PLDT (TEL) – Deep in the Woods

It was reported by on March 9, 2018 that telco giant PLDT  (TEL) sounded off hope hat its business struggles were coming to a close this 2018. believes that it won’t be so.  Its balance sheet would show that as of the end of 2017 it is still loaded with debt.  PLDT’s total debt stood at 348 Billion pesos while its capital stood at 111 Billion giving it a total debt to equity ratio of 3.14.  PLDT is heavily leveraged.  In 2011, PLDT was just leveraged to a ratio of 1.61 total debt to total equity.

Meanwhile, its cash flows from operations is dwindling.  For the year 2017 it generated cash flows from operations of 58.6 Billion, 27% lower compared to the cash it generated from operations in 2012 when PLDT generated 80.4 Billion.  PLDT’s slowing cash flow generation ability has been due to the fact that it has not respond well to the needs of the time.  This is very evident in the erosion of its revenue. From 170.8 Billion for the year 2014 its revenue for the year 2017 was just 160 Billion down 6% from the 2014 level. is changing how we use and think about money. Click here to enroll!

PLDT did not re-invest enough its earnings during the good years to attune its capabilities with the time, instead PLDT distributed it mostly to its stockholders.  It was made a milking cow by its controlling stockholder, the First Pacific Co. Ltd..  In its full-year 2017 results presentation, PLDT boasted that over the last 13 years it has distributed dividends totaling 400.6 Billion or an average of 30.8 Billion per year to its stockholders.

PLDT has put itself deep in the woods – huge debt load, dwindling revenue and cash flows from operations, and huge capital expenditure requirements to update its capability with the demands of time.  PLDT has no where to go to funds its capital expenditure (capex) requirements.  It is already debt laden, its capability to add more debt to fund its capex is now constrained.  To go deep on its balance sheet its remaining material investments is now Rocket Internet with a carrying value of 12.8 Billion Pesos and MediaQuest PDRs with a carrying value of 10.8 Billion as of end of 2017.  The two assets are the only material investments left available for sale to fund capex requirements. reported this earlier. believes that eventually PLDT will have to lower its dividend payout.  As of end of 2017 at a price of 1,480, PLDT’s (TEL) dividend yield stands at 5.1%.  It is of our opinion that to sustain such dividend yield, the market has to price PLDT (TEL) lower at around 990 or maybe higher at 1,000.  At that price we recommend to include it in your portfolio.


SM Prime Holdings Inc. (SMPH) – Real Estate Domination

SM Prime Holdings (SMPH) reported an impressive 15.8% growth in net income.  The reported net profit results show SMPH domination in Philippine real estate.

The growth came mostly from the expansion of malls/retail space for rent and the consistent 7% annual growth in same-mall-sales.  In 2017, it opened 6 new malls adding a gross floor area of around 377,000 square meters. Same-mall-sales represents the growth of consumption spending of the Filipinos.  It is a reflection of the growth in spending power of the population as a result of the growth in the over-all economy.

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SMPH as of year-end 2017 has 67 malls in the Philippines and 7 malls in China.  The malls lay the “golden egg” for SMPH.  The malls are cash gushers creating money year after year after they have been established.   The more mature the mall is, the more it is profitable for SMPH.  The most mature malls of SMPH creates an almost free money to SMPH.  In those mature malls, SMPH has long recovered their costs and the revenue they are generating are almost free of costs.  This makes SMPH the most profitable Philippine real estate company.  SMPH has in 2016 a gross margin percentage of 84.10 meanwhile competitors Ayala Land (ALI) had 34.91, Filinvest Land (FLI) had 49.55, and Megaworld Corp. (MEG) had 56.30.

The profitability of SMPH strengthen its balance sheet. As of year-end 2017 it has a net debt to equity ratio of 0.56 as compared to ALI’s 0.77.  This means SMPH is less reliant on debt to expand. Being a pioneer in mall development in the Philippines gives it a unique insight and capability to know when and where to build a mall in the Philippines. And once it builds a mall, that mall will print money for SMPH forever and long after the costs are recovered it will still mint money and almost for free for SMPH.  This cycle repeats again and again creating a domination in Philippine real estate for SMPH.

