Market Talk (SECB, FLI, MPI, MER)

Banks: Strong growth across all sectors for SECB. Maintain BUY with TP of PHP141, equivalent to 1.7x 2015F PBV and 13.4x PER. Net profit surged more than 4x to PHP2.2b in 2Q14 on strong core lending and treasury income. Loan growth of 30% boosts net interest income 50% while trading income increased fourfold to PHP1.3b. (Details on page x).

Property: FLI’s 1H14 income up 15%. Filinvest Land Inc (FLI-BUY) reported 1H14 net income at PHP2b, 15% higher YoY making up 44% of our full-year estimate. Profits in 2Q14 was at PHP930m, up 16%. Real estate sales surged 30% to PHP6.13b in 1H14, accounting for 56% of our full-year forecast with 2Q14 up 36% to PHP3.07b. Growth in 1H14 real estate sales was driven by project completion and higher sales take-up. Sales take-up grew 9% to PHP7.4b in 1H14. Meanwhile, rental income increased 7% to PHP1.05b, accounting for 46% of our full-year forecast. This was due to higher rental rates and full-year contribution from Plaza E and Filinvest One. Real estate costs surged 33% to PHP3.6b in 1H14 as the company booked sales from lower-margin products. Gross margins from horizontal projects fell 500 bps to 43% in 1H14 while gross margins in medium-rise buildings and horizontal-rise buildings declined slightly to 42% from 43%. General and administrative expenses increased 17% due to higher salaries and professional fees. The high growth in revenues was softened by these costs which resulted in modest growth in net income. Overall performance was slightly below our expectations.

Banks: NPL ratio still minimal at 2.17% in May. Solid asset quality remains as universal and commercial banks recorded NPL ratio of 2.17% in May, little changed from 2.16% in April but better than 2.75% registered in May 2013. In absolute amount, NPLs fell 5.2% YoY but slightly grew 1.7% QoQ to PHP96.07b. Total loan portfolio jumped 20.2% YoY and 1.2% QoQ. Loan loss reserves of PHP132.85b maintained ample NPL cover at 138.29%. Real and other properties acquired fell 6% YoY and virtually unchanged QoQ to PHP96.5b, while non-performing assets (NPA) inched up 0.9% QoQ but declined 5.5% YoY to PHP192.6b. NPA to gross assets ratio slightly increased to 2.09% from 2.08% last month. NPA cover ratio is now at 83.73%.

MPI’s 1H14 net income rose 15%. Metro Pacific Investments Corp (MPI-BUY) reported a 15% YoY increase in net income to PHP4.2b driven by modest performance of operating subsidiaries. Water distribution unit Maynilad grew billed volumes 5%, the same as in 1Q14. Manila Electric Co (MER-HOLD) showed a 3% growth in energy sales and 21% increase in non-electric revenues that was complemented with lower interest expenses at the Beacon level. The toll road subsidiary reported a 7% increase in average daily traffic and 6% increase in average kilometers traveled in North Luzon Expressway; 8% increase in average daily traffic in Manila Cavite Expressway; and contribution from Don Muang Tollways. Lastly, hospitals benefitted from organic growth in the current hospital portfolio and inclusion of earnings from Central Luzon Doctor’s Hospital and Delos Santos Medical Center. Core income also got a boost from lower interest expense as a result of debt refinancing in 2013. There was a slower growth in reported Income of 15% due to business development costs and foreign exchange losses. Net income is 43% of our FY14 estimate, slightly below our expectations.

-ATR Kim Eng

Market Talk (SECB, MEG, SMPH, MPI, GTCAP, SMC)

Banks: Accrual income boosts MBT’s 2Q14 profits. Maintain HOLD with just 9% upside to our new TP of PHP95. Marginal revision in FY14-15 earnings to factor in strong core lending business, lower-than-expected trading profits, and non-recurring gains. Surprise came from a 64% rise in interest income on trading and investment securities. (Details on page x).

