2012 nov. 7 volume 1 no. 13 first metro investment...
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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
1.29yr 2.125% unchanged
3.90yr 4.125% (-0.07) Dealt @ 4.125% to 4.10% for Php220Mn
4.73yr 4.225% unchanged
9.12yr 4.70% unchanged
Dealt @ 4.70% to 4.685% for Php190Mn
9.28yr 4.66% unchanged
Dealt @ 4.65% to 4.625% for Php34Mn
18.78yr 5.65% unchanged
Dealt @ 5.65% to 5.6375% for Php710Mn
Note: GSM is Government Securities Market
MER LIKELY TO BEAT 2012
PHP15.5BN PROFIT GUIDANCE
BC TAKES OVER NICKEL
MINING
Page 2
(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
Page 3
(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
Market Cap (Php Bn) 313.33
Outstanding shares (Bn) 1.13
PE 2013E (X) 15.73
Price to Book (X) 4.86
Source: Bloomberg
Page 4
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
Page 5
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
Market Cap (Php Bn) 3.59
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
Page 6
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
Market Cap (Php Bn) 102.19
Outstanding shares (Mn) 9.38
PE 2013 (X) 12
Price to Book (X) 1.78
Source: Bloomberg
Sales Volume to Rise in Election Year 2013; Margins to Improve on Refinery Expansion
Source: Bloomberg
Page 7
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
Market Cap (Php Bn) 78.36
Outstanding shares (Mn) 356.30
PE 2013E (X) 10.5
Price to Book (X) 5.53
Source: Bloomberg
Semirara Mining Corporation’s (SCC)
Calaca Hikes Load Factor on Imported Coal; Eyes Open Access Clients
Source: Bloomberg
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