15 december 2012 volume 1 no. 16 he...

Bellwether

he Fortnightly on Market Action and Outlook

15 December 2012Volume 1 No. 16

STOCK WATCH

u GT CAPITAL’S TARGET PRICE TO PHP721/SHARE

u SCC’S 17% EARNINGS GROWTH IN 2013 TO PHP7.2BN

Upgrading GT Capital’s target price to Php721/share

Further yield curve downshift

Equity value rises on consolidation and expansionWe’re upgrading our target price to Php721/share from our last DCF valuation of Php615/share in table 1 on page 3. This was based on the slightly lower than the average EV/EBITDA multiple of RP conglomerates, 9-10x in tables 2 and 5 on pages 3 and 5, respectively. Earnings driver is the consolidation of Toyota Motor Philippines Corp. (TMP) and Global Business Power Corp (GBPC). by next year. These two dominant industry players complement the organic growth of associates and subs in banking, insurance and property. We expect the full year impact of incremental attributable earnings from these two outfits in 2013. GT Capital Holdings Inc.’s (GT Cap) ownership of TMP will rise to 51% from current 36% and GBPC to 63% from current 51%,

GSM PM CLOSEDecember 7, 2012

1.29yr 1.50% unchanged3.90yr 3.65% unchangedDealt @ 3.60% for Php81Mn5yr 3.80% unchanged9.12yr 4.20% unchanged9.28yr 4.20% unchanged18.78yr 5.485% to 5.47% for Php5.056Bn

Note: GSM is Government Securities Market

GSM PM CLOSEDecember 7, 2012

23.19yr 5.59% (0.01 bps down)Dealt @ 5.60% to 5.585% for Php198Mn

RTB TradesDecember 7, 2012

25yr 5.585% (0.005 bps down)Dealt @ 5.60% to 5.575% for Php4.769Bn

We expect rates to further drop until year end despite the recent bounce in the short end of the yield curve due to lack of debt supply and inflation already hitting the low end of the full year target. The recent uptick was due to the Bangko Sentral ng Pilipinas’ (BSP) decision of holding key rates steady after four consecutive cuts equivalent to 100bps to 3.5%. Most traders already locked-in in anticipation of BSP’s decision, causing the yield curve to go up by an average of 8 basis points (bps). After the BSP’s decision, traders then repositioned aggressively, pushing yields downward by an average of 4 bps. That is why week-on-week, the yield curve softened and the market was still up by 4 bps. Month-on-month,

yields on government securities fell by an average of 8.75 basis points (bps) because of November’s weak inflation only reaching 2.8%, well below the 3% market expectation. The medium term debt papers rallied the most, led by the 10-year debt paper down by 42.37 bps to 4.1750%. The 4-year Treasury bond (T-bond) also slid by 34.17 bps to 3.6009%. The 182-day T-bill dropped 20.01bps to 0.6500% as well as the 364-day T-bill which slipped 22.10 bps to 0.9000%. In contrast, the 91-day Treasury bill (T-bill) bounced upwards as it rose by 22.50 bps to 0.3500% due to the decrease in demand for short term debt papers.

Continued on page 2.

respectively. At our EPS estimate of Php45/share next year -- Php7.2bn earnings (to common) --which is aligned with the consensus of Php45/share, PE at the last price of Php600/share stands at 13x.

Market dominance TMP has a 35.7% market share, the largest in the local vehicle market, with a 9mo2012 topline of Php52bn. GBPC has a 40% market share of the country’s 2nd largest island grid, Visayas. An expansion of 82MW for Cebu Energy Development Corp. (CEDC) and 150MW for Panay Energy Development Corp. (Panay Ener, ready by 2014, will further raise that market share to slightly half of the Visayan grid’s 1,500MW installed capacity. TMP and GBPC’s market shares have grown from 33% to 36% and from 33% to 40%, respectively, in 2011 to this year.

u DMC BUILDS UP MINING TO 28% OF OUR NAV/SHARE ESTIMATE OF PHP58.00

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15 December 2012 | Volume 1 No. 16

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Majority of earnings While Metropolitan Bank and Trust Company (Metrobank) will continue to be the majority of GT Cap’s earnings at 45%, TMP and GBPC will chip in about 43% (combined) of 2013 earnings. We estimate Federal Land Inc. (Fed Land) and Axa Life Insurance Corp. (Axa) will each have a share of 9% and 3%, respectively. We expect full year earnings to equity holders of the power outfit to reach Php2.9bn. That’s on kilowatt hour (kWh) sales of 1.6bn, up a quarter from 2012’s slightly over 1bn kWh with the full year run of 89.3%-owned 164MW Panay Energy and 52%-owned 246MW CEDC.

