STOCKS IN FOCUS: INDICES COLing the Shots: “Sell in May ...

TUESDAY, 27 MAY 2014

STOCKS IN FOCUS:

COLing the Shots: "Sell in May and go away" doesn't work

Many investors are wondering if they should "Sell in May and go away" especially given the PSEi's elevated valuation and similarities of market conditions today and May of last year. However, a study of the monthly performances of the PSEi during the past 10 years shows that returns for the month of May is no worse than those of other months of the year. Although the market is currently undergoing a correction, we don't expect the magnitude of the drop to be the same as that of 2013. Unlike last year, US interest rates are now going down, leading to a wider spread between US and Philippine bonds. As such, there is less incentive for foreign investors to sell their peso assets.

DD is a good company that could become a bad stock. Although it has an attractive story to tell with the right owners and partners and the right product in the right location, we are concerned that it could disappoint investors given its over ambitious earnings target and the significant jump in its share price recently which makes its valuations unjustifiable. On the other hand, we removed EEi from our COLing the Shots stock picks due to disappointing 1Q14 earnings performance.

TOP STORIES:

EMP: Going Global EDC: Plans JV for US$1Bil 220MW geothermal project in Indonesia

(As of 26 May 2014)

PSEi All Shares Financials Holding Firms Industrial Mining & Oil Property Services

ININDDICICEESS

Close Points 6,790.42 -20.91 4,053.51 -10.12 1,595.17 -8.10 6,142.60 -19.47 10,334.10 8.09 15,631.64 -111.37 2,692.67 -4.59 2,039.18 -4.49

% -0.31 -0.25 -0.51 -0.32 0.08 -0.71 -0.17 -0.22

YTD% 15.29 12.15 11.71 13.13 18.91 31.16 22.09

9.28

Dow Jones S&P 500 Nasdaq

16,606.3 63.2 0.38 0.18 1,900.5 8.0 0.42 2.82 4,185.8 31.5 0.76 0.22

INDEX GAINERS

INDEX GAINERS

Ticker Company MWC Manila Water Co MEG Megaworld Corporation EDC Energy Dev't Corp ICT Int'l Container Term AGI Alliance Global Inc

Price 26.40

4.57 6.15 112.50 30.50

% 1.54 1.11 0.65 0.36 0.33

OTHER NEWS:

MEG: Going further east in Eastwood Economy: Liquidity growth expected to ease in 2H14 Economy: Customs misses collection target in April Economy: Three more PPPs due for roll-out

MARKET SUMMARY:

The PSEi continued to decline, losing 20.91 points or 0.31% to close at 6,790.42. Many investors opted out of the market amid uncertainty regarding 1Q14 GDP numbers, which are forecasted to slow to 6.35% from the 7.7% seen the same quarter last year.

The index ended the day with 18 decliners, 9 gainers, and 3 unchanged issues. Save for the Industrial sector (+0.08%), all sectors closed lower with Mining & Oil posting the largest decline (-0.71%). Significant decliners were BLOOM (-2.72%), LTG (-1.68%), SCC (-1.49%), AC (-1.38%), and BDO (-1.23%). On the other hand, notable gainers were MWC (+1.54%), MEG (+1.11%), and EDC (+0.65%).

Value turnover decreased to Php7.2Bil from Php7.7Bil the previous session. Foreigners were net sellers, disposing Php748Mil worth of shares.

INDEX LOSERS

INDEX LOSERS

Ticker Company

BLOOM Bloomberry Resorts

LTG LT Group Inc

SCC Semirara Mining Corp

AC

Ayala Corporation

BDO BDO Unibank Inc

Price 11.46 14.06 384.00 642.00 88.40

% -2.72 -1.68 -1.49 -1.38 -1.23

TOP 5 MOST ACTIVE STOCKS

TOP 5 MOST ACTIVE STOCKS

Ticker MBT URC TEL MEG MPI

Company

Turnover

Metrobank

1,101,153,000

Universal Robina Corp

532,820,000

Phil Long Distance Co 395,960,000

Megaw orld Corporation 344,347,100

Metro Pacific Inv Corp 240,176,300

PHILIPPINE EQUITY RESEARCH

STOCKS IN FOCUS:

COLing the Shots: "Sell in May and go away" doesn't work Many investors are wondering if they should "Sell in May and go away" especially given the PSEi's elevated valuation and similarities of market conditions today and May of last year. However, a study of the monthly performances of the PSEi during the past 10 years shows that returns for the month of May is no worse than those of other months of the year.

Although the market is currently undergoing a correction, we don't expect the magnitude of the drop to be the same as that of 2013. Unlike last year, US interest rates are now going down, leading to a wider spread between US and Philippine bonds. As such, there is less incentive for foreign investors to sell their peso assets.

