’s Php11.6bn.

Our Optimism is Based on 3Q12 Booking of Under-

recoveries. Quarter-on-quarter (q-o-q), our initial

hunch was that 3Q2012 net profits may turn out better

than 2Q2012 due to the booking of underrecoveries in

3Q2012 related to distribution tariffs. However, 3Q2012

actual results saw a drop q-o-q from Php6.38bn to

Php3.15bn. The underrecoveries booking will offset the

seasonally weak 3Q energy sales due to the cooler

weather and rains/typhoons.

Energy Sales Holding Up, 7.6% was Growth for

Year-to-date (ytd) September, 2012 period versus

1% in the whole of 2011. Last August, MER's sales

flattened, -0.01%, year-on-year (y-o-y), coming from a

resilient July growth of 9%, y-o-y. We learned that after

August, energy sales recovered in September 2012,

leading to a growth of 7.6% in 9mo2012.

Underrecoveries Enhance Distribution Tariff Reve-

nues. MER started collecting a larger portion of the

industrial tariff adjustment to Php1.60/kwh from

Php1.51/kwh in 3Q2012 compared to 2Q2012. Recall

that ERC approved in 2Q2012 MER's application for a

tariff adjustment to Php1.60/kwh given that the effec-

tive overall distribution tariff was pulled down to

Php1.51/kwh because of the double-digit growth post-

ed by the more cheaply priced industrial electricity

sales. Industrial clients enjoy relatively lower tariffs

versus residential and commercial. Industrials now

make up 30% of MER's total energy sales in 2011, a

comeback from just 27%-29% in previous years. It has

caught up with residential consumption, which is 30%

of the 30k GWh (gigawatt hour) total electricity sales in

2011. Commercial users led residentials and industri-

als by a wide margin, making up 40% of energy sales.

MER's energy sales mix were 40% commercial, fol-

lowed by residential and industrial by 30% each, re-

spectively. Recall that exports grew 5-7% in August

2012, y-o-y, led by auto parts, non-electronics and non

-manufacturing segments.

Performance Reward. MER also got a provisional

ERC approval for a further hike of the Php1.60/kwh

rate to Php1.63/kwh in 3Q2012. That adjustment, to be

collected also in 3Q2012, reflected rewards for

achievement and delivery of higher service level stand-

ards.

Stock Data

Price (Php) 278.00


Outstanding shares (Bn) 1.13

PE 2013E (X) 15.73


Source: Bloomberg

Outlook. Energy sales will rise in 2013, being an

election year and given the sufficiency of dependable

power in the Luzon grid with the entry of GN Power's

600MW versus the predicted 5% GDP growth. MER's

purchased power cost may improve as the additional

power capacity in the Luzon Grid (GN Power) miti-

gates spikes in the supply-sensitive electricity spot

price and encourage more electricity consumption.

But the distribution tariff downtrend as prescribed by

the ERC in the third regulatory period (the latter years

2014-2015) may weigh on the distribution revenues

going forward, unless energy sales pick up in line

with the government's sustainable GDP growth target

of 6-7%. See our assumption which is in line with the

average tariff prescribed by the ERC. MER has been

a high PE stock. Be that as it may, there are trading

opportunities on the expected 4Q2012 earnings up-

side.

Open Access by end 2012, Discussions Ongoing

on Billing and Contestability of ERC's Mandate.

Out of MER's 4m clients, 600 consume 1MW and

above and will, under the mandate of ERC, fall under

open access. This particular provisional ruling some

of MER's clients are contesting, who want to retain

MER as their power source. These 600 customers

account for 30% of MER's total energy sales last year

equal to 10k GWh, which by force of the ERC man-

date will switch directly to a power source other than

MER. Open access enables electricity savings by

huge power users by directly connecting with a power

source instead of MER but still using the MER power

lines or by installing their own direct connection with

the power source/ Independent Power Producer

(IPP). MER's power cost, because it is a blend of

sources such as WESM, National Power Corporation

(Napocor) and the Lopez-owned IPPs, is more ex-

pensive than a single direct power source. MER

management said the potential migration of the 600

clients from the MER power source to a supposedly

cheaper alternative won't have any effect on compa-

ny earnings as the electricity will still pass through the

MER distribution franchise and thus be charged with

the distribution tariff.

Source: FMIC-IAG Research Estimates

Earnings Rise on Record Gold Prices and Output

Ramp-Up. BC sees a 75% improvement in core mining

net profits to Php700mn in 2013 from this year's ex-

pected Php400mn. This forecast does not include the

Balatoc Gold tailings' anticipated Php800mn-Php1bn

topline in 2013 on which the company was mum about.

BC, the country's fourth largest primary gold producer

in 1H2012, is riding the gold price bull run.

