PHN – A Company with an Identity Crisis

PHN has not found what it is really is. PHN started as Bacnotan Consolidated Industries, Inc. (BCII) with investments in cement, steel, pulp and paper, and financial services and ran by Philippine Investment Management Consultants (PHINMA), Inc. BCII was basically an investment vehicle of PHINMA. BCII was a vehicle of PHINMA to raise funds to be invested in what was then growing industries.

The partnership in PHINMA cratered and changes were made. BCII divested its investments in the industries it nurtured and change its name to PHN. Along the way it lost its identity. PHN seems not to know what it is. Is it an aspiring conglomerate or an investment vehicle?

This identity crisis makes PHN hard for the investors to understand and value. PHN touched a 52-week low of 8.26 and as of December 29, 2017 it closed at 8.40 which is 21.69% down a year ago. We believe PHN is undervalued and we recommend to buy the same.

PHN has potential values. PHINMA should refocus PHN into an investment vehicle. If PHINMA will not refocus PHN as an investment vehicle then it should have no right to collect management fees from PHN. PHN is once a venture fund, it invests in growth industries and once it matures it sells them. Like the cement which it sold to Holcim and banking which it cashed-out during the banking consolidation years of the early 2000s.

We can see PHN investing and scaling two industries the steel & construction technologies and educational services. The two investments are cash flows and earnings positive.

Aside from the two investments PHN has also the following investments: PHINMA Energy Corporation (PHEN, 26.245); PHINMA Property Holdings Corporation (PPHC, 35.42%), Microtel Development Corporation (PHINMA Hospitality, 36.23%), Trans-Asia Petroleum (12.99%), and others. Those investments have as of December 31, 2016 a carrying value of 3.4 Billion.

To focus PHN as a venture fund/investment vehicle and unlock value, it should dispose PPHC, PHINMA Hospitality, and Coral Way Hotel Corporation. With regards to PPHC, real estate development is capital intensive and cash flow negative aside from owning only a minority interest, we could not find a scenario where PHN could make a profit out of it. All other investments where it has minority interests except for PHEN should be disposed of and the proceeds be used to further scale the two investments it already had or find a new investments to grow and scale. We found no reason for PHN deploying capital on those minority investments. What is PHN expecting from those investments, investment cash flows? capital gains?

Right now, PHN’s investments in steel and construction materials and education services are enough unicorns of PHN which could provide tremendous value once unlocked. We exclude PHEN from the divestment because PHN has been realizing the value from the said investment through dividend cash flows and capital appreciation.

PHINMA should remake PHN into a venture fund again, funding and scaling business then unlocking their values through out-right sale or initial public offerings.

We can gamble to recommend it a buy right now and advocate for PHINMA to remake PHN into a venture fund to grow the value of PHN.

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ABS – Wait and See

ABS set a new 52-week low as of December 12, 2017 trading session when it reached 34.75. Over this period, the share price is down 21.56%.  Although, the shares is at lowest during the 52-week period, we cannot recommend to buy or sell the same at the moment.  The following is a discussion of why we do not recommend to buy or sell it in the meantime.

 

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Blockchain is changing how we use and think about money.

We are in the period of technological disruption.  Broadcast is no longer the prime platform for news, information and entertainment as it was in the 1990s.  The internet and mobile has replaced broadcast as the primary go-to place for news, information and entertainment.  In the advent of mobile internet, people now spend more time on their computers and mobile devices than in their television sets.  This technological sea change is most evident in the recent elections in the Philippines and in the US, where information proliferated in the internet more particularly in the social networking sites impacted the elections more than the mainstream broadcast media outlets.

ABS is the local broadcast giant. For the 9-month period of 2017, 52% of the revenue of ABS came from advertising revenue from its broadcast unit.  The said revenue provides virtually all of the net income of ABS of 2.3 Billion.  As what has been said there is a technological sea change in the telecommunications and media industry and this technological disruption gradually erodes the revenue of ABS.  In the 9-month period of 2017 advertising revenue of ABS is down 517 Million or 3% lower year-on-year.

The technological disruption affecting ABS’ business would be a convenient reason to recommend to sell it but we do not.  First, ABS is generating positive operating cash flows and free cash flows.  EBITDA for 2016 was 9.85 Billion and for 9-month period 2017 EBITDA is 7.03 Billion.  Second, ABS is the local leader in content creation and content is still king.  ABS has invested in capabilities to create local content.  It has Star Magic, ABS-CBN University and it has invested in studios and sound stages.  Its capabilities to create world class content is hard to replicate.  Third, it has been doing something to mitigate the effects of disruption.  It has gradually balanced advertisement revenue with consumer sales.   This endeavor of ABS, makes-up our reason to recommend to wait and see before recommending buying or selling it.

ABS is doing something to mitigate the effect of technological disruption.  It ventured into mobile telecommunications with ABSCBNmobile.  So far, this venture has not been profitable.  Another venture is Kidzania, which in the meantime has also not been so profitable.  Its cable, satellite and broadband distribution platform has not provide meaningful contribution to the bottom line.  To us the more promising investments ABS have made is its investments in digital and interactive media more specifically in Iwanttv and TFC.tv.

ABS, no doubt, has great catalog of great contents and has the ability to create best-in-class content.  In the age of broadcast erosion and internet dominance, ABS must find a way to sell its content directly to the consumers as what Netflix is doing. We believe, Iwanttv and TFC.tv are steps in the right direction.  Presently, there contributions to the bottom line is insignificant.  This is so because Iwanttv and TFC.tv are not world-class.  They are mediocre platforms.  The challenge of ABS is to make Iwanttv and TFC.tv world-class.  Those platforms should be like Netflix, Amazon Prime, Fox Plus or NBA Game Time.

ABS has word-class content creation capabilities.  Content capabilities would be not so valuable if it does not have a world-class delivery platform to its consumers where consumers can actually enjoy the content and pay for it.  In the meantime, ABS has a cash pile and positive operating cash flows.  With its cash pile let us wait for few more periods to see whether ABS will be able to build a world-class internet delivery platform direct to consumers as a hedge to the declining broadcast business . Let us wait and see then.