Strong WESM and car salesWe believe GBPC’s 2013 peaking power sales (spot 20% and 80% contracted) could average up realized selling rates to as high as Php15/kWh on the continuing WESM spot price bonanza. Based on GBPC’s Php14.7bn total revenues, we estimate it already achieved said selling price. Management earlier projected the 2012 average selling price could be Php12/kwh. On the other hand, TMP’s earnings may grow 15% next year to Php3.4bn based on guidance. Axa will be steady while Metrobank will grow 16% to Php15bn by consensus. TMP’s earnings in 9mo2012 were up 41% to Ph2.46bn, outpacing revenue growth of 28% to Php52bn. This feat was due to sales volume growth of 17.2%, a favorable model mix, and the

normalization of vehicle and parts supply. Next year, TMP’s strong sales in 9mo2012 of 28% will likely normalize to 22% on base effect and undisrupted parts flow.

Metrobank’s earnings not necessarily lower with Toyota divestmentAlready, GT Cap added 15% (equal to 2.3m common shares) to its existing Toyota shareholdings of 21% based on a disclosure. It was a deal with Toyota’s parent Metrobank worth Php4.5bn. Metrobank’s interest in TMP will eventually be down to 19% from 49%, a move that does not necessarily mean lower earnings for the bank as the cash proceeds face equally attractive reinvestment opportunities in the money market.

Election year good for the vehicle assembly businessThe automotive industry association Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) forecasts a growth of 8.7% to 154k units this year, a reversal of the 4% drop in 2011. Last October, the CAMPI revised its 2012 unit sales forecast higher to 185k on the view the fourth quarter will show an outperformance, notwithstanding a weak start early in the year due to the 3rd quarter 2011 supply limitations. The industries 9mo2012 sales were 6% above last year to 112k units. Next year is promising as the recent election years in the country had seen sales volume growth of 18.4% and 28.6% in 2007 and 2010, respectively. In the past 7 years, it was only in 2011 that sales volume dropped 3% and that was due to a disaster-related supply limitation. The Philippine automotive market grew at a compounded annual growth rate (CAGR) of 10.5% between 2006 and 2011. In the 10 months of this year, growth stood at 7.5% year-on-year (y-o-y).

Full year earnings impact of Panay and CEDCThe full year earnings impact of two power plants of GBPC -- 164MW Panay Energy (in Iloilo) and 246MW CEDC (attributable capacity of 52%) commissioned in 1Q this year -- is expected in 2013. These start-ups ended this year the rotating brownouts that frequented the Visayas region.

Strong Volume and Selling PricesGovernment predicts peak demand in the Visayan grid from 2009-2030 will grow the fastest, 4.9% versus 4.41% for Luzon and Mindanao’s 4.86%. Until 2016, Visayas will be well supplied in terms of electric power, currently at 2,393MW, above that of Mindanao’s electricity supply of 1,971MW. El Nino is expected to return while aging plants in Luzon will make them susceptible to unplanned downtime, affecting the Visayan grid. Peak demand growth, hot temperature and forced outage in Luzon could keep spot prices highly supply-sensitive. Thus we believe the combination of robust selling prices and increased volume could mean a 22% increase in net fees to Php23bn and earnings of Php3bn for GBPC in 2013. GBPC, in 9mo2012, posted earnings of Php2.0bn or an 89% growth year-on-year on net fees to GT Cap worth Php8.4bn. Further, our DCF valuation has been boosted by the impact of increased capacity of the power business. The Toledo plant was contracted with Atlas Mining’s Carmen Copper as off-taker as the latter expands its daily tonnage to 60k from 40k to start production in 2Q2013. p

GTCAP Stock DataPrice (Php) 664.00Market Cap (Php Bn) 104.91Outstanding shares (Mn) 158.00PE 2013E (X) 13.00Price to Book (X) 3.00

