October 25, 2015

Union Bank’s 9M15 earnings decline 33% to P3b

Union Bank of the Philippines (UBP) today disclosed that its 9M15 earnings amounted to P3b, 33% lower YoY. The bank’s results were mainly dragged by the 60% decline in trading gains (to P795m) and 56% drop in miscellaneous income (to P450m).

These resulted in the 28% YoY decline in non-interest income to P3.5b. On the other hand, the bank’s net interest income grew 4% YoY to P5.6b, supported by the 33% increase in loans (to P164b) and 22% growth in its investment portfolio (to P104b). However, as a result of lower non-interest income, net revenues declined 11% YoY to P9.1b.

While operating expenses grew by just 4% YoY to P5.0b, provisions were 32% higher at P275m as the bank started to provide more for its growing consumer loan portfolio. UBP’s 9M15 results have come significantly below the 2015E consensus expectation of P7.3b, accounting for only 41% of the estimate. - WealthSec

BDO nets P17.6b in 9M15

In a disclosure to the Exchange, BDO Unibank (BDO) said that it netted P17.6b in 9M15, 5.6% higher YoY. The bank grew its loan portfolio by 19% YoY to P1.2t on the back of sustained growth across target segments. This was supported by the 12% increase in deposits to P1.6t, supported by the bank’s continued branch expansion, with low-cost deposits growing at a faster pace of 16% YoY. These brought 9M15 net interest income to P41.8b, 12% higher YoY.

Fee-based income came in at P13.9b, growing 9% while trading and FX gains was at P6.3b, 4% higher YoY. So far this year, the bank has set aside provisions amounting to P2.7b, markedly lower than the P3.9b booked in the same period last year, as the bank’s asset quality continued to improve. The bank’s NPL ratio declined to 1.2% from 1.4% last year, while NPL cover stood at 182%, relatively the same level as last year.

Our take: BDO’s 9M15 results are trailing our expectations, accounting for just 69% of our 2015E earnings estimate. This can be traced to the slower than expected pick-up in net interest income which, in turn, is a result of continued margin pressures due to competition and delayed interest rate hikes. The sustained loan and low-cost deposit growth were not adequate to fully offset margin compression. The bank was also able to lower its provisions on the back of the continued improvement in its NPL ratio. We will review our numbers pending the release of the full details of BDO’s results. – WealthSec

October 20, 2015

Villar mulls VLL merger with STR

BusinessWorld today quoted Manuel Villar, chairman of Vista Land and Lifescapes Inc (VLL) that he is considering the merger of the company with shopping mall operator Starmalls Inc (STR). The Villar family is the controlling shareholder of both VLL and STR.

Our take: If this plan pushes through and depending on the final valuations, STR can potentially enhance the value of VLL and could even spur a rerating of VLL shares. Annualizing the 1H15 results of STR indicate that the company can potentially contribute another 8% and 10% to VLL’s annual revenues and net income, respectively.

More importantly, a 2014 independent appraisal put the fair value of STR’s investment property at P21.26b which can add roughly 12% to VLL’s gross asset value by our estimates. Such valuation also translates to a cap rate of 9.4% which we believe is fair (vs. the 8.5% cap rate valuation assigned by the market for the bigger mall operators) given STR’s relatively limited reach at the moment.

We believe that the merger between VLL and STR can also significantly enhance VLL’s operations. The simultaneous expansion of the mall business with VLL’s plan to build more mixed-use estates across the country will not only diversify and expand the company’s revenues base but may also spur further reflation of VLL’s land assets and development projects. This can prove to be a potential catalyst for a rerating of VLL shares which have been historically trading at a deep discount (between 50%-60% by our estimates) to its net asset value. – WealthSec

Moody’s report highlights strength of Philippine banks

The Philippine Star today quoted a report by Moody’s Investor Service as saying the Philippine banking system is a source of credit strength as it is “virtually immune from external shocks.” It reportedly highlighted that Philippine banks are largely deposit-funded and is also aided by remittances from OFWs and are thus less dependent on external funding and exports. Further, the article quoted Moody’s as saying that the local banking system, as a whole, is well-capitalized, profitable, well-managed and very liquid.

Our take: We agree with the view of Moody’s that Philippine banks should be less affected by the current global headwinds that are affecting emerging countries. This should allow local banks to continue supporting credit growth while leveraging on their expanding operations. This, however, does not mean that banks are totally unscathed. Banks have been affected by the uncertainty in monetary policy outlook due to decelerating inflation numbers.

This has resulted in the delay of expected interest rate hikes, causing bank margins to stay lower for longer. Banks under our coverage are now working on maintaining their growth trajectories while operating more efficiently in order to compensate for flattish margins and low asset yields. – WealthSec

Government beefs up spending in August

Quoting data from the Budget department, news portal interaksyon.com reported that total government disbursements grew 15.3% YoY in August and 11.4% in Jan-Aug this year. More importantly, the report showed infrastructure spending grew 29.2% during the month and 21.5% in Jan-Aug. The disbursements were further bolstered by the 46% hike in maintenance spending (on higher funding support for the conditional cash transfer program, indigent senior citizens pension program, and Armed Forces equipment maintenance), as well as the 184% hike in support for government-owned and –controlled corporations. The latter is largely due to the P4.4b housing subsidy for resettlement of informal settlers and P3.8b allocation for a multi-
purpose dam project.

