FRIDAY, 14 NOVEMBER 2014 STOCKS IN FOCUS: CEB: Seasonality and weaker peso pull down 3Q14 results, full year outlook still positive Seasonality and weaker peso pull down 3Q14 results. Cebu Pacific reported 3Q14 net loss of Php1.1 Bil, worse than the Php750 Mil loss registered in 3Q13. The loss was largely due to the fact that the third quarter is a seasonally weak period. Moreover, bulk of the loss was due to the booking of Php911 Mil worth of forex losses which was a result of the quarter on quarter depreciation of the peso. Nevertheless, core operating results were actually in line with expectations. 3Q14 EBITDA reached Php979Mil, almost four times that of 3Q13’s Php225Mil. Revenues were also in line with expectations, with 3Q14 revenues up by 32.4% and 9M14 revenues higher by 25.7%. Growth was driven by both higher passenger numbers and yield. Fourth quarter earnings should also benefit from falling oil prices as CEB will start to benefit from the steep drop in oil price in September starting October. We are reiterating our BUY rating on CEB with an FV estimate of Php90/sh. Valuations remain attractive, with a 23% upside potential to our FV as of yesterday’s closing price. MBT: 9M14 profits miss estimates; downgrading FV estimate to Php106 but maintaining BUY rating 9M14 profits miss estimates. Metrobank’s 3Q14 profits jumped by 57.4% to Php4.0Bil. This brought its 9M14 net income to Php13.1Bil, equivalent to only 70.2% of our full year forecast. Earnings disappointed due to its weaker than expected fee income and profits from the trading business, partly offset by the booking of significant non-recurring gains. On the positive side, MBT’s core lending and deposit taking business remained strong with net interest income for the year to date period rising by 23% to Php34.0 Bil in 9M14. We are lowering our core net income forecast after as we factor in MBT’s weaker-than-expected non-interest income during 9M14. We are also downgrading our FV estimate on MBT from Php111.00/sh to Php106.00/sh. Nevertheless, we are maintaining our BUY recommendation. TOP STORIES: AGI: Disappointing results from subsidiaries RWM: Earnings disappoint yet again AC: Sustains strong growth in 3Q14 JFC: 9M14 earnings in line with estimates ICT: 9M14 core profits trail forecasts due to higher than expected operating expenses EDC: 9M14 earnings beat estimates as revenues exceed forecast CHIB: Earnings continue to lag on higher expenses AT: Lower margins and metal prices drag 9M14 earnings OTHER NEWS: Economy: FPI declines in October (As of 13 November 2014) INDICES INDICES PSEi All Shares Financials Holding Firms Industrial Mining & Oil Property Services Dow Jones S&P 500 Nasdaq Close Points % 7,198.63 -34.24 -0.47 4,237.06 -16.54 -0.39 1,691.84 -9.10 -0.53 6,281.78 -47.59 -0.75 11,682.76 7.84 0.07 15,186.47 -76.69 -0.50 2,868.32 -1.37 -0.05 2,118.81 -11.70 -0.55 17,652.8 2,039.3 4,680.1 40.6 1.1 5.0 0.23 0.05 0.11 YTD% 22.22 17.23 18.48 15.70 34.43 27.43 30.06 13.55 6.49 10.33 12.06 INDEX GAINERS INDEX GAINERS Ticker Company SMPH SM Prime Hldgs Inc GTCAP GT Capital Hldgs Inc BDO BDO Unibank Inc MEG Megaworld Corp URC Universal Robina Corp Price 17.60 1069.00 103.00 4.85 186.40 % 1.73 1.62 1.38 1.25 0.59 INDEX LOSERS INDEX LOSERS Ticker MBT AGI GLO EMP RLC Company Metrobank Alliance Global Inc Globe Telecom Inc Emeperador Inc Robinsons Land Corp Price 82.45 24.50 1,650.00 10.72 25.10 % -4.18 -3.54 -2.37 -2.19 -2.14 TOP 5 MOST ACTIVE STOCKS TOP 5 MOST ACTIVE STOCKS Ticker TEL BDO ALI AGI MBT Company Turnover Phil Long Distance Co 1,211,082,000 BDO Unibank Inc Ayala Land Inc Alliance Global Inc Metrobank 397,542,400 298,442,200 262,155,300 248,764,900 PHILIPPINE EQUITY RESEARCH MARKET SUMMARY: The PSEi made modest gains on Wednesday, lifted by positive corporate earnings results. The index rose 28.32 points or 0.39% to close at 7,232.87. Index gainers led decliners 14 to 13 while 3 issues remained unchanged. Apart from Holding Firms (-0.23%), all other sectors closed higher last trading session with Property (+1.01%) advancing the most. Notable gainers were RLC (+3.43%), EDC (+3.04%), BLOOM (+2.90%), GLO (+2.80%), and FGEN (+2.51%). On the other hand, significant decliners were LTG (-2.58%), SM (-1.13%), and PCOR (-0.79%). Value turnover decreased to Php8.1Bil from Php12.4Bil the previous session. Foreigners were net sellers, liquidating Php549Mil worth of shares. FRIDAY, 14 NOVEMBER 2014 page 2 PHILIPPINE EQUITY RESEARCH STOCKS IN FOCUS: CEB: Seasonality and weaker peso pull down 3Q14 results, full year outlook still positive Seasonality and weaker peso pull down 3Q14 results. Cebu Pacific reported 3Q14 net loss of Php1.1 Bil, worse than the Php750 Mil loss registered in 3Q13. The loss was largely due to the fact that the third quarter is a seasonally weak period. Moreover, bulk of the loss was due to the booking of Php911 Mil worth of forex losses which was a result of the quarter on quarter depreciation of the peso. Nevertheless, core operating results were actually in line with expectations. 