Source: Bloomberg

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Mining investments are too young to fully replace lucrative contract with Benguet Corp (BC). We forecast DMC might make Php500mn earnings contribution in 2013 from the Acoje Nickel Mine (ENK), where it has a 60% ownership. That amount, however, hardly replaces total earnings from nickel mining with BC, which in 2010 reached a high of Php1bn. It is also not enough to tilt back earnings to pre-Maynilad divestment to Marubeni Corp., where DMC gets a yearly share of 42%. Maynilad’s 14% of DMC’s Php7.2bn 9mo2012 earnings or Php1.9bn and is the second biggest earnings contributor to flagship coal mining and electricity arm, Semirara Mining Corp. (SCC) with total earnings contribution of Php2.8bn. Nickel mining operations are separate from coal mining which is housed under SCC. DMC’s nickel mining income was hugely sourced from a nickel contract mining with BC, but that expires this year. ENK owns the Acoje mining tenement which has nickel ore reserves of about 70m tons, 20m of which are high grade. DMC, through ENK, is loading its first shipment of high grade nickel this month after DMC took over as owner and sees to make $358k in

profits (Php15.3mn) on said shipment. Next year, the Acoje mine, located up in the mountains of Zambales province, will ship 1.8m tons of nickel ore. Gross profit margin is $13/ton or about Php1bn; less overhead of Php100mn yields profits before taxes of about Php500mn, attributable to DMC’s 60% interest. Acoje is the lone operating nickel mine of DMC after it exits this year as a contract miner of BC’s Sta. Cruz nickel mine, in Sta. Cruz, Zambales province.

Bullish on mining DMC is stepping up its mining acquisitions with an earlier reported capex of Php3bn. It is eyeing 17% of the Berong Nickel mine, which has mining rights over three areas in Palawan namely: Berong, Ipilan and Ulugan, with total mineable reserves of 52m tons. That deal could be worth $5.5mn or Php237mn, but whose structure is not yet clear and follows the earlier $50mn acquisition of 60% of ENK, with which it had a contract mining agreement prior to the acquisition. DMC may buy directly into Berong or at the parent level of Toledo Mining Corp. DMC may spend a total of $15mn maximum for this deal that may give it at least a cumulative interest of 34% in Berong and Toledo Mining Group, combined. Berong is owned by SM Group’s mining arm, Atlas Mining, where the Consunji family already has a direct equity stake of 5%. Already, DMC has acquired the 17% shareholdings of Deintree Resources in Berong Nickel for $5.5mn. The earnings picture in 2013 will depend on just how

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DMCI Holdings Inc. (DMC)builds up mining to 28% of our NAV/share estimate of Php58.00

DMC Stock DataPrice (Php) 52.50Market Cap (Php Bn) 138.88Outstanding shares (Bn) 2.66PE (X) 11.00Price to Book (X) 3.61

Source: Bloomberg

much DMC’s earnings share in Maynilad will shrink after its divestment of 16%, down to 25%. Maynilad’s earnings contribution to DMC amounted to Php1.9bn in 9mo2012, above the Php1.5bn a year ago. We estimate a Php13bn reduction in DMC’s net asset value as the result of its divestment in Maynilad. DMC made Php7.9bn in earnings (to common), up 12% year-on-year (y-o-y), but expects the full year to be lower than the Php10bn guidance due to the weakness of the coal mining business (weak prices specifically) and protracted rehabilitation of electricity arm’s results, Semirara Mining Corp.

NAV valuation Our net asset value estimate of DMC of Php58/share will be sensitive to the future LME spot price nickel as it will drive the valuation of the mining portfolio whose nickel ore reserves we priced at $18,500/ton, with the following: assumptions-- 1.2 g/ton grade estimate, 120m ton mineable reserves (not joint ore reserves committee (JORC) certified, but based on company data), payable factor of 0.15 given the low grade and depressed LME spot price. Also, NAV will rise with the accumulation of more equity stakes in the mining portfolio using the Php3bn budget, Php600m of which has been disbursed. There is no earnings guidance for 2013, but net profits by consensus stands at Php14.35bn for a PE of 11x. For 2012, Php10.9bn consensus estimate may not be achieved due to the weakness of coal mining results. p


Bellwether



The Bellwether is a fortnightly research on market action and outlook by the Investment Advisory Group of First Metro Investment Corporation. The content of this publication does not represent the official view of First Metro, but those of the author. The content of this publication is for information only, whose accuracy/completeness is not guaranteed. This is not a personal recommendation, offer or solicitation to buy/sell. Any price and company earnings estimate is indicative only.