Banks: High CAR and CET1 under Basel III rules. The central bank released, for the first time, universal and commercial banks’ capital ratios under the new Basel III framework. Common equity Tier 1 (CET1) ratio reached 13.44% on solo basis and 14.41% on consolidated basis in March 2014, well above the 8.5% minimum requirement. This supported Tier 1 ratios at 13.67% and 14.59% on solo and consolidated bases. Likewise, capital adequacy ratio (CAR) was more than adequate at 15.45% on solo basis and16.35% on consolidated basis, higher than the 10% requirement set by the BSP. Adjustments to the treatment of banks’ capital under Basel III rules compared with Basel II are: (1) capital instruments that do not have loss absorbency features will not be counted; (2) investments in non-allied undertakings defined as benefit pension fund assets, goodwill and other intangible assets will be deducted from qualifying capital; and (3) revaluation losses for the holdings of available-for-sale securities will also be deducted from capital. The latest figures are near our estimates of CET1 and CAR averages of 13.6% and 17.7% in FY14, respectively. We believe CAR will get a boost from new Tier 2 debts being issued by several banks this year.

Banks: SECB earnings more than doubled in 1H14. Security Bank (SECB – BUY) posted higher-than-expected 1H14 earnings of PHP3.6b, an increase of 115% YoY on strong growth in both core lending and trading gains. Net interest income jumped 46% as loans expanded 30% on reported NIM of 3.5%. Non-interest income nearly doubled to PHP2.6b on a 14% rise in fee-based earnings and trading gains of PHP1.66b, up nearly 6x from PHP279m in 1H13. 1H14 net income accounted for 69% of our FY14 forecast and 62% of consensus. Implied 2Q14 earnings is about PHP2.2b, an increase of more than 4x YoY. We shall provide more details later.

Property: MEG reports 14% growth in core income. Megaworld Corp’s (MEG) net 1H14 income excluding one-time gain was up 14% to PHP4.8b from PHP4.2b. This is 47% of our FY14F PHP10.3b.Net profit in 2Q14 rose 16.7% to PHP2.8b from PHP2.4b. One time gain of PHP11.6b was mainly on 1.1b shares of Travellers International Hotel Group (RWM-BUY) sold at PHP9.27/sh to parent Alliance Global Group Inc (AGI-Under review). MEG’s cost was roughly PHP1/sh.1H14 net profit including one-time was PHP16.4b. Reservation sales was PHP47.0b, 67% of their guidance of PHP70.0b, 58% of our FY14 estimate of PHP81b and up 9% YoY. MEG’s rental income was up 22% to PHP3.4b. Maintain BUY and TP 5.40.

Property: SMPH prices bond offering. SM Prime Holdings Inc. (SMPH-BUY) has finalized interest rates on its fixed-rate bonds. 5.5-year bonds will carry a rate of 5.1% per annum, seven-year bonds will have a 5.2% rate and 10-year bonds will have 5.74%.

Conglomerate: MPI’s Vietnam venture encounters hurdles. Metro Pacific Investments Corp.’s (MPI- BUY) planned investment in a toll road operator in Vietnam has been experiencing difficulty due to an ownership dispute. MPI and First Pacific Co Ltd prequalified to bid for this PPP project being undertaken by the Vietnamese government, World Bank and Bitexco Group. The project is currently being delayed due to multiple claims to ownership.

Consumer durables: Vehicle sales climb 32% in July. Latest data show vehicle sales in July leaped 32% YoY to 20,730 units on new product launches and marketing. Commercial vehicle sales went up 16.6% to 12,391 units while passenger cars jumped 64.6% to 8,339 units. In 7M14, vehicle sales grew 26% YoY to 129,687 units, with commercial vehicles rising 15.6% to 80,739 units while passenger cars expanded 47.9% to 48,948 units. Toyota Motor Philippines, a subsidiary of GT Capital Holdings (GTCAP – HOLD), continues to dominate the market at 45.21% market share with sales of 58,635 units in 7M14. CAMPI’s FY14 industry sales target is at 230,000 units.

