29 november 2012 volume 1 no. 15 he...

Bellwether

he Fortnightly on Market Action and Outlook

29 November 2012Volume 1 No. 15

STOCK WATCH

u SMC EYES PHP200BN BORROWINGS; WILL USE PF’S PHP7BN FOLLOW-ON FOR INFRA FUNDING

u TOUGH BASEL 3 CAPITAL CALL PROMPTS LTG TO SHED PNB-ALLIED BANK MERGER AMBITION

San Miguel Corporation (SMC) eyesPhp200bn borrowings

Further yield curve downshift

SMC sees 10% earnings growth in election year 2013Food giant and increasingly infrastructure-geared conglomerate SMC sees 2013 earnings up 11%. We estimate earnings to reach Php27.5bn attributable to common on potential reported earnings of Php37.7bn. SMC reported 9mo12 earnings of Php19.2bn to equity holders, 61% up year-on-year (yoy), led by power and brewery businesses. The view is that election spending will buoy the food and beverage (F&B) business. F&B comprised rhum, brandy, gin, beer, meat, poultry and branded consumer products (BCP). BCP, in turn, are the Purefoods’ processed and canned meat products, Magnolia chicken and dairy products. The product assortment consists of hotdogs, luncheon meat, ham, sausage, corned beef, ice cream, cheese, chicken nuggets and drummets.

GSM PM CLOSENovember 29, 2012

1.29yr 1.50% unchangedDealt @ 1.40% to 1.075% for Php893Mn3.90yr 3.675% unchangedDealt @ 3.625% for Php1.072Bn5yr 3.80% unchangedDealt @ 3.80% for Php1.243Bn9.12yr 4.40% unchanged9.28yr 4.45% unchangedDealt @ 4.39% to 4.325% for Php334Mn 18.78yr 5.535% (0.03 bps down)Dealt @ 5.563% to 5.53% for Php12.707Bn

Note: GSM is Government Securities Market

GSM PM CLOSENovember 29, 2012

23.19yr 5.70% (0.05 bps down)Dealt @ 5.72% to 5.65% for Php1.293Bn

RTB TradesNovember 29, 2012

25yr 5.67% (0.055 bps down)Dealt @ 5.7175% to 5.65% for Php13.049Bn

Falling inflation rate and lack of new debt supply will cause a further downshift in the yield curve before the year is out. Inflation sustained its downtrend with the November rate coming in below expectation at 2.8% versus the widely predicted 3%. There is a last T-bill auction for this year in the month of December while the 10-year T-bond auction showed an oversubscription (2x against the awarded Php9bn) where the rate fell 30 basis points (bps) down to 4% from 4.4%. In late November, government securities fell by an average of 27.59 bps month-on-month (m-o-m). The medium to long term debt papers rallied the most with the 7-year Treasury

bond (T-bond) leading the drop by 58.59 bps to 3.9141% m-o-m, followed by the 4-year T-bond, down 49.56 bps to 3.6241%, and the 5-year T-bond which slipped by 48.33 bps to 3.7417%. Meanwhile, the short end of the curve had a smaller change with the 91-day Treasury bill (T-bill) declining by 3.87 bps to 0.6113% and the 182-day T-bill down by 0.72 bps to 0.6438%. Strong 3q12 GDP of 7.1% makes it less urgent for a BSP policy rate cut, but the continuing peso strength could mean policy action against peso speculation. These may entail caps or capital charges on peso bets via NDFs.

Continued on page 2.

Earnings profile to even out in two yearsFood and beverage’s 32% share in SMC’s earnings, the most dominant, will reduce to a quarter in two years. Earnings from investments in fuel and oil, power and infrastructure will register going forward. By 2014-2015, there could be even profit contributions in all the four businesses at about a quarter each. The ongoing and planned investments are as follows:

� $2bn refinery upgrade (fully funded) of Petron Corp. (PCOR) to make Php40bn EBITDA in 2014.

