The Moat Report plus more!

Transcription

1 Philippines Market Outlook Alfred Dy (63) April 2011 The Moat Report plus more! CLSA recently published The Moat Report. Report highlights 246 companies in Asia that generated return ratios above cost of capital, sustained earnings growth, and were at undemanding valuations. Economic moats are the basis for this durable competitive advantage. Warren Buffet coined the term economic moat to refer to the ability to sustain such an advantage. Companies that have a moat around their operation can be said to have a business franchise. They generally have pricing power that leads to wide margins and good return ratios. Out of the 246 companies mentioned, 4 are from the Philippines and these are PLDT, SM Investments, ICTSI, and Jollibee. Aside from the 4 companies mentioned, we believe that there are still other moats in the Philippines and these are Aboitiz Power, DMCI Holdings, Univeral Robina, Alliance Global, and Phoenix. Though still EVA negative, Metro Pacific could also be considered a moat in the coming years. The experts say In CLSA s latest thematic piece entitled The Moat Report, Amar Gill and Anirudha Dutta highlight 246 companies in Asia that generated return ratios above cost of capital, sustained earnings growth, and were at undemanding valuations. Investment guru Warren Buffet coined the term economic moat to refer to the ability to sustain such a competitive advantage. To uote Buffet specifically: [the] most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles. Firms that have a moat around their operation can be said to have a business franchise. They have pricing power that leads to wide margins and excellent return ratios. We define a franchise as a business that has a comparative advantage which over time will lead to return ratios staying above cost of capital which in turn will result in economic value creation or a positive EVA. There are various ways a company might be able to sustain a long-term advantage, or business franchise. The analysis of Pat Dorsey in The little book that builds wealth suggests they can create economic moats from one of the following main channels: Intangible assets, eg, brands, patents, or regulatory licenses that allow a business to sell products or services that can t be matched by competitors; Customer switching costs that give the firm pricing power as it is hard for customers to move away from the product/services offered; Network economics where the value of the product or service increases with the number of users; and Please see important notice on last page Page 1 of 10

2 Cost advantages stemming from process, location, scale or access to a uniue asset, which allows the company to offer goods or services at a lower cost than competitors. In practice, most of the corporations that build a franchise do so through developing a brand. A tale of four moats Out of the 246 moats mentioned in the report, 4 come from the Philippines and these are PLDT, SM Investments, ICTSI, and Jollibee. Key takeaways for each are as follows: PLDT Leading telco play in the Philippines with bundling/convergence possibilities over the longer term through affiliates, eg, Meralco and hospitals that will allow it to offer services (eg, paying electric bills on the phone) that competitors will not be able to match. Figure 1 Figure 2 PLDT s 12-month forward PER PLDT s 12-month forward PBV 3, , , , , , , ,100.0 PLDT- Price to Earnings Bands max15.6x 13.8x avg11.9x 10.4x 3, , , , , , ,100.0 PLDT - Price to Book Value Bands max5.67x 5.11x avg4.55x 1,900.0 min8.9x 1, x 1, , , ,500.0 min3.12x Apr06 Apr07 Apr08 A pr09 Apr10 Apr11 Apr12 Apr06 Apr07 Apr08 A pr09 Apr10 Apr11 Apr12 SM Investments Largest conglomerate in the Philippines with leading market positions in retail, shopping malls, supermarkets, cinemas and banking. Has been savvy in capitalizing on the buying habits of the middle and mass markets. Figure 3 Figure 4 SM s 12-month forward PER SM s 12-month forward PBV SM Investments- Price to Earnings Bands max18.6x SM Investments - Price to Book Value Bands max2.61x x avg12.5x x x avg1.66x min6.7x x min0.87x 83.0 Apr06 Oct06 Apr07 Oct07 Apr08 Oct08 Apr09 Oct09 Apr10 Oct10 Apr11 Oct Apr06 Oct06 Apr07 Oct07 Apr08 Oct08 Apr09 Oct09 Apr10 Oct10 Apr11 Oct11 Please see important notice on last page Page 2 of 10

