August 18, 2014

AC’s core earnings recover in 2Q14

Ayala Corp (AC) reported a 34% increase in 1H14 net earnings to P9.80b, thus implying 2Q14 net earnings grew 55% YoY to P4.33b. The growth was mainly driven by lower one-off expenses from Globe Telecom Inc (GLO) this year (consisting mainly of AC’s share of GLO’s accelerated depreciation charges, estimated at approximately P140m in 2Q14 and P860m in 2Q13, related to the change-out of equipment from its network upgrade) and a P1.8b net gain from the sale of Stream Global Services Inc by Liveit in 1Q14. Stripping out AC’s share of GLO’s non-recurring items and the P1.8b one-off gain booked this year, we estimate AC’s 2Q14 and 1H14 net earnings at P4.4b and P8.1b, respectively.

Earnings are down 10% in 1H14, due to lower trading gains booked in 1Q14 by Bank of the Philippine Islands (BPI), higher parent related expenses from new debts (US$300m exchangeable bonds in May) and increased business development costs. To recall, BPI’s income contribution declined 49% in 1Q14, thereby pulling down AC’s consolidated recurring net income to P3.6b, a 30% drop. The bank’s performance in 2Q14, however, recovered strongly up 33%, thus enabling AC to post a 19% increase in 2Q14 recurring net profit to P4.4b.

All major operating units, namely BPI, GLO, Ayala Land (ALI) and Manila Water Co Inc (MWC) all posted growth in 2Q14. Combined, these units accounted for approximately 98% of AC’s total equity in net earnings of PHP5.95b.

BPI continues to be largest contributor to net profits with P2.1b, up 33% YoY on the back of BPI’s higher stand-alone profit (up 21% YoY) and AC’s higher stake in the bank to 48% from 44%. ALI’s income contribution also grew strongly, up 24%, as earnings rose 25%. Excluding one-offs, we estimate GLO’s net income contribution reached P1.3b in 2Q14. This represents a 22% increase as net profits grew 27%. Meanwhile, MWC contributed P770m, higher by 23%, with stand-alone profits increasing by approximately 9% in 2Q14.

Making up the balance are AC’s other investments, namely Integrated Microelectronics Inc (IMI), LiveIt, AC Energy, and automotive, among others. Combined, these units contributed a net profit of P138m, a reversal from losses of P170m. IMI and AC Energy both posted profits with P164m (vs P48m in 2Q14) and P140m (vs a loss of P10m), respectively. However, LiveIt continue to be a drag, with higher losses of P114m, presumably due to the sale of Stream early this year. Auto turned in a loss of P34m (from profits of P40m in 1Q14) due to startup costs incurred by AC’s new car dealership business (Volkswagen) and lower income from Honda Car Phils.

AC continues to explore growth opportunities in the energy space and has committed to invest another US$600m in equity investments in the next 12-24 months. To date, it has spent around 92% of its US$430m committed equity investment on thermal, wind and hydro power projects.

As of end-June, total parent net debt amounted to P67.8b, a 49% increase from end-2013. Gross debt is at P105.6b while parent cash amounted to P37.8b. Gearing, however, remains healthy with net debt-to-equity ratio at 0.44x.

Our take: In all, AC’s recurring 1H14 net income is at pace with expectations (about 50% of full-year consensus forecast). We believe AC’s overall profit picture should remain steady, with the conglomerate’s earnings still mainly driven by major operating units ALI, BPI, GLO and MWC. New power projects, with a total attributable capacity of 114 MW, should come on stream in 4Q14 but their overall contribution to AC’s consolidated earnings remains insignificant. – WealthSec