SPURTS AND OUTLIERS by Gus Cosio
11:45am Friday 11 June 2010 Philippine Stock Exchange Index 3253.78 What I am seeing is a market that wants to move higher but gets fidgety whenever external factors, notably Europe and the U.S., show their ugly economies. Actually, I am not convinced that it is all that bad after seeing the huge rise in China trade figures announced yesterday. China’s exports jumped an unadjusted 48.5% in May from the same month a year earlier, while monthly imports surged 48.3%. The question that nags me is “who is buying and who is selling?” The U.S. consumer is not buying new houses, cars and refrigerators (consumer durables), but nobody has stopped shopping at Wal-Mart or Safeway. The point is, the average American still has to buy the day today supplies and gadgets, many of which are produced in China. Same thing goes for the European consumer; their wine may not come from China but their sneakers and laptops do. So the developed economies are slowing down, but it does not imply that trade with selected regions will drop drastically. Life will go on and old habits die hard. Asia will continue to sell to and buy from the developed world. Moreover, they are now selling and buying among themselves as inter-regional trade has been growing. Economic activity in East Asia, including the Philippines, will maintain a growth path. We’ve seen it in Indonesia, Thailand and Singapore, not to mention our own 7.3% GDP growth. The more important fact that remains is that we have stocks that are so much of a bargain. I’ll talk about two stocks today – EDC and PNB. The power sector has a very compelling story simply because the Philippines needs to add to present generating capacity. The existing reserve generating capacity is only 3% of demand. That margin is very thin and needs to be raised to at least 10%. That is why the rise in price of AP and SCC is relentless. Now, EDC is the only geothermal operator in the country and its cost is similar to the hydro generators. In short, EDC will have strong revenues and returns over the next 2 years or so. Price-wise, it appears to be trading in a range between 4.60 and 5.60. As I write, the stock is trading at 4.70. It has a lot of room to make it to the top of the range in a month or so. One can make a 20 – 25% return over a period of 30 to 60 days. That’s not so bad. For PNB, I think that the merger with Allied is a lot closer today than has ever been. At a price of 29, PNB is trading at 0.58X book value. When it merges with Allied, the book value has nowhere to go but up. Again, this merger could happen in the next 3 months, in which case, the price of PNB could rise to 40. That is around a 34% over 3 months which is not a bad bet. PNB has cleaned up its balance sheet. It has good management and it has good franchise in the markets it serves. For one, it still has the widest remittance network among Philippine banks having been the first mover years ago in this market. I think we will have a market that will have spurts, as we have seen today, occurring regularly as we work on a consolidating trading range for the next few weeks. That is not to say that there will be outliers that will fuel the spurts. Right now, my bet is on EDC and PNB.
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