Announcements

1. I graduated in MBA (at last!) which means more time for blogging! 🙂

2. Joined social media sites:

LinkedIn: http://www.linkedin.com/pub/renzie-doem-agutaya/8b/60b/399

and

Twitter! https://twitter.com/RenzieDoem

I was looking for a platform where investors both sophisticated and newbies can interact and I think twitter is the best platform.

3. There is a new site where I am planning to participate actively: http://www.stockquotient.com/
I receive no financial benefits from the site but I like their concept of following the structure of seekingalpha.com. I believe that someday filipinos will help each other in the journey of continuing education in stock investing and stockqoutient is that platform for those investors who are willing to help and willing to learn more.

 

More posts coming your way! 🙂

Aboitiz Power Case Analysis

How many people have you heard that said: “I wish I could have bought AP way back 2007 at P6”?

AP1

Instead of wishing something that will never happen (i.e. turning back time), let’s examine why AP increase from P6 to P35 and moved sideways from thereon so that through this analysis we will learn something that we can apply for future stock purchases.

The breakdown of our problem is:

  1. Why AP increased from P6 to P35 in 2007 to 2010?
  2. Why AP price moved sideways from thereon?

Why AP Increased From P6 to P35 in 2007 to 2010 and Traded Sideways Thereon?

In order to answer the problems, much insight can be derived from the following relationships:

AP2 AP3 AP4

Based on the charts presented above, the following can be observed:

  1. Capacity of AP’s power generation increased before price jumped from below P10 to P30’s level.
  2. The substantial increase in generation capacity was only reflected in the revenues of AP in 2010 thus the spike in the price in 2010.
  3. AP’s stock price is driven by the increase in revenues and EPS.
  4. The stock price moved sideways as generation capacity growth slowed down.

Power capacity drives the revenues of AP. Revenue growth in effect drives the EPS of AP. The increase of EPS places AP at an attractive valuation.

AP5

Therefore, power capacity is the foundation of AP’s value (and to other power generation companies).

Warren Buffett loves a company with good economic moat and a good management. Economic moat is the barrier for entry of competitors. The power generation industry has a natural barrier for entry of being capital intensive and the 3-year lead time before the completion of a power plant construction. The power shortage in the Philippines assured AP that the electricity capacity that it produces have ready buyers. Combined that with a management that can deliver what it promised, AP delivered a lot of shareholder value to its investors.

 

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: No position

Forecasting ACR’s 2013 and 2014 Earnings

Alsons Consolidated Resources, Inc. (PSE: ACR, the “Company”) is different from stocks which I consider cheap, at P1.40 ACR is trading at 17.5x PE ratio using 2012 earnings. A purchase of stock with high PE ratio is justified if there is substantial growth in expected future earnings. For example, stock A trades at P40 with earnings per share (EPS) of P1 or a PE ratio of 40x (P40 / P1). Assuming that by next year stock A’s EPS will jump to P30, then stock A is a bargain even at P40 because by next year stock A will be trading at 1.33x PE ratio (purchase price of P40 / EPS next year of P30).

ACR’s attraction is its move to concentrate its earnings source to power generation in Mindanao. ACR currently have 100 MW and 55 MW capacities through Western Mindanao Power Corporation (WMPC) and Southern Philippines Power Corporation (SPPC). ACR announced in a press release on March 22, 2013 the takeover of 98 MW Illigan Diesel Power Plant. [1] On July 9, 2013, ACR announced the buyout of the remainder 40% interest in Conal[2] hiking its effective interest in WMPC and SPPC to 55% from 37.40%. ACR expects phase one (105 MW) of its 75%-owned coal-fired power plant in Maasim, Sarangani, Sarangani Energy Corporation (SEC) to operate commercially in September 2015 and phase two (105 MW) to operate in 2016. [3] Other than SEC, ACR is in the advance stages of development for the 105 MW San Ramon Power, Inc. (SRPI) in Zamboanga. The completion of the construction is expected to be delayed for 6 to 12 months or a push back of the completion from 2016 to 2017-2018. [4] All in all, ACR expects a surge of its power capacity from 155 MW to 463 MW by 2016-2018 which is 25% of Mindanao’s projected peak demand of 1,829 in 2016. [5]

However, what matters most to investors are: how much will it contribute to ACR’s earnings and what should be the valuation?

For 2013, we should consider the following events:

  1. Increase of ACR’s interest in Conal to 100% from 60%.
  2. Takeover of 98 MW Illigan Diesel Power Plant.

Illigan Diesel Power Plant is 100% owned by ACR through Mapalad Power Corporation (MPC) while WMPC and SPPC initially contributes 37.40% earnings and was later increased to 55% with the 100% control of Conal in July. For conservatism, let’s assume that the increase of interest in Conal will have no effect in ACR’s earnings. In order to calculate for the estimated earnings contribution of MPC, 1) revenue contribution must be calculated and 2) applied with applicable profit margin.