� That EBITDA is half of SMC’s current EBITDA of Php80bn or a third of 2014 EBTDA Php120bn

� $1.2bn capex for the coal-fired 600MW power generation asset expansion in Mindanao (yet to be

u TA IS RP’S BIGGEST WIND ENERGY PROVIDER IN 3 YEARS, TO SPEND PHP51BN FOR 400 MW CAPACITY

Bellwether


29 November 2012 | Volume 1 No. 15

(San Miguel Corp... continued from page 1)

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funded at the operating sub at $2m/MW) and whose coal fuel will be coming from three coal mines, each with existing coal operating contracts: Daguma, Bonanza and Sultan, all in South Cotabato with an estimated mine life of 20 years. SMC is validating the coal reserves (reportedly capable of fueling 3,000MW capacity in 20 years) through a contracted exploration undertaking now ongoing, after which mine development will start.

� Php100bn project cost for the overall infrastructure portfolio, 30% of which will be equity from the SMC-led consortium. SMC is sinking Php20bn for the connector roads (NLEX and SLEX -- passing thru Manila), an amount bigger than those for MRT Extension to Bulacan and LRT 1 South extension, the latter amounts undisclosed.

� Php8bn for the Boracay Airport development (yet to be funded).

� Php2.5-Php3bn Tarlac, Subic, Pangasinan Expressway-TPLEX- (fully funded).

� Based on company guidance, the aviation business will break even next year. SMC earlier said it is infusing Php20bn capital, part of the funding for for the 65-plane refleeting program, the figure has gone up from reportedly 57 planes.

SMC to ramp up leverageSMC may have to borrow up to Php200bn more for the project pipeline. That will only be half of the estimated maximum Php400bn. That’s how much borrowing headroom its agreed 4.5x net debt to ebitda ceiling with creditors would allow. Right now, SMC has interest bearing debt of Php314bn and a net debt of Php129bn (debt net of cash) while 9mo2012 net debt to ebitda ratio stood at 2.66x.

Food and powerSMC’s earnings upside will be in power and food businesses. The gin business is showing signs of recovery, 3Q12 volume was up 14% for GSM. It trimmed net losses for the period by 26% to Php393m from last year’s net losses worth -Php532m.Volume recovery at its gin-making unit GSMI and beer brewer SMB are seen to pick up next year from the 9mo2012 drops of -7% to 17.8m cases and -1% to 164m cases, respectively. The beer volume drop was true for both local and international operations, -1% to 133m cases and 30m cases, respectively.

Branded consumer food group’s follow-on offer (FOO) on forward PE of 13xPurefoods’ gross profit margin (GPM) has recovered on improving raw materials costs. GPM rose to 19% from 7.5% and 15.2% in 2Q2012 and 1Q2012, respectively. GPM recovery will be sustained by products shifting to higher margin branded/value added products, which last year comprised 30% of total operating income worth Php6.2bn. Currently, branded products are already half of the Php69.4bn 9mo12 topline from the previous 30%. The product shift reduced the share of the more volatile agro-industrial products--feeds, poultry, hogs, and flour or the so-called commodity-based products -- to 50% from previously 70%.

Purefood’s 2013 earnings growth of 11% will mark emergence from flat 2012 earnings2013 earnings growth of Purefoods is seen at 11%, which means earnings may reach Php4.4bn. This year, projected earnings is Php4bn. We calculate that to bear a Php20.94 EPS2012, fully diluted, or an implied price of Php270/share for the FOO at forward PE of 13x. Indicated a price range for the FOO was Php240-Php300/share on 11x-14x PE. Proceeds are expected at Php6bn-7bn and will go to infrastructure funding, in as much as Purefoods is a cash cow with EBITDA of Php8bn. Thus, it could take care of its own grains terminal’s capex of Php3bn, an efficiency initiative involving storage, hedging capacity for raw materials such as wheat for the flour business, soybean meal, corn for the feedmilling business. Public float rises to 17% from 15%, post-offering. SMPFC’s earnings were flat in 9mo12 worth Php2.9bn versus yearago and will end this year lower at a Php4bn versus 2011’s full year earnings of Php4.1bn. The culprit was a raw materials shortage that had caused input prices to rise due to costly replacements. Cassava is an input to the feed milling business, which is part of the agro-industrial portfolio accounting for 38% of operating income. The flour business, which also relies on volatile imported wheat, accounts for 30% of operating income. Combined, the two business input costs make for half of the overall cost of sales and a highly commodity-price sensitive cost structure. p

