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COL Prospects for 2015 and Beyond
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Transcript of COL Prospects for 2015 and Beyond
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APRIL LYNN TAN, CFA VP & HEAD OF RESEARCH
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Stay the Course! PSEi on track to hit 10,000 by 2020 at the latest
7,500
10,000
3000
4000
5000
6000
7000
8000
9000
10000
11000
2012 2013 2014 2015 2016 2017 2018 2019 2020
PSEi 10,000
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2015: Liquidity will be the Main Driver of the Stock Market
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Deflation rather than inflation is now a bigger concern. . .
. . . Reducing pressure for central banks to raise interest rates
20
40
60
80
100
120
Jan-
13
Mar
-13
May
-13
Jul-1
3
Sep
-13
Nov
-13
Jan-
14
Mar
-14
May
-14
Jul-1
4
Sep
-14
Nov
-14
Jan-
15
Crude oil
-2.0-1.00.01.02.03.04.05.06.07.0
Inflation
US Europe Japan China
2015: Liquidity will be the Main Driver of the Stock Market
Source: Bloomberg Source: Bloomberg
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Domestic factors ensuring low interest rates Strong government finances Strong external account
position Ratings upgrade Banks awash with cash
0.00
1.00
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3.00
4.00
5.00
6.00
7.00
8.00
9.00
1/4/2010 1/4/2011 1/4/2012 1/4/2013 1/4/2014
Philippines 10-Year T-Bond Yield
2015: Liquidity will be the Main Driver of the Stock Market
Source: BSP, Bloomberg
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Stocks Remain the Most Attractive Peso Asset Class Available
Comparative Yield of Different Asset Class
Stocks* Time Deposit SDA 10-Yr-T-Bond
5.6% 1.4% 2.5% 3.6%
Due to low interest rates, stocks remain the most attractive peso asset class even though valuations seem expensive compared to
historical averages
*The PSEis earnings yield based on 7,400
Source: BSP, Bloomberg, COL Estimates
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Stocks Remain the Most Attractive Peso Asset Class Available
Spread between the PSEis earnings yield and the 10-yr bond rate remains positive despite the PSEis above average P/E
Source: Bloomberg, COL Estimates
0.02.04.06.08.0
10.012.014.0
Earnings Yield vs 10 Year Bond Rate
Earnings Yield 10 Year
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Spread
Spread Average
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Growth more Important than Valuation Presently
Comparison of Stock Market Returns, GDP Growth and P/E Ratio
COUNTRY 2014 Return (%) 2014 GDP Growth 2014 PE 2015 GDP Growth 2015 PE
Russia -7.2 0.5 4.6 -0.2 4.7 Brazil -2.9 0.2 11.6 0.9 10.5 UK -2.7 3.0 13.9 2.6 13.6 Europe 1.2 0.8 14.4 1.1 13.1 Japan 7.1 0.3 19.2 1.0 17.0 US 11.4 2.3 17.3 3.0 16.2 Thailand 15.3 0.8 16.2 4.0 13.8 Indonesia 22.3 5.1 17.3 5.4 14.7 Philippines 22.8 6.0 20.3 6.1 17.6 India 29.9 5.5 17.5 6.3 14.5 China 52.9 7.4 13.0 7.0 11.6 Source: Bloomberg
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Consumer Spending has Always Been Resilient. . .
Consumer Spending Growth under Different Administrations
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Cory Aquino Ave:4.2%
Ramos Ave:3.6%
Estrada Ave:4.5%
Arroyo Ave:4.3%
PNoy Ave:5.6%
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. . . And is Expected to Stay Resilient
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To Benefit from Falling Oil Price
Impact of US$10 Decline in Oil Price on the Economy
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Government Spending Usually Picks up a Year Before a Presidential Term Ends
Comparison of Government Spending Growth
President Spending Growth
Term Average Last Year of Term Cory Aquino 4.0% -1.9% FVR 3.7% 4.0% Estrada/GMA -1.1% 3.6% GMA 5.5% 10.9% PNoy 6.7% ?