3Q14 EBITDA reached Php979Mil, almost four times that of 3Q13’s Php225Mil. This brought 9M14 EBITDA to Php6.0Bil, 27.7% higher y/y, and in line with COL’s estimates at 73.4% of our full-year estimates. (it was slightly below consensus forecasts at 69.8% of full-year estimates) Revenues were also in line with expectations, with 3Q14 revenues up by 32.4% and 9M14 revenues higher by 25.7%. For the year to date period, revenues were equivalent to 75.4% of COL and 73.1% of consensus full year forecast. Exhibit 1: Results Summary in PhpMil Revenues EBITDA EBITDA Margin (%) Core Income Core Income Margin (%) Net Income Net Income Margin (%) 3Q13 8,855 225 2.5% (733) -8.3% (750) -8.5% 3Q14 11,728 979 8.3% (15) -0.1% (1,099) -9.4% % Change 32.4 335.9 229.1 (98.0) (98.5) 46.5 10.6 9M13 30,582 4,694 15.3% 1,990 6.5% 664 2.2% 9M14 38,446 5,992 15.6% 2,333 6.1% 2,079 5.4% % Change 25.7 27.7 1.5 17.2 (6.7) 213.1 149.1 Meredith Hazel Cua Ticker: CEB Rating: BUY Target Price: Php90.00 % Forecast COL Consensus 75.4% 73.1% 73.4% 69.8% 78.4% 72.0% 69.9% 64.1% Source: CEB, COL estimates, Bloomberg Revenues on track to meet estimates. Revenues for the third quarter grew 32.4% to Php11.7Bil, bringing the 9M14 total to Php38.4Bil, up 25.7% year-on-year. Growth was supported by an increase in both passenger volume and average yields, as the company continued to enjoy the benefits of industry consolidation. Cebu Pacific flew 12.5Bil passengers during the period, 14.7% more than that in 9M13. This also brings the company well on its way to meet our full year passenger volume target and the company’s own passenger volume target of 17Mil. Furthermore, average yield per passenger surged by 9.9% to Php2,895. The said factors increase our conviction that CEB will be able to meet our full year revenue targets especially since the fourth quarter is a seasonally stronger period. 9M14 forex loss down to 13% of 9M13’s loss. Cebu Pacific experienced forex losses amounting to Php911Mil during the third quarter. This is because of the peso’s depreciation from Php43.66 to a dollar as of end-June 2014 to Php44.96 to a dollar as of end-September 2014. However, for 9M14 forex losses just reached Php193Mil as the peso was only 1.2% weaker from its end 2013 level of Php44.40 to a dollar. Low fuel prices to manifest in 4Q14. Part of the reason why we are positive on CEB is falling oil price. Note that jet fuel price fell by around 5% from end August to end September this year due to several factors including the strong oil production in the US and slower global economic growth. According to management, it will benefit from the drop in oil price in the fourth quarter as the booking of fuel cost is one month delayed. During 3Q14, the cost of its fuel was still flattish on a year on year basis, explaining why CEB might have performed below consensus expectations. Nevertheless, CEB can still meet consensus’ full year earnings target assuming that oil prices stay where they are at US$96.37 per barrel. FRIDAY, 14 NOVEMBER 2014 page 3 PHILIPPINE EQUITY RESEARCH Reiterate BUY rating with FV estimate of Php90/sh. Despite CEB’s poor headline net income for 3Q14, we continue to like the company fundamentally as we still believe that the carrier is a major beneficiary of the advantages of industry consolidation and falling oil prices. Average yields have already significantly improved and we expect this trend to continue as CEB further solidifies its position as the domestic market leader. In addition, declining fuel prices should lead to significant cost savings for the company, although the benefit may come slightly later than what we originally expected. We are reiterating our BUY rating on CEB with an FV estimate of Php90/sh. Valuations remain attractive, with a 23% upside potential to our FV as of yesterday’s closing price. MBT: 9M14 profits miss estimates; downgrading FV estimate to Php106 but maintaining BUY rating 9M14 profits miss estimates. Metrobank’s 3Q14 profits jumped by 57.4% to Php4.0Bil. This brought its 9M14 net income to Php13.1Bil, equivalent to only 70.2% of our full year forecast. Earnings disappointed due to its weaker than expected fee income and profits from the trading business, partly offset by the booking of significant non-recurring gains. On the positive side, MBT’s core lending and deposit taking business remained strong with net interest income for the year to date period rising by 23% to Php34.0 Bil in 9M14. Profits for 9M14 translate to an annualized ROE of 12.8%. Exhibit 1: Results Summary In PhpMil 3Q13 3Q14 % Change 9M13 Net interest income 10,322 11,656 Non-interest income 4,128 5,420 Provisions 1,231 1,368 Net income 2,542 4,002 12.9 31.3 11.1 57.4 27,595 32,722 3,980 20,690 9M14 % Change 34,015 19,030 3,300 13,077 23.3 -41.8 -17.1 -36.8 Charles William Ang, CFA Ticker: MBT Rating: BUY Target Price: Php106.00 % FY14E COL Consensus 75.4 NA 71.6 NA 79.5 NA 70.2 80.1 Source: MBT, COL estimates Core operations remain strong. MBT’s core operations remained strong, with net interest income expanding by 13% to Php11.7Bil in 3Q14 and by 23% to Php34.0Bil in 9M14. This was driven by the 21.4% growth in its loan portfolio to Php697.3Bil and the 22.4% jump in interest earning assets to Php1.5Tril. This in turn was supported by the 23.4% jump in total deposits to Php1.1Tril and the net issuance of Php21Bil worth of tier 2 capital notes. Despite the rapid growth in assets, net interest margin was steady at 3.35% for the nine month period and was in line with our estimate. Non-interest income lag estimates on weaker-than-expected fee income, slower activity in bond market. While MBT’s lending business was in line with estimates, its non-interest income trailed our forecasts. During 9M14, total non-interest income fell by 57.1% to Php19.0Bil. The decline was primarily due to the 90% drop in trading gains to Php1.5Bil. Although we already expected trading gains to drop given the peak in bond