Accommodative Regulatory Climate. BC is reasona-

bly priced at its PE of 10.7x, but external challenges

remain: the regulatory overhang and China slowdown.

Recall that executive order (EO) 79 implementing rules

deleted a provision ensuring the automaticity of an

MPSA renewal for another 25 years. Also, negative

news flow beset a still economically weak China, the

world's biggest iron, nickel ore and copper importer.

Key catalysts to a share price run would be a shift

towards a more accommodative domestic regulatory

climate for mining investments and continuing strong

gold prices, which BC expects to hit $2,400/oz. in mid-

2013.

Ability to Execute on both Mining and Balance

Sheet Clean-up. BC deserves to be credited for its

ability to execute on a target gold daily tonnage ramp-

up to today's 180 tons from 140 in 2Q2012. Also, its

capital deficit has been wiped out and debts reduced

post a debt buy-back scheme. By year-end, daily ton-

nage will be 300, a project financed by internal cash.

Full year Impact of Nickel Unit. Another income

booster is the full year impact of Sta. Cruz Nickel Pro-

ject's doubling of nickel shipments to 1.2m tons in 2013

as BC takes over DMCI Holdings Inc.'s lucrative con-

tract mining deal which gave the former Php1bn in

profits in 2010. BC has a 100 hectare nickel mine site

being mined by DMC (the so-called contract area 1,

which count among the four areas) as the contractor,

with a margin through a share in shipments. That con-

tract will expire by year-end and won't be renewed.

Stock Data

Price of A/B (Php) 21.85/22.00


Outstanding shares (Mn) 163.80

PE (X) 10.7

Price to Book of A/B (X) 1.34/1.56

Source: Bloomberg

Benguet Corporation (BC)

Takes over Nickel Mining

Petron Corporation’s (PCOR)

Profit Guidance is Written Off But Looks to Recov-

ery in 2013. PCOR’s 9mo12 profits are seen to be way

below the 2012 full year target of Php10bn. Manage-

ment sees 2012 full year income to dip below 2011's

Php8.5bn. 3Q2012 net profits are bound to be higher

quarter-on-quarter (q-o-q) only due to 2Q2012's

Php2bn losses.

Volume and Price In Favor of PCOR. We think both

sales volume and inventory cost will be in favor of

PCOR next year. First, 2013 is an election year, likely

to replicate the high 48.2m barrels (bbls) sold in 2010,

also an election year. PCOR sold 21m bbls in 1h2012

and slowed in the whole of 2011 with only 42m bbls

sales volume. Second, foreign banks forecast of a slow

oil price climb, suggesting a stable crude inventory cost

for PCOR. Sudden spikes in imported oil prices and

sharp drops in the local pump could mean inventory

losses for PCOR as seen in 2Q12.

Losses all Blamed on Oil Price Volatility. PCOR's

Php500mn loss in Phil operations and Php1.6bn from

Esso Berhad were behind the Php2bn losses in 2Q12.

Esso is a Malaysian petrol subsidiary which PCOR

bought last March 2012. Its business model is just like

Petron except that its crude is light, more expensive,

cost based on Brent crude, & sourced from the Exxon

field in Malaysia, Esso's previous parent. Esso oper-

ates in Malaysia were oil prices are fixed but oil com-

panies are subsidized for the difference between the

market and the government-set oil price. The similarity

of PCOR's operations with that of Esso, both of which

stocked up on high-cost oil in 1Q then sold amid falling

crude oil in 2Q2012 meant that both suffered net loss-

es. Note that 70% of PCOR's crude come from Saudi

Aramco. PCOR also maintains a 60-day inventory.

Slow Rise in Crude Oil Prices. Favoring PCOR is the

improvement in the local pump prices as Dubai crude

recovered to $110/bbl (Dubai crude) in 3Q2012 from

$89/bbl in 2Q2012. In the attached graph showing the

median of Bloomberg's survey of foreign banks' oil

price forecast on a quarterly basis, the climb will be a

slow one to $110/bbl in 4Q2013. This trend is a far cry

from the volatility seen this year. In 1Q12 oil prices

were strong, $122/bbl based on Dubai, which raised

PCOR's optimism the 2012 Php10bn profits was

achievable. But in 2Q12, PCOR sold volumes at a

cheaper price to replace reduced imports of competi-

tors that were also reeling from costly imported crude

and finished products. As a result, 1H2012 earnings

were trimmed down to Php695m from Php6bn a year

ago on sales volume of 21.81m bbl, up 9% yoy.

Investments for Growth and Market Dominance.