Below is the calculation of MPC’s actual and estimated revenue contribution:

ACR1

Note that MPC rehabilitated the 98 MW diesel power plant in Illigan. The power plant started operating at 10M-26MW for March to June which explains the small revenues it generated in the second quarter. It gradually increased capacity and was finally fully rehabilitated at 98MW capacity in September 2013. Thus, it is very conservative to assume that MPC will generate only P591 million revenues in the fourth quarter given that MPC will operate at 98MW capacity in the last three months of 2013.

In determining the applicable profit margin, looking at historical profit margin will be helpful in in order to determine the appropriate figure:

ACR2 ACR3

The sudden dip of ACR’s profit margin in the 3rd quarter of 2013 is alarming. It may mean inefficiency in operating the Illigan power plant which is likely because the power plant is already old. However, according to the management, the surge in cost of goods and services was caused by the increase in fuel usage of MPC but was pass-on to its customers. [6] However, should the fuel costs be “pass-on” ACR’s profit margin should have not declined from 40% in the 2nd quarter to only 16% in the 3rd quarter. Therefore, we can say that costs incurred in rehabilitating MPC’s Illigan power plant were also included in the cost of goods and services. For conservatism, let’s assume a profit margin of 20% for Illigan power plant.

Below is the calculation of estimated earnings of ACR’s in 2013:

ACR4

Based on our calculation above, we can expect ACR to report earnings attributable to parent of P582 million which is a little higher than P508 million reported in 2012.

How about for 2014? For 2014, let’s consider the increase in ownership in Conal.

 ACR5

For 2014, we can expect earnings attributable to parent of P930 million or an EPS of .148. With an estimated EPS of .148 for 2014, ACR is trading at 9.45x PE ratio.

One more thing to consider

ACR’s sale of 60% interest in Lima Land, Inc. for 1.36 billion [7] appears to be at a huge gain. Below is my calculation based on the figures provided in the 3rd quarter of 2013:

ACR6

Considering one-time gain, we can expect ACR to report earnings in 2013 attributable to parents of P1,081 million. (Warning: Make sure not to use PE multiple valuation on earnings that includes one-time gains.)

Using conservative assumptions in estimating forecasted earnings, in my opinion, ACR is an attractive investment for those willing to hold for 2-5 years.

Sources:

  1. Press Release: “Alsons Consolidated 2012 Profit up 12%, as it takes over Iligan Diesel Power Plant”; Board approval of cash dividend declaration, Annual Stockholders’ Meeting on May 24, 2013 with record date of April 15, 2013, http://goo.gl/r2vhM0
  2. Press Statement: “Alsons Consolidated Resources, Inc. Acquires EGCO stake in Conal Holdings Corporation”, http://goo.gl/4bk66r
  3. Press Release: “Alsons Power’s 13 Billion Peso Sarangani Energy Plant to Operate First 105 Mega Watt Phase by 2015”, http://goo.gl/lnwKYT
  4. Clarification of news article: “Alson’s Zamboanga City power plant faces delay”, http://goo.gl/piKaDV
  5. Press Statement: “Alsons Power current capacity to more than double in 3 years – will supply over 1/4 of Projected Mindanao Peak Demand by 2016”,http://goo.gl/7Y4bHK
  6. SEC 17-Q September 2013, Management’s Discussion and Analysis of Results of Operations and Financial Condition, p.29
  7. Signing of Share Purchase Agreement by Aboitiz Land, Inc. with Alsons Land Corporation re: acquisition of 60% interest in Lima Land Inc.,http://goo.gl/t9Syy3

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: I own ACR shares

Looking at Phoenix Petroleum (PSE: PNX)

Phoenix Petroleum Philippines, Inc. (PSE: PNX, the “Company”) derives most of its revenues from trading refined petroleum products. In 2005 until the first half of 2009, PNX sourced its petroleum products mainly from PTT Philippines Corporation and Total Philippines Corporation. Starting from the second half of 2009 until the present, PNX imports refined petroleum products from Singapore, Taiwan and various foreign traders from Thailand, Korea, and China.

PNX has witnessed its revenue growing since 2006 albeit with low and declining profit margins:PNX1

As of the end of 2013, PNX has 209 stations in Mindanao, 47 in Visayas, and 112 in Luzon. Below is the growth of PNX’s retail stations:

PNX2

PNX source substantial amount of revenues from sale of jet A1 fuel to Cebu Air, Inc. (PSE: CEB). PNX supplies more than 50% of CEB’s fuel requirements and handles all the logistical needs of CEB in Mindanao and partly in Visayas. [1] Logistical service involves the use of oil depots and storage facilities. [2] Relying on the numbers provided in PNX’s press release, it would mean that PNX derives a total of not less than 8.7 billion (half of CEB’s estimated fuel costs of P17 billion) sales from CEB or 20% of PNX fuel sales.