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Reforms Expected to Endure Beyond Current Administration
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End 2015 PSEi Target Raised from 7,800 to 8,300
Fundamental factors coupled with falling US bond rates warrant a reduction in risk free rate assumption from 5.0% to 4.5%
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1.0
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US vs PH 10 year yield
US 10 Year PH 10 Year Spread
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(FV: PHP17.80, BUY BELOW: PHP15.48)
(FV: PHP53.20, BUY BELOW: PHP46.26)
Manufactures raw materials used by consumer companies
Focus on specialized products makes it less vulnerable to competition
Consolidation of Chemrez to be value accretive
Market leader in air-conditioning and refrigeration
To benefit from growing demand due to large untapped market and Filipinos increasing affluence, improving margins, and contribution from new businesses
Attractive valuations
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(FV: PHP1,340, BUY BELOW: PHP1,165)
Holding company for Ty familys stake in Metrobank, Toyota Motors Philippines (TMP), Federal Land and Global Business Power
TMP - A major beneficiary of growing motorization of the Philippines and the weak yen
TMP now accounts for 30% of net income and 44% of NAV
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(FV: PHP38.40, BUY BELOW: PHP33.39)
(FV: PHP9.90, BUY BELOW: PHP8.61)
Pure play on renewable energy More than 80% of capacity
secured with LT take-or-pay contracts
Completed rehabilitation of Bacman to fuel a 27% increase in revenues and a 32% growth in net income in 2015
A cheaper way to own EDC Power generation capacity of Sta Rita and San Lorenzo gas plants fully secured Avion and San Gabriel plant projects to boost attributable power generation
capacity by 23.5% in 2016 Share placement no longer a concern after FGEN raised Php7.5 Bil from share
sale
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(FV: PHP46.10, BUY BELOW: PHP40.09)
Largest power distributor in VisMin Also has a growing power generation
portfolio which includes several renewable energy plants
89% of power generation capacity contracted
Profits expected to rebound by 13% in 2015 as new plant starts operations
Attractive dividend yield of 2.5%
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(FV: PHP156.00, BUY BELOW: PHP135.65)
(FV: PHP112.00, BUY BELOW: PHP97.39)
Market leader for domestic travel with a 64% market share
A major beneficiary of industry consolidation and falling oil prices
Removal of the fuel surcharge and Php52 Mil fine for the holiday incident to have minimal impact on profits
Core profits to more than double to ~Php6 Bil in 2015
Second largest bank (assets and deposits) Trading at only 1.5X P/BV vs. 2.0X P/BV for BDO and 2.4X P/BV for BPI Steep discount unwarranted even with concerns of capital raising, larger than
normal exposure to bonds, weaker ability to generate non-interest income
Loan portfolio +21%, ROE 12.8% (as of end September)
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(FV: PHP22.20, BUY BELOW: PHP19.38)
(FV: PHP855.00, BUY BELOW: PHP743.48)
Despite being one of the biggest residential property developers, it is still predominantly a Philippine mall operator (70% of operating income, 64% of NAV) making it a good proxy for consumer spending
Possibility of a share placement no longer a concern as the company already raised Php18.0 Bil through the sale of 1.06 Bil treasury shares last November
Among the oldest and most diversified holding companies in the country with a reputation of excellence given its investments in market leaders BPI, ALI, GLO, and MWC
Diversification into power and infrastructure to help drive LT growth and increase defensive sources of income and cash flow
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Sector Top Picks FV Buy Below Price
Consumer DNL 17.80 15.48
CIC 53.20 46.26
GTCAP 1,340.00 1,165.22
Power EDC 9.90 8.61
FGEN 38.40 33.39
AP 46.10 40.09
Airlines CEB 156.00 135.65
Banks MBT 112.00 97.39
Properties SMPH 22.20 19.30
Conglomerates AC 855.00 743.48
Summary of Stock Picks
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We believe that the market will continue to move higher in 2015, bringing the PSEi well on its way to meet our goal of 10,000 by 2020 at the latest.
The most important reason why the stock market will continue to go up is ample liquidity, both globally and domestically. The resulting drop in interest rates makes stocks more attractive compared to other liquid investments despite the PSEis relatively expensive valuation from a historical perspective.
Other reasons why we expect the market to continue going up is the Philippines above average economic growth outlook for this year and beyond, the favorable impact of falling oil prices on consumer spending, and expectations that reforms to address shortcomings in the country will endure beyond the current administration.
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Given our view that liquidity will continue to drive the stock market higher, we increased our end 2015 target for the PSEi to 8,300 from 7,800 after we factored in a lower risk free rate assumption of 4.5% vs. 5.0% previously.
Our top picks for 2015 include DNL, CIC, GTCAP (consumer plays/play on weak yen), AP, EDC, FGEN (bottom up picks/power plays), MBT (value play), SMPH (consumer play proxy), CEB (oil play) and AC (bottom up pick/ power and infra play). Risks for 2015 include the uneven appreciation in share prices, volatility, and share placements.
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Slide Number 1Stay the Course!2015: Liquidity will be the Main Driver of the Stock Market2015: Liquidity will be the Main Driver of the Stock Market2015: Liquidity will be the Main Driver of the Stock MarketStocks Remain the Most Attractive Peso Asset Class AvailableStocks Remain the Most Attractive Peso Asset Class AvailableGrowth more Important than Valuation PresentlyConsumer Spending has Always Been Resilient. . .. . . And is Expected to Stay ResilientTo Benefit from Falling Oil PriceGovernment Spending Usually Picks up a Year Before a Presidential Term EndsSlide Number 13End 2015 PSEi Target Raised from 7,800 to 8,300Slide Number 15Slide Number 16Slide Number 17Slide Number 18Slide Number 19Slide Number 20Slide Number 21Slide Number 22Slide Number 23Slide Number 24Slide Number 25