Conglomerate: SMC reported 1H14 net profit turns around to PHP12b from PHP2.4b losses last year. San Miguel Corp (SMC – Not rated) reported PHP12b net income to parent equity holders in 1H14, a turnaround from PHP2.4b loss last year. This includes forex gains of PHP2.7b this year and PHPforex losse of PHP11.96b a year ago. Net income to common shareholders amounted to PHP8.9b from loss of PHP5.5b in 1H13. The strong recovery was driven by the 13% increase to PHP404.7b in consolidated sales while operating income went up 14% to PHP32.9b. EBITDA also improved 11% to PHP45.3b in 1H14. SMC ended 1H14 with PHP1.17t in assets, PHP200b cash and PHP443b interest-bearing debts with interest-bearing debt to equity ratio of 1.15x.

-ATR Sec

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Market Talk (SMPH, MPI, DMCI, AC, ALI, SMC, RLC, FLI, MWIDE)

Property:SMPH reports strong 2Q14 results. SM Prime Holdings Inc (SMPH-BUY) reported that 1H14 net income was up 12%YoY to PHP9.8b. This was 51% of our full-year estimate of PHP19.3b. Net income was driven by 7% growth in total revenue to PHP33.4b (50% of our 2014 estimates of PHP66.5b), boosted by rental income and real estate sales which accounted for 89% of the total revenue.The increase in rental income was due to the opening of two malls last year and the contribution of the SM Megamall expansion which was opened in January with total additional rental GLA of 500k sqm. Same-store-sales growth was sustained at 7%, same as in 1Q14. For the residential segment, 2Q14 saw a turnaround in revenues as it grew 9% YoY and 37% QoQ to PHP6.9b. Still, 1H14 real estate sales were down 4% YoY to PHP11.9b due to lower launches. We maintain our BUY rating and TP of PHP21.67. Although the residential segment has been a drag, the apparent recovery in 2Q14 reinforces our belief inventory levels are being sustainably trimmed. We believe there could be a re-rating in the stock as net income is ahead of consensus.

Conglomerate: MPI, DM Consunji and WalterMart team up for ITS project bidding. Metro Pacific Investments Corp. (MPI-BUY) has teamed up with DM Consunji Inc, a subsidiary of DMCI Holdings Inc (DMC-Not Rated) and Walter Mart Property Management Inc to bid for the PHP2.5b Integrated Transport System Southwest Terminal Project. Other listed companies interested in bidding include Ayala Corp (AC-BUY) and Ayala Land (ALI-BUY), San Miguel Corp (SMC-Not Rated), Robinsons Land Corp (RLC-BUY), Filinvest Land Inc (FLI-BUY) and Megawide Construction Corp. (MWIDE-Not rated). This terminal project, which will be located at the Coastal Road terminal, will connect passengers to several urban transport systems.

-ATR 

Market Talk (CIC, MBT, PGOLD, COSCO, PBC)

Consumer: CIC 1H14 net income up 45%. Concepcion Industrial Corp (CIC – BUY) announced during its annual stockholders’ meeting yesterday its 1H14 net sales grew 28% while net income after minority interest went up 45% YoY. This implies 1Q14 net sales of PHP4.8b and net income after minority interest of PHP346m, equivalent to 51% and 54% respectively of our corresponding full year forecasts. 2Q14 top line 

growth slowed to 20% after coming off a 39% in 1Q14. The lower 2Q14 growth is expected as 1Q14 net sales got a boost from trade loading prior to the price increase in 2Q. The 2Q14 numbers should include 

earnings contribution from 51%-owned Otis Elevators and Escalators Phils which was consolidated starting end-March 2014. Stockholders likewise approved the 30% stock dividend to shareholders of record as 

of 22 August with payment date of 8 September. Pending additional details regarding CIC’s 1H14 results, we maintain our BUY rating. 

Banks: MBT plans to raise PHP20b in LTNCDs. Metrobank (MBT –HOLD) today disclosed plans of issuing up to PHP20b in long-term negotiable certificates of deposit (LTNCD). Other details have yet to be 

set when relevant regulatory approvals have been obtained. 