prices last year, the decline was much larger than our forecast. MBT attributed the steeper than expected decline to weaker trading activity in the secondary bond market. This in turn negatively affected the spreads earned by MBT on bonds sold to clients. Note that in our forecast, we assumed a normalized trading income of about Php4-6Bil per year arising from the spreads earned from client transactions. Also hurting non-interest income was the slower-than-expected growth in fee-based revenues. For the year-to-date period, fee-based income increased by just 3.2% to Php6.6Bil. We were expecting fee income to grow in line with the increase in assets and deposits as bulk of the fees are transaction based. According to MBT, the slower growth in fee-based income was due to the decline in rates charged on banking services as competition is becoming more intense. FRIDAY, 14 NOVEMBER 2014 page 4 PHILIPPINE EQUITY RESEARCH Shift to HTM investments continues. Investment securities still account for a large part of MBT’s asset base at Php409.4Bil or 27.2% of total assets as of end September. However, MBT continued to take steps to increase the share of held to maturity (HTM) investments in its books which should make it less vulnerable to mark to market losses. As of end September, MBT had Php104.5Bil worth of HTM investments, up from Php82.2Bil as of end June. The said amount is also equivalent to 25.5% of its investment portfolio, up from 21.0% as of end June. MBT said that it aims to continue reducing its investments in available for sale (AFS) securities in favor of HTM investments. Lowering 2014 core income forecast. We are lowering our core net income forecast after we factored in MBT’s weaker-than-expected non-interest income during 9M14. With the more conservative estimates on fee-based revenues and normalized trading income, our net income forecast will drop from Php18.6Bil to Php17.3Bil in 2014; from Php20.7Bil to Php19.1Bil in 2015; and from Php23.6Bil to Php22.5Bil in 2016. However, we believe that MBT will still deliver strong headline numbers for the full year of 2014. Last October, MBT sold a portion of its investment properties (ROPA) to Federal Land for Php6.3Bil, resulting in a gross gain of Php5.2Bil. Based on our estimates, this could lead to a one-time gain of Php3 to 4Bil (net of taxes) in 4Q14. Including this one-time gain, MBT’s headline net income for 2014 could reach as much as Php20.6Bil. Exhibit 2: MBT Earnings Revisions in Php Mil Fee based income Trading and FX gains Net inc before one-off in 4Q14 One-off gain in 4Q14 Net income 2014 10,100 5,041 18,636 Old 2015 11,192 5,103 20,655 2016 12,511 5,380 23,615 2014 9,060 2,795 17,261 3,321 20,582 New 2015 9,798 3,126 19,194 2016 10,779 3,524 22,835 So urce: COL estimates Downgrading FV estimate to Php106/sh but maintaining BUY rating. We are downgrading our FV estimate on MBT from Php111.00/sh to Php106.00/sh (based on 1.8X 2015E P/BV) after factoring in the lower core income forecast. Nevertheless, we are maintaining our BUY recommendation. Despite the reduction in our FV estimate, capital appreciation potential based on the stock’s market price remains significant at 23%. Moreover, Metrobank is still expected to be one of the major beneficiaries of the growing demand for loans given its size, and highly liquid and healthy balance sheet. FRIDAY, 14 NOVEMBER 2014 page 5 PHILIPPINE EQUITY RESEARCH TOP STORIES: AGI: Disappointing results from subsidiaries Disappointing 9M14 earnings from subsidiaries. AGI’ recurring net profit rose 21.3% to Php3.90 Bi, bringing 9M14 recurring net income to Php11.4 Bil, which is flat versus 9M13. Although AGI’s 9M14 net income reached 75.1% of our full-year estimate, we focus more on the results of AGI’s major subsidiaries, which were mostly weaker than expected with the exception of Megaworld which performed in line with expectations. Richard Lañeda, CFA Ticker: AGI Rating: BUY Target Price: Php31.60 Exhibit 1. Core Earnings summary 3Q13 3Q14 Megaworld Emperador Travellers Golden Arches 2,270 1,322 1,265 136 2,461 1,520 1,119 84 y/y change 8.4% 15.0% -11.5% -38.2% AGI 3,215 3,900 21.3% in Php Mil 9M13 9M14 6,458 4,496 3,574 516 7,187 4,578 4,000 406 y/y change 11.3% 1.8% 11.9% -21.3% 11,473 11,400 -0.6% % of estimates COL Consensus 74.9% 73.9% 70.0% 71.0% 67.4% 61.6% 57.3% N/A 75.1% 68.1% Source: AGI, COL estimates, Bloomberg MEG 9M14 core profits up 11.3%. MEG’s net income for the third quarter grew 8.4% to Php2.46 Bil driven by higher realized gross profit and rental revenues. Realized gross profit for 3Q14 rose 35.52% on higher completions of projects. Total realized gross profit for 9M14 rose 26.23% to Php6.84 Bil and is ahead of our full-year estimate of Php8.69 Bil. For the first nine months, MEG’s core net income (excluding a total of Php11.62 Bil in one-off gains) was Php7.2 Bil, 11.3% higher than a year earlier. Take up sales remained healthy in 3Q14, growing by 16% overall for the group including GERI. Take-up sales of GERI is noteworthy as it grew 75% y/y from Php2 Bil to Php3.5 Bil. Revenue growth still a challenge for EMP. Emperador’s 3Q14 net income rose 14.6% y/y and 13% q/q to Php1.51 Bil. This was mainly driven by lower costs and expenses. Gross profit and EBITDA for the quarter improved 10.7% and 13.7% y/y respectively despite disappointing sales. Sales in 3Q14 were just up 0.9% to Php6.64 Bil in 3Q14. A positive development for EMP this year is the margin improvement. For the first nine months of this