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Daily Edge Summary - 18 March 2014

Core Content

This report covers market insights and analyst recommendations for various companies and sectors in the Philippines, focusing on financial performance, valuation, and future outlook. Key highlights include the performance of the PSEi index, updates on major conglomerates and utilities, and detailed analysis of specific stocks.

Market Overview

• PSEi Index: Closed at 6,399.99 on 3/17, showing a 0.14% increase.
• Turnover: Dropped by 3.79% to PHP7,273.71 million.
• PLDT ADRs:
  • USD: 59.78, up 1.30%
  • PHP: 2,671.57, up 1.38%
• Ave interbank rate: Remained at 2.03% with no change (0 bps).
• PHP/USD rate: 44.69, down by 0.03%.

Analysts

• Head of Research / Economist: Luz Lorenzo
• Analysts: Laura Dy-Liacco, Rommel Rodrigo, Lovell Sarreal, Katherine Tan, Ramon Adviento

Top Idea: Conglomerates

Ayala Corp (AC)

• Target Price: Raised to PHP769, implying a 38.6% upside.
• 2014 Earnings Forecast: Increased by 10% to PHP16.64 billion.
• NAV Estimate:
  • Real-time: PHP653.72
  • Target: PHP769.53
• Recommendation: Maintain BUY.
• Key Points:
  • Ayala Land Inc (ALI) remains the largest contributor to NAV at 44%.
  • AC is trading 15% below its real-time NAV and 28% below its target NAV.
  • The discount is considered undeserved due to its strong reliance on listed investments.

Market Talk

Mining: Nickel Asia Corp (NIKL)

• Pay Factor: Increased significantly, leading to a 26% rise in 2014F net income to PHP4.38 billion.
• Target Price: Raised to PHP20.35 from PHP17.19.
• Recommendation: Upgrade to BUY from HOLD.
• Key Points:
  • Pay factors increased over 25% across all product lines.
  • Cash costs per WMT reduced to USD10 from USD13.
  • Increased equity in Coral Bay Nickel Corp from 6% to 10%.
  • Global nickel deficit forecasts are 56-100kt for 2014 and 200-400kt for 2015.
  • Long-term nickel price assumption remains at USD7/lb after 2017.

Banks: East West Banking Corp (EW)

• FY13 Net Income: Increased by 13.1% to PHP2.06 billion, slightly below forecast.
• 4Q13 Net Earnings: Declined 30% YoY to PHP325 million due to high provisions.
• Consumer Loans: Rose 29.5%, boosting NIM to 8.4% but increasing NPL ratio to 5.5%.
• Provision Charges: Doubled to PHP3.1 billion, 21% higher than estimated.
• Recommendation: Maintain BUY.
• Key Points:
  • Net interest income surged 38%.
  • Trading gains increased by 25%.
  • Operating costs rose 24%.
  • Capital adequacy ratio at 17% and Basel II-Tier 1 at 13.8%.

Consumer: Robinsons Retail Holdings Inc (RRHI)

• 2013 Adjusted Earnings: Up 151%, in line with estimates.
• 2013 Net Income: PHP2.68 billion, up 151% YoY.
• 2013 Net Sales: Increased 17% to PHP67.3 billion.
• 4Q13 Earnings: Up 124% to PHP923 million.
• Recommendation: Maintain BUY.
• Key Points:
  • Full-year consolidation of drug store business contributed to sales growth.
  • 152 net new stores opened during the year.
  • Same-store sales growth (SSSG) improved to 2.5% for full-year 2013.
  • Gross profit increased 30% to PHP14.3 billion.
  • EBITDA grew 63% to PHP5.2 billion.
  • Operating income rose 186% to PHP4.1 billion.
  • Net margin improved 1.9 pps to 4%.

Utilities: Manila Electric Co (MER)

• Core Earnings: Up 5% YoY in 2013, in line with estimates.
• Core Net Income: Reached PHP17.21 billion, slightly below target.
• Dividends: Declared PHP6.45 per share, composed of regular and special dividends.
• Recommendation: Maintain HOLD.
• Key Points:
  • Distribution revenues grew 10% to PHP56.10 billion.
  • Volume sales increased 4% to 34,084 GWh.
  • Average distribution rates rose 7% to PHP1.66/kWh.
  • Operating profit increased 9% to PHP24.68 billion.
  • Earnings target for 2014 at PHP20.2 billion.
  • Forecast implies YoY growth of 14% driven by new power generation investments, volume sales, and lower provisions.

Market Highlight

• NIKL: Pay factor jumps, leading to a rating upgrade to BUY.
• MER: Declared dividends and partnered with Mitsubishi Corp for a nonrevenue water reduction project in Myanmar.

The Week Ahead

• 19 Mar: Metro Pacific Investments Corporation - Analysts' and Investors' Briefing
• 21 Mar: Travellers International Hotel Group, Inc. - Analyst and Investors' Briefing
• 24 Mar: Trans-Asia Oil and Energy Development Corp. - Annual Stockholders' Meeting
• 31 Mar: Col Financial Group, Inc. - Annual Stockholders' Meeting

Earnings and Valuations Summary

| Stock | Share Price (PHP) | Target Price (PHP) | Upside (%) | Recommendation | 2014F Net Profit (PHPm) | 2014F EPS Growth (%) | 2014F PE (x) | 2014F DPS (PHP) | 2014F Yield (%) | 2014F P/BV (x) | 2014F Net Gearing (%) | 2014F ROA (%) | 2014F ROE (%) |
|-------|------------------|-------------------|------------|----------------|--------------------------|-----------------------|--------------|------------------|------------------|----------------|----------------|------------------------|----------------|----------------|
| AC | 555.00 | 769.53 | 38.6 | BUY | 444,632 | 16.1 | 20.1 | 0.7 | 0.7 | 2.0 | 12.1 | 18.6 | 16.2 |
| NIKL | 18.04 | 20.35 | 105.9 | BUY | 4,379 | 105.9 | 10.4 | 0.7 | 0.7 | 1.8 | 18.0 | 13.4 | 12.5 |
| EW | 28.80 | 31.80 | 10 | BUY | 2,784 | 22.3 | 19.8 | 1.5 | 1.5 | 1.8 | 11.7 | 11.2 | 12.3 |
| MER | 286.00 | 280.00 | (2) | HOLD | 20,200 | 18.0 | 16.5 | 1.2 | 1.2 | 1.8 | 11.9 | 11.7 | 11.5 |

Key Information

• Ayala Corp: Significant upside potential for its subsidiaries, particularly ALI.
• Nickel Asia Corp: Increased pay factors and lower costs led to higher net profit forecast.
• East West Banking Corp: Strong consumer loans drove provisions and NIM up, but increased NPL ratio.
• Manila Electric Co: Core earnings in line with estimates, but some variance from target.
• Market Trends: Strong performance in certain sectors like mining and consumer retail, with caution on potential risks such as Chinese economic slowdown and possible policy changes in Indonesia.