Banks: Lucio Co buys 37.67% of PBCom for PHP5.98b. Businessman Lucio Co, owner of retailer Puregold Price Club Inc (PGOLD – BUY) and holding firm Cosco Capital Inc (COSCO – Not rated) yesterday bought 181m common shares of mid-sized commercial bank Philippine Bank of Communications (PBC – Not rated) for PHP5.98b or PHP33/sh, a 48% discount from PBC’s last closing price of PHP64. This represents 37.67% of PBC post capital stock issuance which will raise outstanding shares 60% to 481m shares. As of 1Q14, PBC ranked 18th out of 36 Philippine commercial banks by asset size with PHP59b in assets, PHP27b loans, and PHP48b deposits. It recorded PHP37m and PHP1.6b net earnings in 1Q14 and FY13, respectively. PBC operates with 71 branches and 160 ATMs located nationwide. This transaction should boost PBC’s capital adequacy ratio of 10.8% in 1Q14, just hovering near the 10% minimum prescribed by the central bank. 

LTG to close gap?

LTG closed last Tuesday with 3.79% gain. On the daily chart below, it was able to breakout from the 15.14 resistance which is the 23.6% Fibonacci line. The last candlestick seen below is a solid green candle which indicates that there's a strong buy from the opening of the market until it closed. This also gives a higher probability that there may be a continuation of the price to go up on the next trading day. Also the price have closed above the 38.2% Fibonacci resistance line which now the newly found support.

Observe also on the 2 white circles on the chart below. Those are gaps created through strong selling pressure on the previous trading days. I hope these gaps will be closed on the following days so that everybody will be happy. :)

Take note that the RSI or Relative Strength Index is currently valued at 69 and near overbought level. Most traders take profits or sell some of their positions once it reaches overbought. Also the price is approaching the next resistance at 16.44 or the 50% Fibonacci level.

Caveat!

Stock in Focus: HOUSE

8990 Holdings Inc. (HOUSE) plans to take advantage of the housing backlog in the country, by planning to build a total of 64,000+ units by the year 2022.

HOUSE offers a low-cost housing, with units ranging from as low as PHP 450,000 to PHP 1.25 million, targeting the OFW market, as well as the BPO employees with an average salary of about PHP 25,000 per month (considered as the lower middle class of the market). For as low as PHP 25,000 downpayment (2% of the package), people can already acquire a 13 sq.m house, with an interest rate of only 8.5% (first 4 years) and 11.5% (on the 5th year).

HOUSE has a low default rate of only 4-5%, but we remain cautious given the size of receivables of the company. The profile of the buyers likewise poses a concern, with a possibility of rising default levels from the buyers of HOUSE properties. HOUSE mainly caters to low-income segment, with an average salary of PHP 25,000 per month.

In terms of the land bank of the Company, it is significantly low (250-hectares of landbank), compared to its peers. In the first quarter of 2014, HOUSE reported robust growth, growing its Net Income by 30% to PHP 933.6 million, on track to have a banner year of about PHP 3 billion this year, equivalent to a 55% growth from the previous year.

PinoyInvestor’s Recommendation

We revise our Fair Value and Target Price estimate to PHP 9.30 per share, with the assumption that HOUSE achieves its target by 2016, giving a 12% upside from the current share price. We, however, remain cautious on the company due to the possibility of rising default rates as mentioned above.

- PinoyInvestor

Market Talk (GTCAP, HLCM, LRI, ICT)

Banks: BSP to set uniform loan pricing benchmark this year. The central bank of the Philippines (BSP) is reportedly going to set a uniform market-based benchmark to price loans and will issue a circular within the year. The new benchmark is said to be similar to the UK’s LIBOR which is the average interest rate for banks’ overnight transactions. The proposal is currently under review as the BSP waits for comments from banks. At present, lenders use different benchmarks such as the 91-day Tbill which at the last auction was at at 1.2%, or the SDA rate, pegged at 2.25%. 

Consumer durables: Vehicle sales jump 25% in 1H14. Data from the Chamber of Automotive Manufacturers of the Philippines Inc. (CAMPI) and the Truck Manufacturers Association showed that in 1H14, vehicle sales jumped 24.9% YoY to 108,957 units. Passenger car sales surged 44.9% to 40,609 units while commercial vehicle sales went up 15.5% to 68,348 units. For June alone, vehicle sales grew 27.8% to 19,622 units. Passenger car sales soared 100% to 8,278 units while commercial vehicles sales rose 12.2% to 11,344 units. Toyota Motor Philippines, a subsidiary of GT Capital Holdings (GTCAP – HOLD), remains the market leader with 44.5% market share with sales of 48,512 units in 1H14. Strong demand for passenger cars was evident amid aggressive product launches and marketing for vehicle brands. For FY2014, CAMPI is looking at industry sales of 230,000 units.