year, gross margin stood at 36.2%, expanding from last year’s level of 33.7%. However, growing net income by expanding margins will not be sustainable as margins will peak at some point. Revenue growth is still our main concern with EMP. RWM earnings disappoint yet again. RWM’s net income for 3Q14 dropped 11.5% y/y to Php1.12 Bil to Php1.27 Bil. This brings RMW’s net profit for 9M14 to Php4 Bil, an improvement of 11.9% compared to 9M13. This accounts for only 67.4% and 61.6% of COL and consensus full-year estimates respectively. We believe the reason for the disappointing income was the weaker than expected gaming revenues, which was brought about by a weak hold rate. Golden Arches income disappoints. Net income of Golden Arches in 3Q14 dropped 38.2% y/y to Php84 Bil, brining 9M14 income to Php406 Mil or 21.3% lower y/y. This is very disappointing as this is only 57.3% of our full-year estimates. Details on Golden Arches were not yet disclosed therefore we are unaware of the reason for the underperformance. Downside risk on current FV estimate. Given the underperformance of RWM, Emperador, and Golden Arches, we will be reviewing our earnings and fair value estimates with downside risk. Despite this, we maintain our BUY rating on AGI as we believe the market has priced in much of the negatives. We should point out though that AGI shares may continue to underperform given the negative sentiment on RWM, EMP, and Golden Arches. FRIDAY, 14 NOVEMBER 2014 page 6 PHILIPPINE EQUITY RESEARCH RWM: Earnings disappoint yet again 3Q14 earnings down 11.5%. RWM’s net income for 3Q14 dropped 11.5% y/y to Php1.12 Bil to Php1.27 Bil. This brings RMW’s net profit for 9M14 to Php4 Bil, an improvement of 11.9% compared to 9M13. This accounts for only 67.4% and 61.6% of COL and consensus full-year estimates respectively. We believe the reason for the disappointing income was the weaker than expected gaming revenues, which was brought about by a weak hold rate. Other details of RWM’s 9M14 results have not yet been disclosed. Richard Lañeda, CFA Ticker: RWM Rating: BUY Target Price: Php12.40 Earnings and fair value estimates to be reviewed. In light of RWM’s weaker than expected net income, we will be reviewing our growth assumptions for the succeeding years. We see downside risk on our current fair value estimate of Php12.40 AC: Sustains strong growth in 3Q14 3Q14 income surges on ALI, GLO and BPI earnings. AC’s net income grew 36% in 3Q14, driven by the growth of ALI, GLO, and BPI. AC’s consolidated core net income for 9M14 is up 17.5% and is slightly lagging estimates due to BPI’s and MWC’s underperformance. Other non-core businesses also contributed to the slight underperformance of AC. Exhibit 1. Results summary 3Q13 3Q14 % change 9M13 9M14 % change 3,129 3,129 4,254 4,254 36.0% 36.0% 10,432 10,432 14,053 12,253 34.7% 17.5% % of estimates COL Consesnsus 82.4% 82.0% 71.8% 71.5% Core earnings of sub sidiaries ALI 2,979 GLO 3,100 BPI 3,739 MWC 1,382 3,735 3,989 4,700 1,391 25.4% 28.7% 25.7% 0.7% 8,602 9,526 15,763 4,293 10,789 11,578 12,800 4,549 25.4% 21.5% -18.8% 6.0% 77.0% 88.9% 70.6% 67.7% in Php Mil AC reported income AC core income Richard Lañeda, CFA Ticker: AC Rating: BUY Target Price: Php816.00 75.6% 88.3% 69.3% 78.3% Source: AC, COL estimates, Bloomberg ALI 9M14 income better than expected. ALI’s net income in 3Q14 surged 25.42%, sustaining the 25.45% growth it registered in 1H14. Growth was driven by a combination of revenue growth and margin expansion. 3Q14 operating revenues grew 12.4% while EBIT jumped 30.2% on strict cost controls. For the first nine months of the year, net income was better than expected due to higher than expected earnings before interest and tax. Strict cost control by the company enabled it to register higher than expected margins. BPI 9M14 earnings slightly miss on higher operating expenses. BPI reported Php4.8 Bil in net income for 3Q14, up 27.6% y/y. BPI’s net interest income grew 15% in 3Q14 to Php8.9Bil, sustaining its 15% rise in 1H14. Interest income was buoyed by a 28% expansion of net loans, backed by a 17% increase in deposits. BPI’s trading performance continued to normalize during the period. Based on our estimates, income attributable to securities and FX trading during the third quarter totaled around Php400Mil, largely flattish compared to the Php416Mil booked in 3Q13.Despite the strong 3Q14, 9M14 profits are still 18.8% lower y/y to Php12.8 Bil due to the extraordinary trading performance recorded in 1Q13. 9M14 earnings slightly missed our forecast due to higher than expected operating expenses. MWC 9M14 earnings disappoint on weaker-than-expected revenues. Manila Water reported 3Q14 earnings of Php1.4Bil, slightly higher by 0.7% than 3Q13 earnings. 