20140605-Maybank_KERPL-All_negatives_in,_still_BUY_27页_1016kb

Metro Pacific Investments (MPI PM) Summary

Core Content

Metro Pacific Investments Corp (MPI PM) is a diversified conglomerate primarily operating in the Philippines, with a focus on real estate and other infrastructure-related businesses. The current share price is PHP5.29, with a target price of PHP6.10, indicating a potential 15% upside. The market capitalization is PHP137.7B, and the company has a free float of 38%. The main shareholders include First Pacific Co. Ltd. (55.8%), Cartica Management LLC (5.0%), and Norges Bank Investment Management (1.5%).

The company's core business segments include water distribution, electricity distribution, toll roads, and healthcare. Despite regulatory challenges in three of its four businesses, the analyst maintains a BUY rating, forecasting a 3-year net profit CAGR of 8.2% for FY14-16 and a 31% earnings growth for FY14.

Key Financial Forecasts

• Revenue (FYE Dec):

  • FY12A: PHP30,877.0M
  • FY13A: PHP32,701.2M
  • FY14E: PHP34,265.5M
  • FY15E: PHP35,757.9M
  • FY16E: PHP35,757.9M

• Core Net Profit (FYE Dec):

  • FY12A: PHP7,209.0M
  • FY13A: PHP9,476.5M
  • FY14E: PHP9,534.1M
  • FY15E: PHP9,079.1M

• Core EPS (PHP):

  • FY12A: 0.28
  • FY13A: 0.36
  • FY14E: 0.37
  • FY15E: 0.35

• Core EPS Growth (%):

  • FY12A: 13.0
  • FY13A: 31.5
  • FY14E: 0.6
  • FY15E: -4.8

• Net Dividend Yield (%):

  • FY12A: 0.6
  • FY13A: 0.6
  • FY14E: 0.6
  • FY15E: 0.6

• Core P/E (x):

  • FY12A: 19.1
  • FY13A: 14.5
  • FY14E: 14.4
  • FY15E: 15.2

• P/BV (x):

  • FY12A: 1.5
  • FY13A: 1.3
  • FY14E: 1.2

• EV/EBITDA (x):

  • FY12A: 15.7
  • FY13A: 16.9
  • FY14E: 16.5

• Net Debt/Equity (%):

  • FY12A: 35.9
  • FY13A: 30.7
  • FY14E: 26.9

Business Segments Overview

• Water Distribution (Maynilad):

  • Contributes 35% to operating profit in 2014.
  • Faces regulatory issues with the MWSS-RO, which ordered a 4.82% rate cut.
  • Arbitration is ongoing, with a potential PHP6/m³ swing in rates.
  • Forecasts assume a 1.3% decline in net profit in 2014 and flat growth in 2015 if the rate cut is implemented.
  • Current 2014 revenue: PHP4.391B, up 8% YoY.
  • Core income in 1Q14: PHP2.109B, up 7.4% YoY.

• Electricity Distribution (Meralco):

  • Contributes 30% of operating profit in 2013.
  • Expected to see a 35% cut in distribution rates in 2015.
  • Net profit for 2014 is forecasted to grow by 3.5%, but declines of 9.3% and 11.6% are expected in 2015 and 2016 respectively.
  • Current 2014 revenue: PHP4.0B, with flat growth in 1Q14.

• Toll Roads (MPTC):

  • Contributes 26% to operating profit in 2013.
  • Net profit is expected to rise by 28% in 2014 due to increased traffic and operational efficiencies.
  • Segment 9 of the Harbor Link road starts operations in 2H14.

• Healthcare:

  • The fastest-growing business segment.
  • Expected to grow by 27% to PHP739M in 2014 and 15% to PHP849M in 2015.
  • No new acquisitions are factored in, but existing operations are expected to improve.

Valuation and Target Price

• NAV per share: PHP7.68
• Target Price (20% discount to NAV): PHP6.10
• Implied 2014F PER at target price: 16.75x
• Sum of Parts (SOTP) Valuation:
  • Water (Maynilad): PHP47.097B (23.55% of NAV)
  • Electricity (Meralco): PHP64.632B (32.32% of NAV)
  • Infrastructure (MPTC): PHP68.104B (34.06% of NAV)
  • Healthcare (Neptune Stroika): PHP21.845B (10.92% of NAV)

Recent Developments

• LRT1 South Extension Project:

  • LRMC, comprising Metro Pacific Light Rail Corp (55%), AC Infrastructure (35%), and Macquarie (10%), submitted a bid for the project.
  • Total cost: PHP65B, with PHP40B to be funded by the winning bidder.
  • The project is a PPP and will generate immediate cash flow if awarded.
  • No final award has been made, and the project is not included in current valuation.

• Regulatory Environment:

  • Regulatory issues in water and electricity distribution have led to rate cuts and delays.
  • MWSS-RO’s decision is under dispute and will be arbitrated by the ICC.
  • The tax issue is a key point of contention, with MWSS-RO excluding income tax from recoverable expenses.

• Arbitration Impact:

  • If Maynilad loses, it faces a PHP4.04/m³ rate reduction, which would impact revenues by PHP1.9B.
  • If it wins, a PHP2.51/m³ rate increase would result in a PHP1.2B revenue boost.

Analyst Notes

• Contact Information:

  • Rommel Rodrigo: (63) 28498839 | rommel_rodrigo@maybank-atrke.com
  • Laura Dy-Liacco: (63) 28498840 | Laura_DyLiacco@maybank-atrke.com
  • Bianca Solema: (63) 28498835 | bianca_solema@maybank-atrke.com

• Key Assumptions:

  • Forecasts assume the worst-case scenario from the arbitration.
  • Rate cuts are expected to be retroactive to 1 January 2014.
  • The current low-interest rate environment may lead to a lower WACC for Meralco.

• Market Performance:

  • 1Mth: +4.8%
  • 3Mth: +17.3%
  • 12Mth: -11.1%
  • Relative to index: +4.4%, +10.8%, -12.3%

Conclusion

Despite regulatory challenges and potential rate cuts, MPI PM is still rated BUY due to its strong earnings growth in toll roads, hospitals, and electricity distribution. The company's NAV-based target price of PHP6.10 implies a 15% upside, and the forecasted 3-year net profit CAGR of 8.2% supports the positive outlook. The arbitration outcome for Maynilad will significantly impact the company's financials, with a potential PHP6/m³ swing in rates. The analyst remains optimistic about the long-term prospects of MPI PM, particularly in the healthcare and infrastructure sectors.