SMC Stock DataPrice (Php) 109.00Market Cap (Php Bn) 258.50Outstanding shares (Bn) 2.37PE 2013E (X) 9.91Price to Book (X) 0.84

Source: Bloomberg

Bellwether



400 MW expansionPhinma-led Trans-Asia (TA) is raising an estimated Php51.6bn in debt and equity to cover a 400MW three-year expansion in wind energy to make it the country’s largest wind energy provider. Wind power development costs $3m/MW, according to the turbine blades manufacturer of Trans-Asia from Spain called Gamesa.

More than the national targetTA’s target 400MW capacity will be above the national target of 200MW for the wind power component of the country’s overall 760MW national renewable energy capacity target in the next three years as provided by law, the Philippine Renewable Energy Act. TA’s first is the 54MW San Lorenzo in partnership with a Singaporean group. It will begin construction before yearend and declare commerciality in 2014.

Follow-on offer By that time (2014), TA will have a follow-on offering to raise more of the equity component of the project cost while the rest will be project financing, the longest of which--in the history of Phil project financing--will be San Lorenzo’s 25-year deal with reportedly two of the country’s major banks. Two more projects (wind also) are slated in the same island to add to San Lorenzo’s energy output of 127 Gwh per year at load factor of 30% (the norm for wind projects) priced at the feed-in tariff of Php8.53/kwh, the level approved for all participants in the next 20 years.

Extremely profitableTA will not disclose the net profit margin per kwh of wind energy except to say that post debt payments, energy sales will be extremely profitable. GAMESA representatives estimate a minimum of 5 cents worth of opex for wind energy (Php2.15/kwh) but TA said it is much lower than that as hydro energy’s cost to produce (to which wind is comparable) amounts only to Php0.50/kwh of electricity. San Lorenzo will be connected to the national grid and is thus free of off-take. TA officials explained once electricity passes through the grid, there’s no way of knowing who the users are, without clarifying categorically if San Lorenzo’s capacity will in effect be merchant and bound to the WESM. It is a must dispatch, due to its low cost nature.

SubsidySince feed-in-tariff may at times be higher than the WESM, a subsidy fund/mechanism supervised by the government and whose funds will be charged to the consumers, will plug the gap between the spot price and feed-in-tariff. The feed-in tariff for the Philippine Renewable Energy Act was approved last month and set to be implemented in November 2012.

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Trans-Asia Oil and Energy Development Corporationis RP’s biggest wind energy provider in 3 years, to spend Php51bn for 400MW capacity

TA Stock DataPrice (Php) 1.12Market Cap (Php Bn) 4.99Outstanding shares (Bn) 4.46PE (X) 8.00Price to Book (X) 0.73

Source: Bloomberg

Half of TA’s energy is windTA’s wind project will comprise about half of the predicted 877MW installed TA energy capacity by 2014-2015 as the present 209MW consist of 20MW geothermal plant in Sto. Tomas, Batangas in partnership with Petroenergy of the Yuchengcos; 135MW diesel-fired, an additional 54MW of IPPA on diesel and coal and an ongoing Php12bn joint venture coal-fired 135MW with the Ayalas with an option for another 135MW worth Php10bn, with ongoing fund raising. TA made Php220mn worth of earnings in 1H2012 and eyes Php400m full year 2012 net profits. PE is 8x on 2013 earnings. p

TA’s wind project will comprise about half of capacity by 2014-2015 as the present 209 MW consist of 20 MW geothermal plant in Sto. Tomas, Batangas.