It would then be reasonable to assume that PNX’s revenue growth will be positively affected with the fleet growth of CEB and the increase in economic activity in Mindanao. A major threat for the business of the Company is that as an importation Company, PNX is at the disadvantage in the weakening of the peso.

PNX stock price and reason for plunge

PNX historically trades at 16.5x to 17x PE ratio. However, PNX’s stock price plunged from a 52-week high of P11 to just P4.90 range of a PE ratio of just 10.88x. The reason for the plunge in stock price is the smuggling case filed against the President and CEO of PNX, Dennis A. Uy.[3]

PNX3

In the information statement disclosed by the Company, PNX is very cooperative with the authorities by executing a Waiver of the Statute of Limitation (granting the BIR to assess the tax liabilities of the Company) and application for the Voluntary Disclosure Program of the Bureau of Customs on the period questioned (June 2010 – July 2012). [4]

The current P5-billion smuggling case filed was first filed against the President of PNX in 2011 but was later dismissed in January 2012 and the decision in January 2012 was affirmed by the DOJ in November 2012. I understand that there were new details that surfaced which enable the revival of the smuggling case against Dennis Uy in April 2013. In my opinion, the President and CEO of the Company is probably not being guilty taking hints from how cooperative the Company is in the smuggling case investigation.

In any way, guilty or not guilty, I believe that the Company will continue their dividend policy of declaring 30% of prior year net income as dividends will continue:

PNX4

I expect dividends to be the same as last year (.10 cash dividend and 30% stock dividend) given that PNX only managed to grow net profit by 2%.

Comment:
CLSA is selling huge number of shares in the market. Willing buyers of this stock should not go beyond P4.90.

Source:

  1. Press release, http://goo.gl/NnvJtB
  2. SEC 17-A 2012, note 28, p. 163
  3. DOJ reveses ruling, recommends smuggling case against Phoenix Petroleum, http://www.interaksyon.com/business/60351/doj-reverses-ruling-recommends-smuggling-case-against-phoenix-petroleum
  4. Information statement (SEC Form IS-20 DIS), Acts and Resolutions of the Board of Directors, p. 36,  http://goo.gl/65k5ZL

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: No position

Philippine Banking Industry 101

In understanding an industry, one must take note of the following important details:

  1. How the industry generate revenues?
  2. What are the regulatory risk surrounding the industry?

How does the banking industry generate revenues?

It is common knowledge that the banking industry profits by extending the cash deposited by the depositors to willing borrowers. To illustrate:

bank1011

However, it was least known that bank profits more through rediscounting loans extended to borrowers. It is in this picture that the Bangko Sentral ng Pilipinas (BSP) plays a major role in a bank’s profit. Rediscounting loans is like borrowing money from the BSP with the loans receivable from the borrower as collateral. To illustrate:bank1012

What are the regulatory risk surrounding the industry?

The regulatory body that greatly affects the banking industry is the Bangko Sentral ng Pilipinas (BSP). Every time news comes out like BSP maintains key interest at record lows, what was referred as “key interest rates” are overnight borrowing and lending rates. Overnight borrowing rates or reverse repurchase rates (RRP) are the rates used in rediscounting loans.[1]

Changes in overnight borrowing rates should be followed by bank investors since change on the rates will affect bank profits.

Is there a way to anticipate interest rate changes?

Definitely! Interest rate changes can be anticipated by watching the inflation rates. The BSP adopts the inflation targeting framework since 2002. In other words, should inflation go beyond their target, the BSP will certainly increase the interest rates. For 2014, the BSP targets inflation rates of  4 ± 1 percentage points.[2] Therefore, should inflation go beyond 5%, expect the BSP to increase interest rates.

Obtain the inflation rate information from the BSP through here.

Schedule of releases of key statistical information (includes inflation rates) are found here and exact dates here.

 

Sources:

  1. Lending rates, http://www.bsp.gov.ph/loans/loans_lending.asp
  2. Inflation Targeting: The BSP’s Approach to Monetary Policy, http://www.bsp.gov.ph/monetary/targeting.asp

 

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

 

Stock investing basics, Interview with Elliott Morss

Stock Investing Basics

Last January 25, 2014, I was invited as a resource speaker about stock investing basics in University of Negros Occidental- Recoletos, Bacolod City. My audience were college senior students, and MBA and PhD students.

To those who are interested:

Stock Investing Basics V.2

If you have any suggestion regarding the presentation, please leave it in the comments below.