3Q14 earnings brought the 9M14 year-to-date total to Php4.5Bil, increasing by 6% y/y. Earnings for the period accounted for only 67.7% of COL full year estimates, as revenues missed estimates on lower-than-expected noncore revenues and higher-than-expected interest expense. Net interest expense reached Php1.1Bil in 9M14, significantly higher than our estimate of Php664Mil. However, 9M14 profits were above consensus estimates, accounting for 78.3% of full year forecasts. FRIDAY, 14 NOVEMBER 2014 page 7 PHILIPPINE EQUITY RESEARCH GLO core earnings outperform on lower than expected depreciation. Globe’s 3Q14 core earnings grew by 28.7% y/y to Php4Bil due to a decline in depreciation expense and an improvement in revenues. Service revenues for the quarter were up 10%. Net profit for third quarter brought 9M14 core earnings to Php11.6 Bil, up 21.5% y/y. Core earnings for the period exceeded estimates on lower than expected depreciation expense. Maintain BUY and FV estimate of Php816. We maintain our BUY rating and FV estimate of Php816.00 on AC. Its major subsidiaries continue to exhibit strong income growth and outlook of each business remains positive. We also like AC for its growing exposure in the power generation sector. We believe AC’s value will be enhanced going forward as more of AC Energy’s investments start operations, making AC more than a parent company for listed companies ALI, BPI, GLO, and MWC but also a play on the power and infrastructure sector. JFC: 9M14 earnings in line with estimates 9M14 earnings up 16.5%, in line with estimates. JFC booked earnings of Php1.2Bil in 3Q14, higher by 15.0% year-on-year. This brought 9M14 earnings to Php3.6Bil, higher by 16.5% from last year. Results were in line with expectations, with 9M14 net income equivalent to 67.2% of COL and 67.7% of consensus full year estimates. Although revenue growth was stronger than expected, this was offset by the slight drop in 9M14 margin. Jed Frederick Pilarca Ticker: JFC Rating: HOLD Target Price: Php143.00 Exhibit 1: Results Summary in PhpMil Revenues Operating Income Operating Margin (%) Net Income Net Margin (%) 3Q13 3Q14 19,766 22,052 1,209 1,409 6.1 6.4 1,019 1,172 5.2 5.3 % Change 11.6 16.5 0.3 15.0 0.2 9M13 9M14 57,834 65,753 3,935 4,422 6.8 6.7 3,124 3,640 5.4 5.5 % Change 13.7 12.4 (0.1) 16.5 0.1 % of Forecast COL Consensus 75.4 71.3 62.8 65.1 67.2 67.7 - Source: JFC, COL estimates, Bloomberg Sales growth still strong. In 3Q14, JFC’s system wide sales grew by 12.2% to Php28.4Bil with the Philippine business growing by 13.0% and the international business growing by 9.6%. According to JFC, growth was driven by the 7% to 8% increase in same store sales and the 5.7% expansion in store network. 3Q14 results brought 9M14 system wide sales to Php85.5Bil, 13.7% higher from last year. Sales growth was faster than expected with 9M14 revenues already accounting for 75.4% of our full year forecast. Note that the fourth quarter is a seasonally strong period, accounting for more than 25% of full year revenues. Margins expand in 3Q but still flattish year to date. JFC’s operating margin showed a 30 basis point improvement in 3Q14 from last year, partially offsetting the margin decline reported in 1H14. Recall that higher raw material prices, the upgrade of IT systems, and expenses related to JFC’s compensation plan hampered margins during 1H14. We believe the improvement in margins is due to the impact of price increases that JFC implemented during the first half of the year. However, operating margin for the year-to-date period is still flattish at 6.7%. Hikes capex for 2015. JFC said that it has approved a capital expenditure budget of Php9.1Bil for 2015. This is significantly higher than the Php6.3Bil that JFC expects to spend for the whole of 2014. The capex programmed for 2015 will be used largely for store openings and renovations as well as to expand commissary capacity. Broken down, JFC plans to spend Php6.7Bil for the Philippine business, Php1.7Bil for China, and Php700Mil for US and Southeast Asia and the Middle East. FRIDAY, 14 NOVEMBER 2014 page 8 PHILIPPINE EQUITY RESEARCH Maintaining HOLD rating. We maintain our HOLD rating on JFC with a FV estimate of Php143/sh. We continue to like JFC for being dominant in the domestic quick service restaurant sector as well as for its plans to expand its foreign business. However, valuations are unattractive with the stock trading at 32.6X 2015E P/E, a significant premium to the 22.6X average multiple for the consumer sector. ICT: 9M14 core profits trail forecasts due to higher than expected operating expenses 9M14 core profits trail forecasts due to higher than expected operating expenses. ICT reported that 3Q14 net income declined 25.9% to US$34Mil. The decline in the 3Q14 earnings was primarily due to the booking of a one-time US$38.1Mil impairment charge on its investment in the Argentina port project. This brought 9M14 net income to US$135.7Mil, up 5.3% y/y, representing only 68.8% of our full year forecast. However, net income in 9M14 included a net non-core gain of US$9.4Mil. Excluding the said amount, ICT’s net income for 9M14 declined 2% to US$126.3Mil, representing only 64% of COL and 77.6% of consensus full year forecasts. Core net income missed our estimates due to higher than expected expenses. Revenues were in line with estimates, rising by 27.4% to US$268.9Mil during 3Q14. This brought 9M14 revenues to US$779.2Mil which reached 76% of our full year forecast. Volume of container handled rose 16.9% to 5.41Mil TEU representing only 69.2% of our full year forecast. However, this was offset by the higher than expected yield/TEU of US$145.8. Meanwhile, 9M14 EBITDA grew 14.2% to US$326.1Mil, representing 71.1 of COL forecast. Cash operating costs grew by a faster rate of 31% compared to revenues, amounting to US$334.1Mil in 9M14. George Ching Ticker: ICT Rating: HOLD Target Price: Php121.50 Exhibit 1: 3Q14 Results Summary in US$Mil 3Q13 3Q14 %Change 9M14 Revenue EBITDA EBITDA margin (%) Net Income Net margin (%) 211.0 97.4 46.2 45.9 21.8 268.9 113.9 42.4 34.0 12.6 27.4 16.9 -3.8 -25.9 -9.1 779.2 326.1 41.9 135.7 17.4 % of FY Forecast COL Consensus 76.0 73.6 71.1 68.7 -2.9 -3.0 68.8 83.3 -1.8 2.0 Source: ICT, COL estimates, Bloomberg Exhibit 2: 3Q14 Revenue Breakdown Revenue 3Q13 3Q14 % change Asia 115.9 136.8 17.9 Americas 73.4 106.9 45.6 EMEA 21.6 25.2 16.8 Total 211.0 268.9 27.5 Container volume 3Q13 3Q14 % change 978.5 937.6 -4.2 419.3 672.7 60.4 203.4 233.9 15.0 1,601.1 1,844.2 15.2 3Q13 118.5 175.1 106.2 131.8 Implied yield 3Q14 % change 145.9 23.1 158.9 -9.2 107.9 1.6 145.8 10.7 Source: ICT, COL estimates, Bloomberg Revenues in line with forecast despite weaker than expected volume. 