PCOR's bottomline recovery will, however, be mitigat-

ed by expansion expenses. There is a 600 service

station a year expansion plan to achieve a network of

5,000 by 2016. Refinery output will rise to 180k bbl/day

from 120k/day under the so-called Refinery Moderniza-

tion Program (RMP2). 113 service stations were set up

from last Feb. 2012 to Oct. 11, 2012. The petrol station

expansion is helping to preserve the market share of

PCOR, now up to 39% from 38% versus the growing

independent petrol players, with a collective market

share of 26%. The independent players have been

eating into the market shares of Shell and Caltex,

which are not expanding their service stations. Caltex

is a pure importer of finished product while Shell has a

smaller refining capacity of 110k barrels per day.

RMP 2 Eliminates the Fuel Oil Drag and Will Double

EBITDA in 2014. The refinery expansion worth $2bn

(for which fund raising is being done now for the 2nd

$1bn tranche) and to commercialize in 2H 2014, aligns

PCOR with the trend among petroleum refiners' of

shedding their unprofitable fuel oil. Fuel oil accounts for

20% of the 120k bbl per day refinery output of PCOR

or 24k bbl/day. Fuel oil is unprofitable with a loss drag

of $5-$20/bbl versus the $20-$30/bbl gross margin or

$16-$26/bbl operating margin of diesel, jet fuel, unlead-

ed gasoline and LPG, collectively known as "white"

products. PCOR will double the 2010 Php16bn

EBITDA to Php32bn once the RMP is in place, i.e.

2H2014. PE is 12x 2013 earnings based on consensus

estimates.

Stock Data

Price (Php) 10.90



PE 2013 (X) 12


Source: Bloomberg

Sales Volume to Rise in Election Year 2013; Margins to Improve on Refinery Expansion

Source: Bloomberg

Profit Guidance is 15% Growth. SCC's earnings

guidance for 2013 is a 15% growth to Php7.5bn. This

target after a likely Php6.5bn net profits this year, the

low side of this year's profit guidance.

Cheap. SCC is cheap at the 2013 PE of 10.5x. Weak

coal selling prices, down 33% to $40/ton, and an ex-

tended plant rehab this year resulted into a decline of

9% to Php4.71bn for 9mo2012. Share selling pressure

on the weakness of 9mo12 operating results is a buy-

ing window.

Profit Picture Improves. Valuation will adjust to a

hugely positive profit outlook in 2013. Two 300MW coal

-fired plants on an estimated load factor of 83% take

on Meralco's (MER) 430MW power requirement. 2013

will be the first year the earnings of the plants will be

booked. Calaca effectively yields a 14% return on fixed

investments based on the MER contract. A maximum

Php3.5bn net profits from electricity sales of 2.5bn kwh

is seen next year or an earnings share of 46%. That

sales volume includes bilaterals - Batelec and Trans-

Asia -- and the spot market.

Plant 1 to Commercialize Anytime Now. Plant 1,

now on testing using imported coal blended with SCC's

own coal, will be commercially available anytime this

month. It will be the last of the two plants to supply

MER's remaining 220MW requirement. Plant 2, the first

to be rehabilitated in 2011, had gone commercial earli-

er this year at 210MW.

Calaca Imports Coal. SCC's coal fuel blending

(imported coal and its own low grade) at plant 1 will be

key to achieving the target overall 500MW running

capacity. Plant 1 could achieve 250MW-280MW from

present 210MW using said fuel blend. Imported coal

has a higher heating value, above SCC's own 5,000

kilocalories benchmark, but whose fuel cost impact

should be lower than those of its peers like Aboitiz

Power's Php2.60/kwh due to the blending.

Open Access Clients. With 500MW, SCC will tap

open access clients, those with above 1MW consump-

tion, on top of the 430MW MER contract. Open access

as envisaged by the Electricity and Power Industry

Reform Act (EPIRA) takes effect end-2012 and gives

huge electric users a choice of direct and most efficient

power source but still using MER's distribution network.

Coal Price Recovery. Coal prices will remain a key

risk but SCC's view is a price recovery by 2Q2013,

above $60/ton in 2H2012. Its target shipment is a

yearly 6.5m tons, this year and next. It already shipped

about 5m tons as of 9mo12, after recording 3.73m tons

in 1H2012. Coal mining is seen to account for 54% of

2013 earnings, less than this year's 62% with exports

making up 40% of shipments. Local coal prices contin-

ue to be more buoyant than exports, slightly below

Php3,000/ton. SCC's coal will be sold locally 100%

once the 300MW expansion, the third unit, gets com-

mercial in 2015.

Stock Data

Price (Php) 220.00



PE 2013E (X) 10.5


Source: Bloomberg

Semirara Mining Corporation’s (SCC)

Calaca Hikes Load Factor on Imported Coal; Eyes Open Access Clients

Source: Bloomberg

2012 nov. 7 volume 1 no. 13 first metro investment...

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