3 ICTSI Fast emerging as a key player in medium-sized ports globally. Management team is strong and is continuously looking form M&A opportunities globally. Figure 5 Figure 6 ICTSI s 12-month forward PER ICTSI s 12-month forward PBV 1.6 ICTSI- Price to Earnings Bands max30.2x 1.6 ICTSI - Price to Book Value Bands max4.84x x x avg15.3x 0.8 avg2.29x x x 0.4 min7.0x 0.4 min0.90x Jan08 M ay08 Sep08 Jan09 M ay09 Sep09 Jan10 M ay10 Sep10 Jan11 M ay11 Sep11 Jan08 M ay08 Sep08 Jan09 M ay09 Sep09 Jan10 M ay10 Sep10 Jan11 M ay11 Sep11 Jollibee The biggest fastfood chain in the Philippines. Nearest competitor McDonald s Philippines is less than half the scale of Jollibee. With strong balance sheet (net cash)the company is beginning to penetrate the vast China market. Figure 7 Figure 8 JFC s 12-month forward PER JFC s 12-month forward PBV Jollibee Foods- Price to Earnings Bands max27.3x Jollibee Foods - Price to Book Value Bands max5.02x x avg19.1x 16.1x x avg3.48x 2.82x min13.1x min2.16x A pr06 Oct06 Apr07 Oct07 A pr08 Oct08 Apr09 Oct09 Apr10 Oct10 Apr11 Oct A pr06 Oct06 Apr07 Oct07 A pr08 Oct08 Apr09 Oct09 Apr10 Oct10 Apr11 Oct11 Figure 9 Philippine companies highlighted in THE MOAT REPORT Company ROIC/ROE EVA/IC Jollibee Foods PLDT SM Investments ICTSO Plus more Aside from the 4 companies mentioned in The Moat Report, we believe that there are still other moats in the Philippines and these are Aboitiz Power, DMCI Holdings, Universal Robina, Alliance Global, and Phoenix Petroleum. All of these companies are generating positive EVA. Though still EVA negative, Metro Pacific could be considered a moat in the coming years. Key takeaways of each are as follows: Aboitiz Power Please see important notice on last page Page 3 of 10

4 36.4 Aboitiz Power Corporation is a member of the Aboitiz Group of Companies. The Aboitiz Group is one of the oldest business groups in the Philippines with over 100 years of experience in doing business in the Philippines; Aboitiz Power is into power generation and power distribution. Aboitiz Power is one of the biggest power generation plays in the Philippines with capacity of 2,100 MW. In terms of power distribution, total capacity is at 800 MW spread into concession areas in Cebu, Davao, Cotabato, and San Fernando; In the medium term, Aboitiz Power intends to add an additional 400MW Aboitiz Power- Price to Earnings Bands Aboitiz Power - Price to Book Value Bands of generation capacity; and max15.3x 41.6 max4.30x Stock is trading at 2011 PER 11.2x of 12.5x 31.6 and 2012 PER of 12.1x avg7.1x x min3.2x Figure 10 Figure AP s 12-month forward PER Apr06 Oct06 Apr07 Oct07 A pr08 Oct08 Apr09 Oct09 Apr10 Oct10 Apr11 Oct AP s12-month forward PBV Apr06 Oct06 Apr07 Oct07 A pr08 Oct08 Apr09 Oct09 Apr10 Oct10 Apr11 Oct x avg1.62x 1.18x min0.74x DMCI Holdings DMCI Holdings is one of the fastest growing conglomerates in the Philippines; Its stable of assets are (1) DMCI Construction; (2) DMCI Homes; (3) Maynilad Water; and (4) Semirara Coal. Through Semirara, DMCI is also in power generation; EPS growth is at 22.5% in 2011 and 21.6% in 2012 on the back robust earnings contribution coming from Semirara and Maynilad; and DMCI- Price to Earnings Bands DMCI - Price to Book Value Bands max13.8x 51.6 max3.05x Stock is trading at 9.3x 2011 PER and 7.6x 2012 PER x 2.12x Figure 12 Figure DMCI s 12-month forward PER avg4.5x 2.7x DMCI s 12-month forward PBV min0.9x Jan08 M ay08 Sep08 Jan09 M ay09 Sep09 Jan10 M ay10 Sep10 Jan11 M ay11 Sep11 Jan08 M ay08 Sep08 Jan09 M ay09 Sep09 Jan10 M ay10 Sep10 Jan11 M ay11 Sep avg1.19x 0.72x min0.26x Please see important notice on last page Page 4 of 10