Cement: HLCM, LRI mulling over combination of businesses. Holcim Philippines Inc (HLCM – BUY) and Lafarge Republic Inc (LRI – BUY) disclosed their respective board of directors authorized the exploration, study and consideration of the combination of their businesses to avail of the resulting synergies and opportunities and subsequently determine optimal structures to implement such combination. It is contemplated that LRI’s Bulacan and Norzagaray cement plants together with their respective related assets, and LRI’s interest in its subsidiary Lafarge Iligan Inc be excluded from the combination and considered for divestment to interested third-party buyers. This is in relation to the earlier announcement by the firms’’ respective parent companies Holcim Ltd and Lafarge SA in April that they are considering merging their respective operations. 

Ports: ICT cancels contract for KCT in India. International Container Terminal Services Inc (ICT – HOLD) cancelled its container port agreement with L&T Shipbuilding Ltd. for the management and operation of the Kattupalli Container Terminal (KCT) in Tamil Nadu, India. ICT says the cancellation of this contract has no effect or influence on any of ICT’s other operations and it will continue to actively search for opportunities in India. ICT will be reimbursed for the license fee it paid to operate the terminal. 

-ATR Kimg Eng

Market Talk (SECB, CHIB, NIKL)

Banks: SECB raises PHP10b in Tier 2 issuance. Security Bank Corp (SECB – BUY) raised PHP10b in Basel III-compliant Tier 2 notes. The coupon rate was set at 5.375% with a tenor of ten years and call option on the fifth year. Issue date is on 11 July. We expect capital adequacy ratio to rise to 18% in FY14. 

Banks: CHIB gets BSP approval for dividends. China Banking Corp (CHIB – HOLD) has received central bank (BSP) approval to issue PHP1/sh cash dividend or PHP1.6b, a 31% payout ratio based on PHP5.1b FY13 earnings and 8% stock dividend. At the current price, this translates to 1.8% dividend yield. Record and payment dates have yet to be set. 

Mining: DENR authorizes disposition of NIKL subsidiary’s limonite ore stockpile. Nickel Asia Corp (NIKL – HOLD) disclosed it received a letter from the Department of Environment and Natural Resources (DENR) last 1 July stating NIKL’s wholly-owned subsidiary Hinatuan Mining Corp (HMC) is authorized to dispose of nickel ore stockpiles in Manicani Island in Guiuan, Eastern Samar. The stockpiles, composed mainly of limonite ore, resulted from HMC’s operations in late 1990s which was subsequently suspended due to social issues and has remained on a care and maintenance status. Studies will be conducted by the company to establish volume and nickel grades of the stockpiles preparatory to determining shipment schedules.

-ATR KIM ENG

Market Talk (MPI, SCC)

Conglomerates: MPI subsidiary acquires majority of Easytrip. Metro Pacific Tollways Development Corp. (MPTDC), a subsidiary of Metro Pacific Investments (MPI–BUY) said it acquired equity interest equivalent to 50% and one share of the outstanding capital stock of EasyTrip Services Corp (ESC) amounting to PHP103m. The acquisition was through subscription to new shares of ESC and purchase of shares from Egis Easytrip Services SA (EGIS). ESC operates the toll collection system of North Luzon Expressway. The acquisition will allow MPTDC and EGIS to manage and expand the business of ESC.

Mining/ Utilities: SCC loses local tax case. Semirara Mining Corp (SCC – Under review) disclosed an adverse ruling from the Regional Trial Court (RTC) of Makati branch 137 stating their appeal has been denied and it is liable for business tax for the portion of its coal sales consummated at Calaca, Batangas in the amount of PHP67m. However, the RTC judge is directing the municipal assessor to make a re-assessment to conform with the proper sales allocation in accordance with the rules and regulation of the Local Government Code. The assessment should only be based on the portion of the coal sales which were consummated in Calaca, Batangas. SCC will file a motion for reconsideration before the RTC. This is likely to delay a final decision on the case.