The capability of SMPH to dominate Philippine real estate is being chased by institutional, mutual fund, and retail investors resulting to a Price-to-Earnings (PE) ratio of 39.37, the highest among its peers and making the SMPH the largest real estate company in terms of market value. SMPH has now a market capitalization of 1.02 Trillion Pesos dwarfing ALI’s 680.73 Billion Pesos market capitalization.

Clearly the ability of SMPH to dominate the Philippine real estate justifies its expensive value, however, it is without challenges ahead. Its present valuation factors in future growth prospects.  Its future growth prospects is being challenged by expensive land banking.  This challenge is being manifested in a recent report of the Inquirer titled “SM bags seafront property for 18B.”  It was reported that the price SMPH paid for the said lot is at 50% premium from the offer of ALI.

While it is clear that SMPH has the ability to dominate the real estate market it is also clear that it is being disrupted by increase in market values of land and to a lesser extent by technology.  So we recommend that if its stock price dip by 10% make an opportunistic buy.  It is presently trading at 36 just 9.32% below it 52-week high of 39.70.

Cemex Holdings Philippines (CHP) Unravels has previously reported that CHP may have overpaid its parent, Cemex Mexico, in the acquisition of the controlling interest in the two cement operating companies it now wholly owns resulting to the booking of a massive goodwill in its balance sheet which at year-end 2016 constitute 55% of CHP’s assets.  The massive goodwill was justified by the existence of an assembled workforce and dealer network in the two cement operating companies. However, scrutiny on CHP’s finances showed that in the face of fierce competition in the cement industry its much touted “workforce” and “dealer network” fails to provides a “moat” for them.  Its “workforce” and “dealer network” did not present cost advantages to the company as other cement companies showed lower costs than them allowing the other cement companies to easily enter the market and capture significant market shares.  We expected then that CHP’s massive “goodwill” will unravel itself.  Please see our previous report.

On February 9, 2017 CHP issued a press release announcing their 2017 full-year results.  CHP reported that revenue declined from 24.3B to 21.8B due to lower cement prices.  Prices of cement were low because of the fierce competition in the industry with the influx of imported cement.  CHP’s “workforce” and “dealer network” did not deter other cement companies and cement importers from entering the market.  This event shatters the justification of the massive “goodwill” booked in its balance sheet.

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The poor results of CHP makes its share price expensive.  CHP, as of end of February 15, 2018, is trading at 4.01.  With the poor results, it is now trading at 29.85 PE ratio as compared to Holcim Philippine’s (HLCM) 17.49.

The price of CHP has gone down 56.88% from a year ago to 4.01 resulting to a price-t- book ratio of 0.7077.  We sensed that the market is now recognizing the impairment of its goodwill,thus, a share price lower than its book value.  With the current price of CHP some institutional investors have gobbled it up.  Institutional investors are reportedly now holding 13.68% of CHP’s total oustanding shares. maintains that the price of CHP has still to go down to make it a rational investment. At the current price its PE ratio is unjustifiable, its stock price has to go down further to align its PE ratio to its peers. In the meantime we cannot expect any dividend from CHP as it is presently struggling with its earnings.

FLI – Get to know Filinvest Land, Inc. and its prospects

Filinvest Land, Inc. (FLI) is one of the leading real estate developers in the Philippines.  It is engaged mainly in residential developments and in investments in rental properties for office and retail  use.

Revenue Stream

As of year-end 2016 FLI derived its revenue as follows:

Real Estate Sales from sales of residential units from its development – 14.3 Billion (80%)

Rents from its investment in office buildings and retail/mall properties – 3.4 Billion (20%).

Residential developments of the company covers the varying income segments of the Filipinos.  FLI’s Futura Homes offers value-for-money communities while its Spatial series offers affordable mid-rise condominium units (condos) for the low-income segment.  The mid-income segment is being catered through the Studio series of condos and the Oasis resort-style enclaves.  Filinvest Premiere offers luxury residences and premium leisure developments suited for the most discriminating tastes of the affluent segment.

Its investments in commercial retail properties is mainly anchored on the Festival Supermall in Filinvest City in Alabang (South Metro Manila) while its investments in office properties include the Northgate Cyberzone a business process outsourcing (BPO) Park also in Filinvest City. Filinvest City is owned and developed by Filinvest Alabang Inc. which is a 20% owned-affiliate of FLI. Rentals from investment properties provide steady recurring revenue and cash flows for FLI.