5 Universal Robina URC is the biggest snack food manufacturer in the Philippines with over 40 years of track record in this highly competitive industry; It has three core businesses: branded consumer foods group (78% of revenue), agro-industrial (11%), and commodities (11%); The company is benefitting from strong domestic consumption given Universal Robina- Price to Earnings Bands rising per capita income and max82.8x still growing population base; and The stock is trading at 2011 PER of 8.6x and 2012 PER of 7.7x. 30.6x avg11.2x 6.6x Figure 14 Figure URC s 12-month forward PER Apr06 Oct06 Apr07 Oct07 Apr08 Oct08 Apr09 Oct09 A pr10 Oct10 A pr11 Oct11 min2.0x URC s 12-month forward PBV Universal Robina - Price to Book Value Bands 49.0 max2.08x x avg0.99x 0.64x 9.0 min0.29x 4.0 Apr06 Oct06 A pr07 Oct07 Apr08 Oct08 Apr09 Oct09 Apr10 Oct10 A pr11 Oct11 Alliance Global Alliance Global is one of the most exciting and fastest growing conglomerates in the country; It has an interesting stable of assets namely (1) Megaworld; (2) McDonald s Philippines; (3) Emperador Distillers; and (4) Travellers International which houses its casino business; We expect EPS growth of 33.6% in 2011 and 18.9% in 2012 on the back of a recovering economy as well as robust growth in the casino business; and Stock is trading at 2010 PER of only 11.5x and 2011 PER of 9.7x. Please see important notice on last page Page 5 of 10

6 Figure 16 Figure 17 AGI s 12-month forward PER AGI s 12-month forward PBV 16.9 Alliance Global- Price to Earnings Bands max15.3x 15.0 Alliance Global - Price to Book Value Bands max1.94x x x avg9.1x avg1.03x x x min2.4x min0.25x A pr06 Oct06 Apr07 Oct07 Apr08 Oct08 Apr09 Oct09 A pr10 Oct10 A pr11 Oct11 A pr06 Oct06 Apr07 Oct07 Apr08 Oct08 Apr09 Oct09 A pr10 Oct10 A pr11 Oct11 Phoenix Petroleum 2 nd largest independent downstream oil industry player with 2.5% market share seen to double to 5% by 2015 with a large 500 service station network; Strong 69% YoY earnings growth in 2011 underpinned by aggressive service station roll-out this year; Inexpensive valuations (mid-single-digit PEs) further highlighted by strong earnings growth and 24-29% ROEs; and 8.8x PE at target price is still at a substantial 40% discount to the market PE. Figure 18 Figure 19 PNX s 12-month forward PER PNX s 12-month forward PBV 30.3 Phoenix Petro- Price to Earnings Bands max7.7x 25.6 Phoenix Petro - Price to Book Value Bands max1.67x x x avg2.5x avg0.57x x x 0.3 min0.4x 0.6 min0.17x Jan07 Jan08 Jan09 Jan10 Jan11 Jan12 Jan07 Jan08 Jan09 Jan10 Jan11 Jan12 Metro Pacific Investments MPI is one of the most aggressive and fastest growing conglomerates in the Philippines; MPI stable of assets include stakes in Meralco, Maynilad Water, Metro Pacific Tollways and a couple of hospitals; We expect EPS growth of 33% in Key driver for earnings growth is Maynilad where we expect non-revenue water (NRW) to fall from 51% this year to 45% next year. Meralco and the tollways are also key assets with expected tariff hike implemented next year for Meralco and added vehicle traffic from new tollroads; and Fundamentals continue to strengthen with businesses that generate strong cash flows. Net gearing is seen to 65.4% next year from 75.4% this year. Please see important notice on last page Page 6 of 10