For any comments or suggestions, please write to the Investment Advisory Group43rd Floor, GT Tower International, Ayala Ave. cor. HV dela Costa St., Makati CityTel: +632 858 7900 | Fax: +632 840 3706www.firstmetro.com.ph

Cristina S. UlangResearch Head(632) 858 [email protected]

Basil Jason L. GoResearch Analyst(632) 858 7900 loc. [email protected]

Patricia L. DalusungResearch Associate(632) 858 7900 loc. [email protected]

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MARKET STATSFor the week ending December 7, 2012

Top Gainers Top Losers

Stock Price % w-o-w change Stock Price % w-o-w

change

MEG 2.79 11.16% EDC 6.85 -2.97%RLC 20.90 10.00% PCOR 10.40 -1.89%AC 520.00 8.06% BEL 5.00 -1.77%BDO 76.75 7.42% DMC 53.95 -1.55%BPI 95.25 7.02% SM 868.00 -1.03%

PSEi Value % w-o-w Change

Closing 5,794.20 2.73%High 5,797.93 2.62%Low 5,613.97 1.05%Value T/O (in mn Php) 40,700.23 32.42%Foreign Buying (mn USD) 110.06 -717.28%

Central bank actions seen to influence stock movements this week

In the week ending December 7, 2012, momentum trend continues to be in favour of the bulls, pushing the Philippine bourse higher. The PSE index gained 153.75 points (+2.79%) to finish at its 36th record peak of 5,794.20. The PSEi is now up 32.5% YTD. Average daily value turnover for the week was at P9.72 b. Foreigners were net buyers by P4.5 b. Indeveloped markets, US equities closed the week mostly higher on upbeat jobs report and hopes for a ‘fiscal cliff’ deal. For the week, the Dow rose 0.99%, the S&P gained 0.13%, while the Nasdaq slipped 1.07%.

Moving forward this week, central bank actions (of both the US and the PHL) are seen to influence stock movements this week. News flows due for the week include FOMC meeting, announcement and forecast, PPI, CPI, Industrial production, and jobless claims. On the local front, the Monetary Board’s last meeting for the year is set on Thursday. Meanwhile, we continue to see momentum towards year-end to be in favour of the bulls. However, the market has been trading on stretched multiples. In addition, technical indicators also point out to an overbought market. Hence, we remain to be firm that a pullback is imminent near term.

MARKET REVIEW & OUTLOOK

Flat earnings in 2012 at Php6bnWe estimate SCC likely made slightly more than Php6bn in net profits this year, flat versus year ago’s Php6.0bn. 9mo2012 earnings were down 9% to Php4.7bn on weak coal prices, doing Php2,700/ton from year ago or 20% lower. There was also the prolonged rehabilitation (rehab) of plant 1, a 300MW coal-fired unit that was supposed to go commercial as early as last August but is still doing reliability testing. Part of the test run is the fine-tuning of the fuel mix (imported coal mixed with SCC’s low grade coal) to raise load factor up to 280MW. Plant 1 is running at 230MW, below the target capacity after the fuel mix added only 20MW additional running capacity post-rehab.

2013 Php3bn earnings from Calaca is conservative. Next year, SCC’s power company Calaca might make Php3bn on two units of 300MW each, running at a combined 485MW or load factor of 80%. Right now, 220MW is currently contracted with Meralco with an additional 160MW as soon as plant 1 runs. The rest of the 100MW (out of the 480MW target) are for other smaller off-takers and the spot market.

At 480MW running capacity available in ten months (net of downtime), we estimate sales volume to reach 3,300GWh. At a net profit of Php1.00/kwh, such sales volume translates to maximum earnings of Php3.3bn.

SCC is cheap Coal shipment is programmed at 7m tons in 2013, same as last year, with 2m going abroad (China and India) and 5m tons for local clients (power plants San Miguel and Metrobank’s Global Power and cement plants Eagle and La Farge Inc., among others). Next year, consolidated coal and power net profits may reach Php7.2bn with coal mining contributing about Php3.9bn and a maximum Php3.3bn from power. We estimate Php567/ton ($14.2/ton) or 21% net profit margin from the coal shipments with Php2,700/ton average selling price for 2013. SCC is cheap at 11x.

Coal operating contracts (COCs)Semirara was awarded by government two COCs in Visayas, recently. Yet to be explored for resource estimate, these COCs complement existing mineable coal reserves of 170m tons in the island of Semirara, with mine life of 25 years. The existing mine life may extend for another 25 years with SCC’s plan to do underground coal mining with a Chinese partner on its coal-rich Panian mine, where mining depth has already reached 300 meters below sea level. Our target price is Php288/share or a 31% upside based on a DCF we did earlier capturing the expansion plan of 600MW. p

Semirara Mining Corp.’s (SCC)17% earnings growth in 2013 to Php7.2bn

SCC Stock DataPrice (Php) 223.00Market Cap (Php Bn) 79.44Outstanding shares (Mn) 356.30PE 2013E (X) 11.00Price to Book (X) 5.21

Source: Bloomberg

15 december 2012 volume 1 no. 16 he...

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