Our take: The numbers bode well for the economy given that the weakness in GDP growth over the past two quarters has been largely traced to weak government spending. It is also important to note that government spending growth over the last three months have reportedly been growing at an average of 20% vs. 6.7% in Jan-May. Furthermore, the numbers point to increased utilization rates of cash allocations for construction of classrooms, farm-to-market roads, and roads-to-tourist destinations which should provide immediate catalysts for growth. Barring any major destruction from calamities, the acceleration in government spending should bode well for economic growth and eventually for overall market sentiment. – WealthSec

Metro Pacific Investments Corp’s (MPI) connector road project faces delay

The Philippine Daily Inquirer today reported that Metro Pacific Investments Corp’s (MPI) 8-km elevated connector road is facing further delays and will not be awarded within this year. The project has been delayed for more than three year now because of disagreements on how the toll road project should be implemented. The original plan was to have the toll road project completed before the end of President Aquino’s term in mid-2016. Assuming the connector road project is approved for implementation early next year, it will have to go through the required Swiss challenge process which takes about 90 days to finish. That would place the awarding in early in 1H2016 with project completion by 2019 to 2020.

Our take: While the project is not expected to contribute to MPI’s profits in the next several years, a further delay could affect the project’s overall returns. Note that the connector road is one of two connector roads that will link MPI’s North Luzon Expressway with San Miguel Corp’s (SMC) South Luzon Expressway. SMC’s own connector project is targeted for completion by early 2018, two years ahead of MPI’s connector project. MPI is looking at this project to interconnect its toll road assets north and south of Metro Manila with enhancing the overall efficiency of its toll road operations. – WealthSec

October 12, 2015

BLOOM buys land in Vertis North

Bloomberry Resorts Corp (BLOOM) announced last Friday that its property arm, Sureste Properties Inc (SPI), is purchasing a 15,676sqm land in Vertis North, Quezon City Central Business District. The lot is part of the National Housing Authority’s (NHA) share in its joint venture with Ayala Land Inc (ALI) in the Vertis North project. The total purchase price is P1.98b or P126k/sqm. SPI has paid the 20% down payment of P395m. Another 40% will be paid on 8 Nov 2015, and the remaining balance will be settled upon completion of the necessary documents. SPI proposes to develop the property into a mixed-use development with hotels, commercial and residential features.

 Our take: BLOOM said the acquisition will be funded by internally generated funds of SPI. BLOOM had cash of P12.9b as of end-1H15. While we view this as part of the company’s efforts to diversify its revenue sources, it remains to be seen how this will pan out given stiff competition among property developers in Quezon City and given ALI’s own development plans for Vertis North. It should also be worth monitoring how the company will finance the construction and development of the project alongside the company’s ongoing projects and planned new investments abroad as these will have cash flow implications. – WealthSec

105-MW Mindanao coal plant begins commissioning

The Philippine Star today reported that Sarangani Energy Corp (SEC), a 75%-owned subsidiary of Alsons Consolidated Resources Inc (ACR), has started commissioning the first 105MW unit of its 2x105 MW coal-fired power plant in Mindanao. The project, which is targeted to commence commercial operations in 1Q16, has an offtake contract to supply 70-MW of its capacity to South Cotabato Electric Cooperative (Socoteco II) by end-2015. A second 105-MW unit is planned for construction and is targeted to begin commercial operations by 2018.

Our take: The SEC power plant is the second coal-fired power to be commissioned in recent months. Last September, the first 150 MW unit of Therma South Inc’s (TSI) 2x150 MW Davao coal-fired power plant was declared to be fully operational. The commissioning of the second unit remains on track in early 2015. The commissioning of these base load power plants should help augment the power supply in Mindanao, which has been facing power storage in the past two years.

The Mindanao grid is heavy reliant on hydroelectric power plants, which accounts for almost half of the grid’s dependable capacity. The year’s supply situation in Mindanao could be critical especially with the threat of potential long dry spell from El Nino until mid-2016. Based on data from the National Grid Corp of the Philippines, the Mindanao grid has a deficit of 7 MW as of 6 am today. – WealthSec

International Container Services Inc (ICT) cuts this year’s capex by half

The chairman of International Container Services Inc (ICT) told BusinessWorld in an interview that the company expects to spend just half of its US$530m programmed capex this year. This is in light of the slowing global growth. The company has spent US$136.7m in 1H15. However, the chairman said the company will still be on a lookout for any acquisition opportunities, including investments in airports.

Our take: The slowdown in acquisitions may take some toll on future growth given that most of the company’s growth has been largely driven by new investments. However, this is not to say that the company will not be having growth drivers in the meantime. It has completed a terminal in Argentina while the development of some projects is in full swing in Colombia, Congo and Australia. It has also just won a favorable court ruling on its case against a labor union in its port in Portland, Oregon which, if finally implemented, could improve the operations and eventually the profitability of the said court. – WealthSec

Vista Land and Lifescapes Inc (VLL to build second Vista City

In a disclosure to the Exchange today, Vista Land and Lifescapes Inc (VLL) said it will be spending P40b to develop Vista City in Iloilo. The project will be the company’s flagship development in the Visayas and will include malls, hotels, BPO office buildings and hospitals. It covers some 500 hectares on Panay Island and it is located near major universities and hospitals in the region.

Our take: The project was originally a residential development but VLL has transformed it into a mixed-use estate under the company’s Communicity concept. This will be VLL’s second Vista City project. The development of the first Vista City on VLL’s Daang Hari property is now in full swing and is expected to gather further momentum with the opening of the Muntinlupa-Cavite Expressway that rendered the property more accessible.

While we do not think that the two Vista City projects will immediately yield a significant base of recurring income, VLL’s Communicity concept should enable it to diversify its revenue sources and spur stronger growth in the long run given the higher margins created by investment assets. This also bodes well as far as investor sentiment is concerned and could lead to better valuations for VLL.

It remains to be seen however how the company plans to finance such big-ticket items as this can create near-term pressure on earnings due to potentially higher interest expenses (if financed through debt) or EPS dilution (in case of an equity issuance). – WealthSec