7 Metro Pacific Inv- Price to Earnings Bands Metro Pacific Inv - Price to Book Value Bands max36.4x x 6.4 Stock is trading at 2011 PER of 15x and 2012 PER of 13x. 5.4 avg19.1x 4.4 max2.05x 1.58x x 3.4 avg1.11x 2.6 Figure 20 Figure Metro Jan08 M ay08pacific Sep08 Jan09 M ay09 12-month Sep09 Jan10 M ay10 Sep10 forward Jan11 M ay11 Sep11 PER min11.0x Metro Jan08 M ay08pacific Sep08 Jan09 M ay09 12-month Sep09 Jan10 M ay10 Sep10 forward Jan11 M ay11 Sep11 PBV 0.82x min0.53x Figure 22 Philippine companies that are EVA positive Please see important notice on last page Page 7 of 10

8 PLDT 458 Aboitiz Power DMC I SM Investments Semirara Mining Cebu Air 99 Energy Development 58 Jollibee Foods 56 Philex Mining Universal Robina Alliance Global 44 Security Bank SM Development Belle C orp 23 First Philippine BPI Meralco 17 Manila Water 15 Ayala Land Phoenix Petro 7 13 Robinsons Land 5 First Gen IC TSI 1 0 EVA(US$m) Please see important notice on last page Page 8 of 10

9 Figure 23 EVA/IC (%) Semirara Mining DMCI Jollibee Foods 20.8 Cebu Air Philex Mining Belle C orp Aboitiz Power PLDT First Gen Phoenix Petro Security Bank SM Development Universal Robina SM Investments Alliance Global Energy Development First Philippine Manila Water ICTSI Ayala Land BPI Meralco Robinsons Land EVA/IC (%) Figure 24 Valuation table of Philippine Moats Company Mcap PE (x) PB (x) Rec PHPm 11CL 12CL 11CL 12CL PLDT 439, U-PF SM Investments Corp 315, BUY ICTSI 80, BUY Jollibee 90, BUY Aboitiz Power 213, O-PF DMCI 100, BUY Universal Robina 69, BUY Alliance Global 113, BUY Phoenix Petroleum 5, BUY Metro Pacific Investments 65, BUY. Please see important notice on last page Page 9 of 10

10 Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%. Performance is defined as 12-month total return (including dividends) CLSA Asia-Pacific Markets ( CLSA ). Note: In the interests of timeliness, this document has not been edited. The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views and opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any person/s in compiling such publication/ communication. The CLSA Group, CLSA's analysts and/or their associates do and from time to time seek to establish business or financial relationships with companies covered in their research reports. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests that could affect the objectivity of this report. The Hong Kong Securities and Futures Commission reuires disclosure of certain relationships and interests with respect to companies covered in CLSA's research reports and the securities of which are listed on The Stock Exchange of Hong Kong Limited and such details are available at Disclosures therein include the position of the CLSA Group only and do not reflect those of Credit Agricole Corporate & Investment Bank and/or its affiliates. If investors have any difficulty accessing this website, please contact webadmin@clsa.com or (852) If you reuire disclosure information on previous dates, please contact compliance_hk@clsa.com IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Notices as set out at a hard copy of which may be obtained on reuest from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) /01/2011 Page 10 of 10