 

Interview with Elliott Morss

To those who are interested, you may view an interview with Elliott Morss regarding my opinion in the Philippine economy and Philippine stock market:

http://www.morssglobalfinance.com/investing-in-2014-how-about-the-philippines/

http://seekingalpha.com/article/1955941-investing-in-2014-how-about-the-philippines

 

Forecasting FGEN Earnings and Valuation

In my first post on FGEN, I used my own calculation of economic interest in forecasting FGEN earnings. I find it confusing why FGEN’s annual reports would say that they have 49.50%[1] economic interest in EDC while you would arrive at different percentages when you calculate the economic interest based on the corporate structure provided in their SEC filings.[2] Below is my calculation on how the Company arrive at their figures:

FGEN1

The major difference between the calculation above and my calculation is the assigning of 100% economic interest in Prime Terracota Holdings Corp. As shown below, FGEN has only 45% economic interest in Prime Terracota Holdings Corp. 

Probably the economic interests in the corporate structure provided in the SEC filings were not updated. We will use what the Company provided.

Below is the breakdown of FGEN’s earnings in 2012: (in thousands)

FGEN2

Below is the breakdown of FGEN’s earnings in September 2013:FGEN2.1

The part that made computing for FGEN’s forecasted earnings difficult is the “Others” column since the details are not disclosed and we will have no idea what drives profit and losses of “Others” column.

Another issue for the “Others” column is the economic interest of FGEN the companies included in the “Others” column. I get through this hurdle by assigning 30% economic interest which yields close to actual figures in 2010 and 2011. I did not work back earnings in 2012 because it’s complicated by changes in percentage ownerships. Below is the chart comparing approximate earnings using 30% economic interest and actual profit:

FGEN3

As shown in the chart above, approximate earnings never go beyond actual earnings. The approximation may not be accurate but it does provide a valid margin of safety in forecasting FGEN earnings.

Estimating for the “Others” column profit or loss for 2014 and beyond is the weakness of the FGEN earnings forecast. To make matters worse, figures prior to 2012 could not be used for trending because of accounting treatment changes which leaves us with 2012 and 2013 quarters available for analysis. Sadly, the two years quarterly data does not give much insight without the full year figures.

FGEN4

To provide margin of safety in the forecast, doubling the losses in September 2013 may be a safe estimation of losses for 2014. Therefore, surprises will present itself should losses in the “Others” column exceed $240 million. Would losses exceed $240 million? Probably not, probably yes but with the public information available to us we can only assign a value pessimistic enough to provide margin of safety in our analysis.

With the hard part in the forecasting out, let’s focus on the more predictable business segments of FGEN: First Gas Philippine Corporation (FGPC), FGP Corporation (FGP), EDC, and FG Hyrdo. Below is a presentation of the profit or losses of FGEN’s business segments from 2008 to 2012: (in thousands)

FGEN5

At first glance, obtaining the average profit or loss figures on each business segments would make sense however there are events to be considered between 2008 and 2012 where we can conclude that assigning a profit or loss on the business segment to be assumed for the next 10 years is more reasonable than averaging the profit or loss in the past five years.

Profit or loss figures to be assumed in the next 10 years are as follows:

FGEN6

Putting all together the information presented above, computation of forecasted annual earnings will be the following:

FGEN7

Comments:

With forecasted annual earnings  of $129,320 when FGEN’s business operations normalize or P1.538 earnings per shares (EPS) (using a forex rate of P40/$ and assuming that FGEN outstanding shares remains at 3.3 billion) FGEN should be valued at P15.38 using a PE multiple of 10x. What if “Others” column of FGEN will report a breakeven operations or no profit nor any losses? Then FGEN’s EPS will jump to P2.394 or a valuation for FGEN of P23.94.

Among all the power companies, FGEN is the cheapest in terms of Book Value multiple:

FGEN8

Assuming that FGEN will trade at a multiple similar to GTCAP, FGEN should be valued at P36.02 (P18.98 x 1.90).

 

Source/Note:

  1. FGEN 2012 Annual Report, p. 3, http://www.firstgen.com.ph/uploads/files/blurb-39_file-855_fgen2012ar_051513.pdf
  2. FGEN SEC 17-Q September 2013 filings, p. 30 – 31, https://www.pse.com.ph/resource/corpt/2013/FGEN_17Q_Sep2013.pdf
  3. FGEN SEC 17-A 2012 filings, p. 9, https://www.pse.com.ph/resource/corpt/2013/FGEN_17A_Dec2012.pdf
  4. FGEN SEC 17-A 2012 filings, p. 126, https://www.pse.com.ph/resource/corpt/2013/FGEN_17A_Dec2012.pdf
  5. Computation of approximate earnings:

FGEN9 FGEN10 FGEN11 FGEN12

FGEN13

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: I own FGEN shares