Alerts

   Adrian Alexander Yu

According to SMC President and COO Ramon Ang, the company has already submitted its proposal to DoTr last month to extend the MRT-7 from North Avenue in Quezon City to San Jose del Monte City in Bulacan. Mr. Ang said that the company is willing to advance the funds for right-of-way acquisition once DoTr accepts the extension proposal. DoTr also mentioned that the MRT-7 project was 49.15% complete as of October and expects to accommodate an estimated 300k to 850k passengers a day once operational.

   George Ching

The government said over the weekend that it is still not asking for the termination of Maynilad and Manila Water’s concession agreement, but wants the contracts amended to remove “onerous” provisions. The government added that it is currently in talks with the water concessionaires, and that there is no need to file cases against the water concessionaires if the latter agree to modifying the concession agreement. Among the provisions in the concession deals that the government wants removed are those that prohibits the government from intervening in rate adjustments and those that require the state to indemnify water firms against losses that stem from regulatory actions. The ongoing talks between the government and the water concessionaires increases the likelihood that both parties can make changes in the concession agreement without the termination of the latter. Given the lack of details, it is difficult to gauge how these changes can impact the operation and profitability of Maynilad and MPI going forward. MPI currently owns 52.8% of Maynilad, and Maynilad accounts for 26% of MPI’s 2019E earnings and 18% of MPI’s NAV. We reiterate our BUY rating on MPI with a FV estimate of Php9.37/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.

   Frances Rolfa Nicolas

MWC’s share price dropped by 10.1% in the past two trading days triggered by President Duterte’s threats against the two water concessionaires in Metro Manila, MWC and Maynilad. Recall that the President said that he would file a case of economic sabotage against the two companies due to alleged onerous provisions included in the respective concession contracts of the two firms. This came after MWC won its arbitration case against the government last week where the latter was ordered to pay damages amounting to Php7.4Bil for breach of obligation specified in its concession contract. Moreover, the President has ordered the drafting of a new contract that would be favourable to the public and the government. In response to the President’s allegations, MWC said that they working on a mutually acceptable manner of implementation of the arbitral award. The company also emphasized that the case was filed due to a violation incurred by the previous administration. Note that there are still no details on how the President’s order will be implemented. This development comes on top on piling regulatory and business risks for MWC including adequacy of water supply and penalties related to the Clean Water Act. As such, we are raising our beta assumption from 0.85 to 1.10. Consequently, we are reducing our FV estimate to Php18.0/sh and maintaining and HOLD rating on MWC.

   George Ching

MPI’s share price has declined sharply by 13.4% in the past two trading days. The sell-off was triggered by the speech of President Duterte where he said he would file economic sabotage cases against officials of water concessionaires (MWC and Maynilad) and ask the Department of Finance (DOF) and Department of Justice (DOJ) to change the concession agreement with the water concessionaires. There are still no details from the DOF and DOJ with regards to how and when the President’s order will be implemented. In addition, MPI has not yet make any statements regarding this matter. Given the lack of details, it is difficult to gauge the impact of this development on Maynilad and MPI. MPI currently owns 52.8% of Maynilad, and Maynilad accounts for 26% of MPI’s 2019E earnings and 18% of MPI’s NAV. Assuming a bear case scenario where MPI would be forced to give up the Maynilad concession without any form of indemnification, our 2020E earnings for MPI will be reduced by 25% to Php13.6Bil while our FV estimate for MPI will decline by 16.3% to Php7.84/sh. We reiterate our BUY rating on MPI with a FV estimate of Php9.37/sh.

   Frances Rolfa Nicolas

House Committee on Legislative Franchises Chairman Franz Alvarez said that his panel has no scheduled hearings until Congress adjourns for the Christmas break on December 20. As such, hearings for the company’s franchise renewal would have to be tackled early next year. House Speaker Alan Peter Cayetano added that ABS’ management is aware of this, as lawmakers need to prioritize the budget and revenue bills. Note that ABS’ franchise is set to expire on March 30, 2020.

   Frances Rolfa Nicolas

President Duterte threatened to file a case of economic sabotage against MWC and Maynilad due to alleged onerous provisions included in the concession contracts with the two companies. This came after the Permanent Court of Arbitration in Singapore ordered the government to pay MWC damages amounting to Php7.4Bil on account of breach of obligation specified in the concession agreement. Note that back in 2017, the arbitration tribunal also ordered the government to pay Maynilad Php3.4Bil damages on the same issue. Moreover, the President ordered Finance Secretary Carlos Dominguez III and Solicitor General Jose Calida to come up with a new water concession contract that is favourable to the public and the government.

   Frances Rolfa Nicolas

President Duterte has renewed his threat to block the franchise renewal of media company ABS. Note that bills seeking to extend ABS’ franchise remain pending in the House of Representatives. Recall that the company’s franchise is set to expire on March 2020.

   Frances Rolfa Nicolas

In a disclosure to the PSE, MWC announced that the Arbitral Tribunal has ruled that MWC has a right to indemnification for actual losses suffered on account of the Republic of the Philippines’ breach of obligation. Recall that MWC filed an arbitration case against the government over failure to reimburse losses after the MWSS imposed a rate cut on the company. Note that the rate cut stemmed from the decision that corporate income tax cannot be recovered from consumers. As such the Tribunal ordered the government to indemnify MWC the amount of Php7.4Bil representing actual losses suffered from June 1, 2015 until November 22, 2019 and pay 100% of the amounts paid by MWC to the Permanent Court of Arbitration and 85% of the company’s other claimed costs. This development bodes well for MWC as this will allow it to recover forgone revenues from the tariff clawback implemented from 2015 to 2017, and other costs paid in relation to the arbitration. However, it remains unclear whether the company will now be able to adjust its tariffs to pass on its corporate income tax to consumers moving forward. Note that the current tariff adjustments do not include recovery of the corporate income tax. We currently have a HOLD rating and FV estimate of Php22.7/sh on MWC. Despite this positive development, other issues such as adequacy of water supply and penalties related to the Clean Water Act continue to haunt the company. Moreover, it may take time before the company be able to enforce and collect the award from the government.

   Adrian Alexander Yu

PLDT Inc. (TEL) said that the company expects to increase its capex in 2020 as it expands its network infrastructure, particularly the 5G network that will be launched early next year. This comes on the heels of 2019’s record capex of Php78.4Bil in order to focus on the company’s fixed and wireless networks. For the wireless side, TEL will build more stations while more backbone infrastructure and completion of the fibering of the cell sites for the fixed line business

   George Ching

Reducing earnings and FV estimates, maintain HOLD rating. As a result of our lower nickel ASP assumption, we are reducing our 2020E earnings forecast for NIKL by 22.4% to Php4.3Bil, and our 2021E earnings forecast by 22.9% to Php3.8Bil. Meanwhile, we lowered our FV estimate for NIKL by 13.5% to Php 3.47/sh. We are reiterating our HOLD recommendation on NIKL. While we believe that the long term outlook for nickel prices will remain positive due to rising EV battery demand and the Indonesian ore export ban, we believe that this has already been priced-in by the market. NIKL’s share price has risen by 49% YTD, outperforming the PSEi’s 4.1% rise during the period. At its current price of Php3.27/sh, upside to our FV estimate is limited at 6.1%.