Growth Strategy

FLI has been acquiring large track of raw land for development into a sprawling mix-use townscape that features work-live-play environment. Master-planned townscapes allow FLI to sell residential units and at the same time invests in the retail and office rental properties. It has been noted that FLI has been increasing its investments in rental properties – retail and office. As of 3Q 2017, its investment properties has grown to 41.3 Billion from 38 Billion as of year-end 2016. Rental revenue as of 3Q 2017 now accounts 30% of the total revenue up 10% from year-end 2016.


FLI has a strong operating cash flows which as of 3Q 2017 amounts to 5 Billion Pesos. The strong cash flow generation from operations can be attributed to its disciplined costs management of its developments and investments. For the period up to 3Q 2017 it was able to generate a gross profit of 50% of its revenue. It generates a net income before tax 0.32 Pesos for every 1 Peso of revenue.

Although investments in rental properties takes a lot of resources to build, FLI has able to tap the capital/debt markets for funding for those investments. The predictable and recurring revenue and cash flows from the investment properties can very well cover repayment of debts. Residential developments of FLI are self-funding through pre-selling and project financing. The availability of funding avenue strengthens the balance sheet of FLI.

Funding for acquisition and/or development of assets are available to FLI. Assets acquired/or developed provide returns greater than their funding costs, thus, value accretive to stockholders. As of this writing FLI is trading at a dividend yield of 2.40%.


FLI is controlled by Filinvest Development Corporation (FDC) which owns 59.4% of its outstanding common stocks. FDC is controlled by the Gotianun family. Aside from real estate development, FDC has investments in banking through East West Banking Corporation, sugar through Pacific Sugar Holdings Corporation, and power generation through FDC Utilities, Inc.

Of the 40.6% owned by the public, around 13% is held by institutional investors the biggest of which is Invesco Asset Management Ltd. holding around 5.05% of the total outstanding shares.

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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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

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 are steps in the right direction.  Presently, there contributions to the bottom line is insignificant.  This is so because Iwanttv and are not world-class.  They are mediocre platforms.  The challenge of ABS is to make Iwanttv and 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.

CHP – Bottom Yet to Be Seen

CHP debuted at the PSE through an IPO priced at 10.75. As of this writing, it is trading 4.36 a 59% discount to its IPO price. It even reaches a low of 3.97. We believe that this is not yet the bottom.

CHP has in its balance sheet a goodwill of 27.8 Billion as of December 31, 2016. According to its filing, the goodwill is attributable to the assembled workforce and dealer network. It arose from the acquisition of the majority interest (60%) of what is now the wholly owned subsidiaries of CHP from CHP’s controlling stockholder for a sum of 47.8 Billion.

A closer scrutiny of CHP’s booked goodwill will show that nothing of its assembled workforce and dealer network provides the company a “moat” or a competitive advantage that can justify the goodwill. In fact, in 2016 its assembled workfoce and dealer network consumes 0.32 Peso for every 1 Peso of revenue/sales while competitors EAGLE consumes only 0.1 Peso and HLCM consumes .06 Peso. In that year, CHP was able to generate a Net Income of 0.06 Peso for every 1 Peso of revenue. That is meager compared to 0.31 Peso for EAGLE and 0.17 of HLCM.

In the present era of cheaper imported cement, the goodwill that CHP had acquired or built-up should have made it invincible from the competitive pressures created by the cheaper cement. The goodwill was no “moat”. The imported cement made their market and eats from CHP. It pressured the revenue and ultimately the cash flows and net income of CHP.

Because the goodwill was no “moat” and “shield.” The goodwill constitute 55% of CHP’s assets as of year-end of 2016. As of the year-end 2106, total equity of CHP is 28.6 Billion Pesos. Had the goodwill been written-off at that time, CHP would only have and equity of 824 Million Pesos. That would translate to a 0.16 per share of equity.

Because CHP was paying CEMEX 47.8 Billion Pesos, the IPO proceeds was not enough to fully pay CEMEX. CHP borrowed another 16 Billion Pesos to fully pay CEMEX. This leaves CHP heavily indebted.

The era of cheaper imported cement dwindles CHP’s operating cash flows and net income. After paying the costs of its debt and the massive debt itself what will be left for growth/expansion and for its stockholders?

We believe that CHP has not yet reached bottom. We see it coming down to 0.50. Sell it now and buy it a lot a cheaper later.