Alerts

   John Martin Luciano, CFA

BDO books Php20Bil in additional provisions for COVID-19 BDO disclosed that it has set aside an additional Php20.0Bil in upfront provisions, on top of the Php2.1Bil provisions in the first quarter, in anticipation of the expected economic impact of the Covid-19 pandemic and enhanced community quarantine (ECQ). The bank expects delinquencies to increase this year with the disruption in business activity, tightness in corporate liquidity, lower consumption, and contraction in GDP. As such, it is allocating a total of 170 bps in credit costs. Still, although the bank expects higher NPLs, it expects the actual write-offs and losses to be much less. We believe that the additional provisions is necessary given BDO’s low credit cost in the first quarter. Note that among the banks, BDO’s annualized credit cost in the first quarter was relatively low at 40 bps (vs BPI’s 116 bps and MBT’s 138 bps). With the Php2.1Bil provisions booked in the first quarter and Php20.0Bil in additional provisions, total provisions for year-to-date period amounts to Php22.1Bil. This is already equivalent to a credit cost of ~100 bps (not annualized). Compared to our estimates, this is significantly higher than our forecast of Php12.2Bil in provisions (54 bps credit cost) for the year. Assuming minimal provisions for the rest of the year, this could further drag our 2020 earnings forecast by ~20%. Nevertheless, we view this decision positively as the bank is being proactive in increasing its NPL coverage ratio despite having one of the highest in the industry. Maintain BUY rating We currently have a BUY rating on BDO with a FV estimate of Php122/ sh based on a 1.35X 2020E P/BV. We expect BDO’s earnings to be hurt by the COVID-19 pandemic and the ECQ as these are expected to slow economic activity which will inevitably curtail loan demand and financial transactions. More importantly, we expect some deterioration in asset quality amidst the suspension of business operations in various locations.

   George Ching

MPI sells 34.9% of MPLRC to Sumitomo for Php3Bil MPI announced that it will sell a 34.9% stake in Metro Pacific Light Rail Corporation(MPLRC) to Sumitomo Corporation for Php3Bil. MPLRC owns 55% of Light Rail Manila Corporation(LRMC), which is the operator of LRT-1. With the sale of 34.9% stake in MPLRC, MPI’s effective ownership in LRMC will be reduced to 35.8%. In terms of valuation, based on our estimates, the selling price implies a total equity value for LRMC of Php15.62Bil, a 100% premium to our valuation of Php7.8Bil for LRMC. MPI’s stake in LRMC accounts for 2% of its NAV. The earnings impact of this transaction on MPI is minimal given that we expect LRMC to post losses in 2020 and 2021. Maintaining BUY rating on MPI Due to the sale of its stake in MPLRC, we are raising our FV estimate on MPI by 0.9% to Php6.45/sh. While near term sentiment on MPI will most likely remain negative due to the uncertainties on Maynilad, we believe that concerns are overblown given MPI’s depressed valuation. Based on MPI’s current market price of Php2.83/sh, the company is trading at a 60% discount to its NAV which implies that Maynilad, its toll road business and its stake in the hospital business are already worthless. MPI is even trading at a discount to the value of its 45.5% stake in Meralco (MER’s value is equivalent to 114% of MPI’s current market capitalization). Even if we assumed the worst-case scenario where Maynilad would become worthless, capital appreciation potential based on MPI’s current price is still 107% to Php5.85/sh.