Bellwether



LT Group may shed banking armLT Group may have to drop a plan to consolidate PNB. PNB’s majority owner, also that of LT Group, is reportedly selling out his control (also of Allied Bank) to BPI at Php96/share--for PNB shares. Mr. Tan is the common majority owner of both PNB and Allied, whose merger awaits the SEC approval after the BSP and PDIC’s nod. The merger also awaits foreign regulator’s approval on the change in ownership of PNB and Allied’s offshore subs and affiliates entailed by the merger. PNB shares climbed to an all-time high last November 20, 2012 at Php84.50/share on turnover of Php688mn prior to its trading suspension last month.

Premium to PNB book Mr. Tan’s selling price of Php96 reportedly at a 14% premium to yesterday’s closing and 66% premium to PNB’s book value (stand alone) of Php57.8/share, net of the deferred charges written off worth Php4bn. We calculate the price tag to carry a PE of 16.16x (PNB stand-alone) based on consensus 2013 EPS growth estimate of 9.4% to Php5.94. Allied Bank is not listed, only its 6.4k preferreds are, convertible to common for total average outstanding common shares of 3.2m. Allied Bank’s book value on fully diluted average shares outstanding is Php8,718.00/share.

Premium of 50% to merged PNB-Allied Bank bookThe rumored price tag of Php96/share for PNB is a 50% premium to our computed book value of the merged PNB Allied at Php64/share. Please see table 1 on page 4. At the swap ratio of 152 PNB shares for each of Allied’s common, the merger will entail 486m new PNB common shares for total 1.1bn shares outstanding of the merged bank. Our computed book value of the merged bank which already captures 2013 earnings and PNB’s Php2bn synergistic benefits of the merger is Php64/share.

Biggest banking franchiseTogether with BPI, the merged PNB-Allied will make it no. 1 in terms of assets worth a combined Php1.4T, past BDO’s Php1.2T, 2nd rank and MBT’s Php954bn as of 3Q2012, the latter will slip to 3rd biggest in asset size. But in terms of loan portfolio, it is still BDO as no. 1, with Php722bn.

Short of Basel IIIThe key consideration for PNB’s sell out could be the tough capital call come Basel 3 implementation in 2014. PNB’s capital adequacy ratio (CAR) dropped to 17.8% as of 9mo12 from 21.7% on some Php4bn deferred charge write-off on its retained earnings, done in 3Q2012. These deferred charges were the unamortized SPV-related losses of the bank. The abovementioned CAR ratio is based on SEC-filing and submitted to BSP still under Basel 2.

But using the stricter Basel 3 capital thresholds, PNB and Allied would seem to have very thin buffers. A third or Php15bn of PNB’s Php45bn gross qualifying capital in 2011 under Basel 2 are tier 2 capital, whereas Basel 3 would cut that share to

LTG Stock DataPrice (Php) 13.00Market Cap (Php Bn) 116.76Outstanding shares (Bn) 8.98PE 2013E (X) 16.16Price to Book (X) 5.73

Source: Bloomberg

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just a fourth or 2.5% of the 10% minimum CAR (before conservation buffer of 2.5%). That means PNB cannot use the entire tier 2 capital of Php15bn for its Basel 3 compliance. In terms of total tier 1 (common equity plus retained earnings and additional paid-in), PNB has Php30bn worth of capital which is 66% of its gross qualifying capital. Basel 3 requires that the share of 66% be raised to 75% requirement or 7.5% of the minimum 10% CAR.