DD is a good company that could become a bad stock. Although it has an attractive story to tell with the right owners and partners and the right product in the right location, we are concerned that it could disappoint investors given its over ambitious earnings target and the significant jump in its share price recently which makes its valuations unjustifiable.

Our COLing the Shots stock picks continued to perform well the last month. Unfortunately, out of all the stocks that we like, only three remain investible ? MBT, MEG and SMPH. The rest have become unattractive due to valuations. This is the reason why we welcome the ongoing correction as this would allow us to buy more fundamentally attractive stocks at reasonable valuations.

As far as changes in the COLing the Shots stock picks list are concerned, we are removing EEI due to its disappointing 1Q14 earnings performance. We also want to highlight that we increased our fair value estimate for AC to Php715.00/sh resulting to an increase in our "buy below price" to Php621.00/ sh.

April Lynn Tan, CFA

TOP STORIES:

EMP: Going Global Emperador recently agreed to acquire 100% of Whyte & Mackay from United Spirits for an enterprise value of ?430 Mil of Php32 Bil. Aside from being earnings accretive, Whyte & Mackay also has strong growth potential as it continues to build its branded whiskey business. The acquisition of Whyte & Mackay is part of EMP's strategy in achieving its Php11.6 Bil net income target by 2016/2017.

Earnings accretive and essential to future growth. The acquisition of Whyte & Mackay will increase Emperador's revenues by an estimated 39.5% from Php29.87 Bil to Php41.66 Bil and EBITDA by 20.2% from Php8.22 Bil to Php9.88 Bil based on Emperador's actual results as of yearend December 2013 and on Whyte & Mackay's normalized earnings estimate for the fiscal year ending March 2014. The acquisition will be EPS accretive as the transaction will be done mostly through cash and debt. No new shares will be issued.

Putting cash into work. The acquisition of Whyte & Mackay is part of Emperador's plan to achieve its net income target of Php11.6 Bil by 2016/2017, double its profit in FY13. The acquisition also makes good use of its huge cash level of Php21.5 Bil as of end-March 2014, which is equivalent to 12.5% of its market capitalization. The deal will put Emperador in net debt position but this should improve the company's capital efficiency given the lower cost of debt compared to cost of equity.

Richard La?eda, CFA

Ticker: EMP Rating: Hold Target Price: Php11.33

Share Price Movement

120

110

100

90

80 26-Feb-14

26-Mar-14

26-Apr-14

EMP PSEi

26-May-14

TUESDAY, 27 MAY 2014

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PHILIPPINE EQUITY RESEARCH

Market concerns over valuation. Emperador has been sold down by the market on concerns over the valuation of the acquisition. The acquisition was valued at 19.3X EV/EBITDA, lower than what Suntory Holdings paid for Beam (20X EV/EBITDA), and what LVMH paid for Glenmorangie in 2004 (23X). But part of Whyte & Mackay's earnings derived from sales of unbranded bulk whisky which is a low-margin business. The company did not disclose how much of its revenues come from the sales of unbranded bulk whisky but valuation of the acquisition will go up if this was excluded.

EDC: EDC plans JV for US$1Bil 220MW geothermal project in Indonesia EDC plans JV for US$1Bil 220MW geothermal project in Indonesia. EDC said it is planning to enter into a JV in Indonesia for a US$1Bil 220MW geothermal project. EDC said that details for the project have not yet been finalized, but EDC will likely take an initial minority project of 20% or an investment of US$200Mil on the part of EDC. However, EDC will increase its ownership in the project and have majority control of the project over time. EDC said that its potential foreign partner has already started initial drilling in the geothermal concession area, and EDC role would be to conduct further drilling and eventually construct and operate the plants.

Given that most details of the project is still not available, it is difficult to gauge the impact of the new project on EDC's long term profitability and value. The 220MW capacity of the new project represents 18.2% of EDC's total capacity.

Maintain BUY rating. We have a BUY rating on EDC with a FV estimate of Php7.60/sh based on the DCF method. EDC is a pure play on renewable energy while 80% of its power generation capacity is secured with long-term take-or-pay contracts.

OTHER NEWS:

MEG: Going further east in Eastwood Megaworld disclosed that it is expanding Eastwood City by adding 1.5 hectares amid growing demand for office and commercial spaces in the area. The company has acquired property on the eastern part of the development, beside Eastwood Le Grand Tower 3. MEG is projecting to build 100,000 sqm of office space and 600 residential units in the newly acquired lot. With the additional property space, this brings Eastwood City's area up to 18.5 hectares.