9M14 revenues were in line with both COL and consensus estimates. Container volume grew by a slower than expected pace of only 16.9% to 5.41Mil TEU, representing only 69.2% of our full year forecast. This was brought about by a decline in the volume of flagship Manila International Container Terminal (MICT) due to the truck ban in Manila, as well as the persistent weakness in ICT’s port in Davao and Portland. The weakness of the three ports was partially mitigated by the strong recovery of ICT’s port in Poland which saw volume growing by 23%. Furthermore, ICT’s lower than expected volume throughput was offset by ICT’s higher than expected yield as blended yield/TEU increased 10.7% to US$145.8/TEU, 11.3% above our forecast. Yield/TEU rose due to higher volume mix and ancillary services booked by MICT. Management indicated despite MICT’s decline in volume during 9M14, the revenue of the port actually grew y/y as it was able to book additional ancillary service revenue as a result of the truck ban. Going forward, management expects the recovery of volume in MICT as the truck ban ended in October 2014. FRIDAY, 14 NOVEMBER 2014 page 9 PHILIPPINE EQUITY RESEARCH EBITDA margin lower than expected due to higher operating costs. Cash operating profits as measured by EBITDA grew 14.2% in 9M14 to US$326.1Mil, equivalent to only 69.2% of our full year forecast. This was caused by higher than expected increase in ICT’s cash operating expenses which grew by 31% to US$334.1Mil, mainly due to the first nine months of expenses related to the new terminals in Mexico and Honduras. This led to a decline 390 basis points reduction in EBITDA margin to 41.9% from 45.7%. Margin was also lower than our forecast of 44.7%. Looking forward, management expects EBITDA margin to improve as revenues of the port in Honduras increase (due to more port services offered to customers) and as the utilization rate of the port of Mexico continue to rise. Outlook deteriorates for port in Argentina. Management said the US$38.1Mil asset write-off in 3Q14 was due to the deterioration in the economic outlook in Argentina as a result of the recent sovereign default. Due to the restriction in imports imposed by the government, container volume was down 22% in Argentina. Management now expects ICT’s port in Argentina( with an annual capacity of 400,000 TEU) to begin operations in 1H15. This is later than our forecast that the port will begin operations in 4Q14. Furthermore, due to the economic condition in Argentina, the port’s utilization rate will likely be disappointing going forward. Reviewing forecasts and FV estimate. We currently have a HOLD rating on ICT with a FV estimate of Php121.5/sh, We will be reviewing our forecasts on ICT in light of the weaker than expected 9M14 results. While we still like the company’s long term outlook given its successful track record of growing its port portfolio through acquisitions and greenfield projects, and its focus on emerging economies which have a favorable long term growth outlook compared to overall global economy, valuations are not compelling at this point. Based on ICT’s current price of Php/sh, upside to our FV estimate of Php121.5/sh is limited at 9.0%. EDC: 9M14 earnings beat estimates as revenues exceed forecast 9M14 earnings beat estimates as revenues exceed forecast. EDC’s 3Q14 core net income rose 49% y/y to Php2.4Bil. This brought 9M14 earnings to Php7.8Bil, up 33.9% y/y, representing 93.3% and 100.8% of COL and consensus forecast, respectively. Earnings increased mainly due to the first year operation of the Bacman and Nasulo (part of Palinpinon-Tongonan) plants, and higher revenue contribution from the Mindanao plants. Meanwhile, earnings beat estimates due to the higher than expected revenue contribution from the Bacman, Palinpinon-Tongonan and Mindanao plants. Furthermore, 9M14 operating expenses was also lower than expected. Exhibit 1: EDC 3Q14 Results Summary in PhpMil 3Q13 Revenue 6,349 Operating expenses 3,188 Finance and other expense -863 Net Income (Core) 1,610 Net margin (%) 25.4 3Q14 7,755 4,298 -833 2,400 30.9 % Change 22.1 34.8 -3.5 49.0 5.6 9M14 22,982 11,620 -2,587 7,800 33.9 George Ching Ticker: EDC Rating: HOLD Target Price: Php8.20 % of FY COL Forecast 82.2 69.2 77.2 93.3 N/A Source: EDC and COL estimates Bacman revenue contribution to exceed full year forecast. The Bacman contributed to a total of Php2.15Bil in revenues during its first full period contribution in 9M14, representing 74.8% of our full year forecast. Revenues met our full year forecast despite the disruption caused by Typhoon Glenda on unit 1 and 2 in July and the planned outage of unit 2 for the installation of a brand new turbine. Given that all three units of the Bacman will be operational in 4Q14, we believe that revenues from the Bacman will likely exceed our full year forecast. FRIDAY, 14 NOVEMBER 2014 page 10 PHILIPPINE EQUITY RESEARCH Pal-Tong and Mindanao plants’ revenues also exceeded forecast. Revenues from both Palinpinon-Tongonan (Including the newly commissioned Nasulo plant) and the Mindanao plants exceeded forecast. The Pal-Tong contributed a total of Php9.3Bil in revenues during 9M14, 11.1% higher y/y, representing 80.6% of our full year forecast. This was mainly due to better than expected sales volume of 1,762GWH, representing 79.7% of our full year forecast. Meanwhile, the Mindanao plants’ revenues rose 26.5% to Php1.74Bil, representing 84.9% of our full year forecast. Sales volume for the Mindanao plants rose 13.4% to 591GWH, representing 83.3% of our full year forecast, as EDC added two steam wells to boost the capacity of the Mindanao plants this year. Hydro plant disappoints due to low water level. The Pantabangan-Masiway hydro plant posted a 6.1% decline in 9M14 revenues to Php1.71Bil, representing only 60.4% of our full year forecast. Revenues declined after the ERC re-computed the plant’s November and December 2013 WESM selling price, as well as a 22.7% decline in the plant’s sales volume due to lower water level in the plant’s dam. Ancillary service revenues amounted to Php593Mil, 19.1% higher y/y, but representing only 37.3% of our full year forecast. Coupled with the income tax holiday expiration in April of this year, the Pantabangan-Masiway’s net income declined 18.04% to Php886.5Bil, representing 62.4% of our full year forecast. Operating expenses lower than expected. Total operating expenses rose 18.1% in 9M14 to Php11.6Bil, primarily due to higher purchased services and personnel expense, as well as higher expense for restoration activities as a result of typhoon damages. However, this represents only 69.2% of our full year forecast. Reviewing earnings and FV estimates. We are reviewing our earnings and FV estimates of EDC in light of the better than expected 9M14 results. We currently have a HOLD rating on EDC with a FV estimate of Php8.20/sh. Fundamentally, we continue to like EDC given it is a pure play on renewable energy while 80% of its power generation capacity is secured with long-term take-or-pay contracts, valuations are no longer attractive. The stock has risen by 52% YTD, outperforming PSEi’s 22.2% gain. At its current price of Php8.1/sh, upside to our FV estimate of Php8.20/sh is limited at only 1.2%. CHIB: Earnings continue to lag on higher expenses Earnings lag estimates. China Bank booked Php1.15Bil in earnings during the third quarter, up 19% year-on-year. Nevertheless, 9M14 net income still fell 14% year-on-year to Php3.37Bil primarily due to the extraordinary trading income in 1Q13. Compared to expectations, the year-to-date performance trailed both COL and consensus estimates, representing just 66% of 2014 forecasts. The underperformance was due to higher-than-expected operating expenses, which expanded 29% year-on-year during the 9 month period. The 9M14 earnings translate to an annualized ROE of 8.94%. Exhibit 1: Results Summary In PhpMil 3Q13 Net interest income 2,655 Non-interest income 916 Provisions 204 Net income 963 3Q14 % Change 9M13 3,592 1,076 113 1,145 35.3 17.5 -44.5 18.9 9M14 % Change 7,084 10,381 4,383 3,039 314 300 3,913 3,370 46.5 -30.7 -4.6 -13.9 Charles William Ang, CFA Ticker: CHIB Rating: HOLD Target Price: Php48.50 % FY14E COL Consensus 74.3 NA 75.9 NA 66.7 NA 65.8 65.8 Source: CHIB, COL estimates FRIDAY, 14 NOVEMBER 2014 page 11 PHILIPPINE EQUITY RESEARCH Lending business grows in line with expectations. In 3Q14, CHIB reported Php3.6Bil in net interest income, 35% higher year-on-year. This brought its 9M14 total to Php10.4Bil, up 47% from the same period last year. The strong growth is attributable to both an expanded asset base and higher margins. As of end September, its loan portfolio grew 33% from last year while interest earnings assets rose 26%. More importantly, net interest margin continued to improve, rising by ~20 basis points to 3.3%. This marks the fifth straight quarter where CHIB’s margins improved year-on-year. Lending operations during the first 9 months of the year were in line with our expectations, with net interest income accounting for 74% of our full-year estimate. CHIB’s fee-based revenues and trading income also met our projections. For 3Q14, fee-based income rose 21% year-on-year. Meanwhile, trading and FX gains continued to normalize at Php202Mil for the quarter. Total non-interest income for 9M14 ended up at 76% of our full-year forecast. Earnings disappoint on higher-than-expected expenses. Nevertheless, earnings disappoint as expenses grew 34% in 3Q14 and 29% in 9M14, faster than our projected increase of 25% for 2014. We believe that the bank’s expenses may have been inflated by the integration of the 78 branches of Plantersbank in 2Q14 as well as the rapid expansion of its asset base. The sharp rise in expenses resulted in a cost-to-income ratio of 65%, above the industry average of 60%. Maintaining HOLD rating in light of 3Q14 results. At its current price of Php48.50/sh, CHIB is trading at 1.25X 2015E P/BV. This is significantly below our FV estimate of Php61.00/sh based on a target multiple of 1.6X. However, despite the 26% upside potential, we are maintaining our HOLD rating in light of the weaker-than-expected 3Q14 results. We will be reviewing our estimates to see whether upgrading to BUY on attractive valuations is warranted. AT: Lower margins and metal prices drag 9M14 earnings Core earnings down 52% y/y, below consensus estimates. Atlas’ 3Q14 core net income declined by 71.4% to Php267 Mil, brining 9M14 earnings to Php1 Bil, down 51.9% y/y. Core earnings for the period fell below expectations as it represented only 47.4% of consensus estimates. Core earnings declined mostly due to depressed metal prices, higher cash costs and financing costs, and higher tax provisions due to the expiration of Carmen Copper’s income tax holiday. Exhibit 1: Results Summary in PhpMil 3Q13 3Q14 % Change 9M13 9M14 % Change Revenues EBITDA EBITDA margin (%) Core net income Net margin (%) 3,924 1,785 45.5 934 23.8 3,921 1,559 39.8 267 6.8 (0.1) (12.7) (71.4) - 10,977 4,528 41.2 2,102 19.1 12,590 4,658 37.0 1,011 8.0 14.7 2.9 (51.9) - Garie Ouano Ticker: AT Rating: HOLD Target Price: Php8.20 % of forecasts COL Consensus 68.1 55.4 47.4 - Source: AT, Bloomberg, COL estimates Lower metal prices offset increase in production. 