LT Group on trackMeanwhile, we learned that LTGroup’s 9mo2012 Php4.2bn earnings put its 2012 Php7.5bn goal within striking distance. Next year, a 15% earnings growth to Php8.6bn seems achievable for a PE of 13.12x. Growth will come from the property development arm, Eaton Properties, which substantial project completion. Next would be the beverage and tobacco arms, Tanduay Distillers and Philip Morris, even with sin taxes seen at Php20/proof liter and Php10/pack (minimum) taxes for liquor and cigarette, respectively. Tanduay sees volume growth of 5% on election spending to slightly more than 20m cases, with growth coming from its 99% rum market share in the Visayas and Mindanao regions. It added 5 marketing companies this year to boost its distribution outlets to 28. p

LT Group, Inc. (LTG)Tough Basel 3 capital call prompts LTG to eye BPI

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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Table 1.0 Book Value Computation of Merged Bank PNB-Allied Bank9mo12 Combined Capital bn Php 66.20

9mo12 PNB Capital bn Php 38.309mo12 Allied Bank bn Php 27.90

2013 Consensus Earnings Est. PNB bn Php 5.702013E Assumed Flat Earnings Allied bn Php 1.00Projected Capital 2013 bn Php 72.90Cost Savings from Merger (PNB Internal Estimate) bn Php 2.00

Book Value/Share Merged Bank Php 63.50Computation of Total Shares of Merged PNB-Allied BankPNB Allied Bank Share swap ratio 152 PNB Shares per 1 Allied BankPNB New shares to be issued 0.486PNB shares outstanding in bn 0.662Allied Bank shares outstanding in bn 0.0032Total Shares of the merged bank in bn 1.148

Source: FMIC-IAG Research Estimates

Table 2.0 Comparative Analysis

Balance Sheetin bn Php

BPI PNB AlliedMerged PNB-Allied

Merged BPI-PNB-Allied

Rank BDO Rank MBT Rank

Total Assets 867.30 320.70 188.87 509.57 1,376.87 1 1,174.24 2 953.71 3

Total Loans 475.40 130.40 97.50 227.90 703.30 2 722.94 1 481.30 3

Total Deposits 697.16 235.85 142.90 378.75 1,075.91 1 859.85 2 662.10 3

Total Capital Funds 97.53 38.30 27.90 66.20 163.73 1 152.29 2 121.17 3

Source: FMIC-IAG Research Estimates

(LT Group, Inc.... continued from page 4)MARKET STATS

For the week ending November 29, 2012Top Gainers Top Losers

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

change

SMPH 15.56 7.31% BPI 89.00 -4.09%SM 877.00 4.90% JGS 35.90 -2.97%MWC 32.75 3.97% FGEN 23.00 -2.13%TEL 2,586.00 3.44% JFC 104.50 -1.88%RLC 19.00 3.04% DMC 54.80 -1.70%

PSEi Value % w-o-w Change

Closing 5,640.45 1.59%High 5,650.10 1.27%Low 5,555.79 2.22%Value T/O (in mn Php) 30,735.80 2.16%Foreign Buying (mn USD) -17.83 -111.02%

PSEi to pullback givenits rise to recent highs

In the week ending November 29, 2012, the bulls continued to push the stock market to new highs, breaching the 5,600-threshold, on euphoria over stronger-than-expected Philippine 3Q GDP. The PSE index gained 87.46 points (+1.58%) to close the week at its 32nd all time high at 5,640.45. The PSEiis now up 29.01% YTD. Average daily value turnover for the week was at Php8.04bn. Foreigners were net sellers by Php728mn. In developed markets, US equities closed the week higher on fiscal cliff hopes. For the week, the Dow rose 0.12%, the S&P gained 0.50%, and the Nasdaq jumped 1.46%.

Moving forward this week, we expect some pullback on the local bourse which we see as warranted given its rise to recent highs. News flows expected this week include US ISM manufacturing index, ISM non-manufacturing index, construction spending, auto sales, ADP employment report, factory orders, jobless claims, consumer sentiment. Elsewhere, investors will also keep an eye on PMI data, BoE announcement and ECB announcement. On the local front, November inflation is due out on Wednesday. Consensus estimate is for a 3.0% rise, according to Bloomberg consensus.

MARKET REVIEW & OUTLOOK

29 november 2012 volume 1 no. 15 he...

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