Economy: Liquidity growth expected to ease in 2H14 Following the last hike in bank reserve requirements wherein the reserve requirement ratios for universal/commercial banks and thrift banks have been raised by one percentage point, the BSP has already seen a slowdown in liquidity growth from 36% to 34%. At this pace, a more normal growth of domestic liquidity can be expected beginning the second half of 2014. Latest money supply and lending data will be released this Friday. (source: BusinessWorld)

Economy: Customs misses collection target in April The Bureau of Customs collected Php30.8Bil in duties and taxes last April, up 13.4% from the Php27.2Bil recorded in April 2013 but still below its target of Php35.8Bil. The improvement came on the back of continued process improvements, tighter watch over imports and import values of goods. Despite missing the target, the strong growth in tax collections is beneficial for the economy and fiscal policies of the government. The bureau aims to collect Php408Bil in duties and taxes this year. (source: BusinessWorld)

George Ching

Ticker: EDC Rating: Buy Target Price: Php7.60

Share Price Movement

120

110

100

90

80 26-Feb-14

26-Mar-14 EDC

26-Apr-14 PSEi

26-May-14

Jed Frederick Pilarca Garie Ouano Meredith Hazel Cua

TUESDAY, 27 MAY 2014

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PHILIPPINE EQUITY RESEARCH

Economy: Three more PPPs due for roll-out Three more PPP projects are set to be rolled out soon. These projects are the operation and maintenance (O&M) contract for LRT-2, the Integrated Transport System-Southwest Terminal (ITS), and the O&M contract for Laguindingan International Airport in Cagayan de Oro. The ITS project, worth Php2.5Bil, is scheduled for bidding in June. The other two projects will be rolled out as soon as authorities finalize planned changes to bidding parameters. These potential changes were not elaborated. Reportedly interested investors include ALI, AC, MPI, and SMC. (source: BusinessWorld)

TUESDAY, 27 MAY 2014

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PHILIPPINE EQUITY RESEARCH

Calendar of Key Events

MAY

MON

TUES

WED

THURS

FRI

1

2

5

6

7

8

9

JFC: Ex-date Php0.75 Cash Dividend

CNPF: Equity Offering

ATI: Ex-date Php0.35 Cash AT: Ex-date Php0.15 Cash

Dividend

Dividend

SCC: Annual Shareholders EDC: Annual Shareholders

BEL: Ex-date Php0.02 Cash FLI: Annual Shareholders

Meeting

Meeting

Dividend

Meeting

CEI: Annual Shareholders

MFC: Ex-date Php0.13 Cash BRN: Annual Shareholders

Meeting

Dividend

Meeting

CHIB: Annual Shareholders PF: Annual Shareholders

Meeting

Meeting

GSMI: Annual Shareholders

Meeting

12

13

14

15

16

SMPH: Ex-date Php0.19

PGOLD: Annual

FMETF: Annual Shareholders MJC: Ex-date Php0.05 Cash HLCM: Annual Shareholders

Cash Dividend

Shareholders Meeting

Meeting

Dividend

Meeting

SCC: Ex-date Php12.00 Cash

GPH: Annual Shareholders ION: Annual Shareholders

Dividend

Meeting

Meeting

CPG: Ex-date Php0.019

SPM: Annual Shareholders

Cash Dividend

Meeting

FGEN: Annual Shareholders

Meeting

GTCAP: Annual Shareholders

Meeting

URC: Annual Shareholders

Meeting

RLC: Annual Shareholders

Meeting

19

20

21

22

23

AP: Annual Shareholders Meeting

SEVN: Ex-date Php0.30 Cash Dividend

GMA7: Annual Shareholders Meeting

SPH: Annual Shareholders Meeting

AEV: Annual Shareholders MVC: Ex-date Php0.05 Cash

ACR: Annual Shareholders

Meeting

Dividend

Meeting

MCP: Annual Shareholders PXP: Annual Shareholders

LOTO: Annual Shareholders

Meeting

Meeting

Meeting

APO: Annual Shareholders

UBP: Annual Shareholders

Meeting

Meeting

PCOR: Annual Shareholders

Meeting

FFI: Annual Shareholders

Meeting

26

27

28

29

30

FPH: Annual Shareholders SM: Ex-date Php10.34 Cash EEI: Ex-date Php0.05 Cash LIB: Annual Shareholders GMAP: Annual Shareholders

Meeting

Dividend

Dividend

Meeting

Meeting

MER: Annual Shareholders KPH: Annual Shareholders BKD: Annual Shareholders FDC: Annual Shareholders

Meeting

Meeting

Meeting

Meeting

CSB: Annual Shareholders LFM: Annual Shareholders

PBB: Annual Shareholders

Meeting

Meeting

Meeting

OM: Annual Shareholders

Meeting

MPI: Annual Shareholders

Meeting

CHIPS: Annual Shareholders

Meeting

PNB: Annual Shareholders ROCK: Annual Shareholders

Meeting

Meeting

SOC: Annual Shareholders Meeting

LRI: Annual Shareholders BC: Annual Shareholders

PIP: Annual Shareholders

Meeting

Meeting

Meeting

PHA: Annual Shareholders

SPC: Annual Shareholders

Meeting

Meeting

TUESDAY, 27 MAY 2014

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