PSEi, Stock and Family, Speculative vs. Investment

PSEi

Index at all time high again and trading at high multiples.

When should one be worried? You should be worried if the company that you are investing does not have any promise of future earnings growth.

Is it time to buy?

I’m patiently waiting.

Stocks and Family

Last December 2011, Me and my client allocated plenty AAI. As some of you might have remembered it was very volatile at 25~35 range. During Christmas and New Year, we find our portfolio at negative 50%. I feel bad about it and have that unusual feeling in my stomach. I enjoyed the moment with my family but my mind just reverts back to my stock.

January 2012, I sold all my AAI stock for a 100% profit.

From that date on, I limit my speculative holdings to just 20% of my portfolio and I learned to disconnect my ego from my bank account. Never again an activity I passionately do distract me in my time for my family!

 

Speculative vs. Invesmtment

What exactly is a speculative and what is an investment?

A stock purchased for speculative and for investment purpose does not differ on the time frame but on the amount of information available prior to the purchase that can promise us safety and returns for our capital.

Stocks I consider an Investment

FGEN, AGI, PCOR, CHIB, and EDC are companies that allow us to project their earnings based on the readily available information that only requires number crunching.

Let’s have FGEN, FGEN derives 90% of their earnings from sale of electricity to MER. Electricity demand is almost certain not to decline dramatically so we can easily project FGEN’s earnings in the coming years.

Stocks I consider Speculative

LPZ, APX, GREEN are speculative.

APX is speculative since the mineral reserve estimates are not yet disclosed and that we are not sure if the increase in APX’s capacity can be met by APX’s reserve. Current APX reserve can only last for 5 years should the capacity be tripled.

LPZ is speculative since GLO buying LPZ’s BTI is in the mind of GLO’s decision maker.

GREEN is speculative since we have no comparable operating years to project earnings.

Why did I buy these shares?

Because, IMHO, the odds are very much skewed to the speculator’s favor. 🙂

APX to announce a substantial mineral resource is very likely.

LPZ’s BTI to be eventually purchased by GLO is very likely.

GREEN’s management declaring property dividends to increase shareholder value is very likely.

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Speculating on Chemrez Technologies, Inc.’s Buy-Back Program

Chemrez Technologies, Inc. (PSE: COAT) disclosed a P500 million share buy-back program on August 22, 2007 representing 9% of the current market price at that time and bought back 75,966,000 shares until 2008 spending a total of P 215 million. They never bought additional shares ever since until August 14, 2012 where the Company disclosed a re-confirmation of their intention to buy-back their own shares. [1] Since that date, COAT has already bought a total of 2.2 million shares spending approximately P6.4 million.

COAT initially intends to buy 9% of its own shares or 125 million shares. Currently, COAT already bought a total of 78 million of its own shares which means that the Company still has to buy 47 million more. The Company still has P277 million left of the budgeted P500 million. Should they push through with their buy-back program, it would mean that the company is willing to pay P5.83/sh (P277m/ 47m sh).

COAT has enough cash to complete the buy-back program:

Pros in the speculation:

  1. Scarcity of COAT shares may force the Company to buy up.
  2. They may buy up COAT to increase shareholder value.
  3. Buy-back program may be part of D&L’s strategy to increase their interest in COAT to above 50%. Currently, D&L only has 19.03% on COAT. D&L may use the IPO proceeds to invest in COAT since it is stated in their prospectus that they intend to use part of the proceeds for “acquisitions and investment”. Should D&L buy COAT @ 5.83 per share, it would only take P2.4 billion to acquire 30% of the shares which is only half of the projected proceeds of P5.6 billion.

Risks in the speculation:

  1. COAT may not push through of the buy-back program despite they are awash with cash.
  2. There may be enough sellers for them to accumulate 47 million shares to complete the buy-back program.
  3. There may be enough sellers at a lower price for D&L to acquire 30% of COAT shares in the market.
  4. D&L may not intend to acquire an additional 30% of COAT. Until it is disclosed that the “acquisitions and investment” use of proceeds is really intended for COAT we can never be certain.

 

Source:

  1. Boar re-confirmation of authority to engage in share buy-back program, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-6064_COAT.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

Globe Telecom, Inc. – Lopez Holdings Corporation

Globe Telecom, Inc. (PSE: GLO) disclosed in November 6, 2012 their intention to acquire 100% of the $200 million  notes (Notes) of Bayan Telecommunications, Inc (BTI) and BTI’s wholly owned subsidiary, Radio Communications of the Philippines, Inc. (RCPI) for $280~$310 for every $1,000 on or before 5:00 PM, New York City time,  November 19, 2012. [1]

The consideration that GLO will pay depends on the acceptance level:

  1. $280, if the acceptance level is less than 75%
  2. $290, if the acceptance level is greater than 75% but less than 80%
  3. $300, is the acceptance level is equal to or greater than 80% but less than 85%
  4. $310, if the acceptance level is equal to or greater than 85%

The tender offer shall be valid if at least 70% of the remaining principal amount of the Notes is tendered and 70% of the principal amount of RCPI debt is tendered. As of the date of the disclosure, approximately 45.4% of the Notes and 79.1% of RCPI debt already agreed to tender their claims.

Assuming that conditions for a valid tender offer are met and GLO is able to pay the highest consideration for the debt, GLO will pay a total of P2.6 billion @ P42/$ exchange rate. [2] GLO’s intention to be the largest creditor signals their intent to acquire BTI.

A Scenario Where GLO Will Buy BTI

Currently Philippine Long Distance Telephone Company (PSE: TEL) is trading at 3.60x price to revenue per share multiple. BTI has revenue of 4.7 billion as of 2011. Assuming the same multiple as TEL, BTI’s fair value should be 17.64 billion (4.9 billion x 3.60x). BTI has a negative book value of 17 billion. Negative BV happens when liabilities exceeds total assets.

The effect of one time gain in a per share basis at a range of consideration is as follows:

LPZ’s fair value range assuming .55x price to book ratio multiple:

Comments:

I believe that GLO will eventually initiate an equity position in BTI. BTI has total long term debt of P14 billion but it is a company with 4 billion annual revenues and generates P2 billion cash from operations with minimal capital maintenance of 700 million. It has the majority interest (85%) in National Digital Transmission Network (NDTN) a major alternative communications backbone, the other being operated by TEL. A communications backbone is a larger transmission line that carries data gathered from smaller lines. NDTN stretches from Santiago City, Cagayan Valley to Davao City passing through Cebu City and Cagayan de Oro City.

 Risk:

November 19, 2012, New York Time, is a crucial date. Should the tendered claims be less than 70%. The tender offer will not be valid and would render all the assumptions above unlikely in the short-term.

Source/notes:

  1. Press release: “Globe Launches Tender Offer for All Outstanding 13.5% Senior Notes Originally Due 2006 Issued by Bayan Telecommunications, Inc.”, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-7966_GLO.pdf
  2. Cash GLO may pay for the BTI’s financial obligation:
  3. PSE disclosure on Bayantel’s NDTN expansion, http://lopez-holdings.ph/~lholding/uploads/files/Blurb-62_File-98_BPCinforeBayanTelNDTNExpansion-3ProjectJan232007.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.