3Q14 revenues were flat y/y at Php3.9 Bil. This brought 9M14 revenues to Php12.6 Bil, up 14.7% y/y. Revenues for the 9M14 period fell below estimates as it represented 68.1% of consensus estimates. Revenues underperformed as an increase in sales volume was offset by depressed copper and gold prices. For 9M14, total production volume rose by 13% y/y to 13.5 Mil DMT. Sales volumes also increased by 15% y/y to 78.1 Mil lbs of copper, and 25% y/y to 17,676 payable ounces of gold. However, the increase in tonnage was met with a 5% y/y decrease in copper prices to US$3.16/lb, and a 10% decrease in gold prices to US$1,290/oz. FRIDAY, 14 NOVEMBER 2014 page 12 PHILIPPINE EQUITY RESEARCH Higher operating cash costs squeeze EBITDA margin. EBITDA declined by 12.7% in 3Q14 to Php1.6 Bil, bringing 9M14 EBITDA to Php4.7 Bil, up 2.9% y/y. EBITDA also fell below expectations, representing 55.4% of consensus estimates, as higher operating cash costs added to the negative effects of lower metal prices. Total operating cash costs for the period rose by 25% y/y to Php8.1 Bil. According to management, the higher cash costs for the period were due to the higher level of production and shipment. Cash operating cost on a per-unit basis also increased, with operating cash costs growing by 13% y/y to US$1.86/lb of copper, significantly higher than management’s initial target of US$1.50/ lb for the full-year. Higher operating cash costs led to a lower EBITDA margin for the period of 37% from 41.2% a year ago. Core net margin declines on higher tax provisions and finance costs. Net margin for the 9M14 period reached 8%, versus a core net margin of 19.1% seen the same period last year. Net margin was lower y/y primarily due to an increase in tax provisions, which was due to the expiration of Carmen Copper’s income tax holiday in October 2013. Higher finance costs also drove Atlas’ net margin down as capitalized finance charges from the recent expansion project were accrued in the period. Management has yet to disclose the specific y/y increase in finance charges for the period. Consensus BUY rating. Consensus has a BUY rating on AT with an FV estimate of Php19.03/sh. OTHER NEWS: Economy: FPI declines in October The BSP reported that foreign portfolio investments fell to US$1.8Bil in October from US$2.1Bil in the previous month. According to the BSP, the decline in investments was due to investors reacting to the IMF’s downgrade of its 2014 global growth forecast as well as to unrest in Hong Kong. Foreign portfolio investments also showed a significant decrease year-on-year as a result of the US Fed’s QE program ending this October. Net outflows for the month amounted to US$180Mi, turning around from the US$969Mil net inflows reported in the same month last year. (source: BSP) Jed Frederick Pilarca Garie Ouano Meredith Hazel Cua SUMMARY OF CHANGES IN SHAREHOLDINGS OF DIRECTORS/OFFICERS: Summary of Changes in Shareholdings of Directors/Officers Stock Volume Acquired or Disposed Price per share Person (Designation) BDO 5,000 D 102.30 Rebecca Torres (SVP) source: PSE FRIDAY, 14 NOVEMBER 2014 page 13 PHILIPPINE EQUITY RESEARCH Calendar of Key Events OCTOBER MON TUES WED THURS FRI SAT 29 30 1 2 BCOR: Annual Shareholders Meeting 3 4 6 7 8 9 11 15 EDC: Ex-date Php0.10 Cash Dividend 16 10 SECB: Ex-date Php1.00 Cash Dividend PHES: Annual Shareholders Meeting 17 18 22 TBGI: Annual Shareholders Meeting CMT: Annual Shareholders Meeting 29 23 MBC: Annual Shareholders Meeting SGP: Annual Shareholders Meeting 30 24 25 31 1 13 14 IPO: Ex-date Php0.06 SMC: Ex-date Php0.35 Cash Dividend Cash Dividend RFM: Ex-date Php0.0328 STI: Ex-date Php0.02 Cash Dividend Cash Dividend FGEN: Ex-date Php0.35 DMC: 400% Stock Cash Dividend Dividend 20 21 27 FRIDAY, 14 NOVEMBER 2014 28 page 14 PHILIPPINE EQUITY RESEARCH Investment Rating Definitions BUY HOLD SELL Stocks that have a BUY rating have attractive fundamentals and valuations, based on our analysis. We expect the share price to outperform the market in the next six to twelve months. Stocks that have a HOLD rating have either 1.) attractive fundamentals but expensive valuations; 2.) attractive valuations but near term earnings outlook might be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely inline or underperform the market in the next six to twelve months. We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to twelve months. Important Disclaimers Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report. 2401-B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City 1605 Philippines Tel: +632 636-5411 FRIDAY, 14 NOVEMBER 2014 Fax: +632 635-4632 Website: http://www.colfinancial.com page 15
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