   Justin Richmond Cheng, CFA

May 29, 2020. Reducing estimates. In light of the weaker-than-expected 1Q results, we are reducing our revenue forecast as we assume that revenues will remain tempered in 2H20. Note that we previously expected a v-shaped recovery following a 3 months full-lockdown assumption. However, the full impact of the pandemic appears to worse than what we initially anticipated. In addition, current indications suggest that the situation will most likely take longer to normalize even after the ECQ gets lifted as consumers remain cautious and social distancing measures remain strictly in place. Thus, we expect sales to remain tempered as stores and dealers carrying CIC’s products will likely operate at a lower capacity (e.g. less stores reopened) to save on costs amid low foot traffic. After reducing our sales forecast by 29% and 12% in 2020 and 2021, respectively, we reduced our earnings forecast by 63% in 2020 and 13% in 2021. Our new 2020 earnings forecast now implies a 74% decline from 2019 levels, followed by a recovery (over 300% increase) in 2021. Meanwhile, we also reduced our FV estimate to Php22.8/sh from Php25.8/ sh previously. There is currently no upside to our FV estimate; thus, we are maintaining our HOLD rating on CIC.

   George Ching

May 29, 2020. Maintaining BUY rating on MPI. Due to the sale of its stake in MPLRC, we are raising our FV estimate on MPI by 0.9% to Php6.45/sh. While near term sentiment on MPI will most likely remain negative due to the uncertainties on Maynilad, we believe that concerns are overblown given MPI’s depressed valuation. Based on MPI’s current market price of Php2.83/sh, the company is trading at a 60% discount to its NAV which implies that Maynilad, its toll road business and its stake in the hospital business are already worthless. MPI is even trading at a discount to the value of its 45.5% stake in Meralco (MER’s value is equivalent to 114% of MPI’s current market capitalization). Even if we assumed the worst-case scenario where Maynilad would become worthless, capital appreciation potential based on MPI’s current price is still 107% to Php5.85/sh.

   Richard Lañeda, CFA

We are reducing our FV estimate to Php1.10 from Php1.14 after factoring in lower revenues and net income. However, we are maintaining our BUY rating on FLI due to its attractive valuations. At its current price of Php0.92, upside to our FV estimate is 19.6%. We also note that FLI has the highest exposure to office leasing among property companies that we cover at 40% of its operating income. This benefits the company as FLI continues to fully recognize revenues from office tenants, unlike mall operators which had to give retail tenants rent concessions because of the ECQ and cut rental rates even as the economy reopens.

   John Martin Luciano, CFA

May 27, 2020. we are maintaining our BUY rating on PIZZA and MAXS with a FV estimate of Php8.50/sh and Php11/sh, respectively. Compared to JFC, valuations of PIZZA and MAXS are much cheaper. Nevertheless, we also adjusted our BUY below prices for both stocks to increase the margin of safety for investors given the prevailing uncertainty.

   John Martin Luciano, CFA

May 27, 2020. we are maintaining our BUY rating on PIZZA and MAXS with a FV estimate of Php8.50/sh and Php11/sh, respectively. Compared to JFC, valuations of PIZZA and MAXS are much cheaper. Nevertheless, we also adjusted our BUY below prices for both stocks to increase the margin of safety for investors given the prevailing uncertainty.

   John Martin Luciano, CFA

May 27, 2020. In light of the risk posed by the possible increase in excise taxes and the recent increase in its share price, we are downgrading our recommendation on JFC to HOLD with FV estimate of Php130/sh. We also adjusted our BUY below price to Php100 to increase the margin of safety for investors given the prevailing uncertainty.

   George Ching

May 18, 2020 Reducing estimates, reiterate BUY rating on DMC Due to the reduction in our earnings forecast for SCC, we are reducing our 2020E earnings forecast for DMC by 7.8% to Php8.8Bil. We are also reducing our FV estimate on DMC by 3% to Php8.5/sh. We are reiterating our BUY rating on DMC. the very poor earnings outlook of the company, we believe that much of the negative news is already priced-in. The stock is trading at only 6.2X 20E P/E based on our revised earnings forecast. Capital appreciation is also the most significant at 106% based on our revised fair value estimate.

   Adrian Alexander Yu

May 15, 2020 We also reiterate our HOLD rating on TEL with an FV estimate of Php1,240/sh. We continue to like TEL because of a) the convincing turnaround of its mobile phone business recently; b) their dominant position in the home broadband business; and c) its strong balance sheet.