PLDT (TEL) – Deep in the Woods

It was reported by Inquirer.net on March 9, 2018 that telco giant PLDT  (TEL) sounded off hope hat its business struggles were coming to a close this 2018.

Undescripts.com 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.

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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. Undescripts.com reported this earlier.

Undescripts.com 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.

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EMP – Valuation Growth on Premiumization and Buy-back

On January 19, 2018 EMP closed at 7.97, just -5.12% below its 52-week high of 8.40 set on July 11, 2017.  We believed EMP can still go higher that its 52-week high of 8.40.  Following is a discussion on why we believe EMP can soar beyond its recent high.

The “premiumization” strategy of EMP will bear fruits in this TRAIN regime.  TRAIN imposes a new excise tax of 12 Pesos per liter on drinks using high-fructose corn syrup.  This affected the major beverage companies like Coke and Pepsi.  In reaction, Coke and Pepsi will reformulate their beverages to utilize local sugar.  This, we believe, will increase the demand for local sugar, thus, increasing local sugar prices. To take advantage of this sugar boom, sugar millers will have to make their plant more efficient.  That means they will extract more sugar from the production leaving little molasses for the production of ethanol.  Short supply in ethanol will cause its prices to increase.

While we project that TRAIN law will make ethanol in short supply another law is projected to shore demand for ethanol. The Biofuels Act of 2006 mandates the blending of locally-produced bio-ethanol into fuels.  The demand from fuel companies will further fuel the rise of the prices of ethanol.

How this will result to the positive impact of the “premiummization” of EMP?  EMP domestically is mainly competing on liquor companies utilizing ethanol as raw materials. Those ethanol-based liquors are generally cheaper than EMP’s “premium” products. Those ethanol-based liquor products will have to increase their prices.  The price increases of the ethanol-based products will make the EMP’s “premium” product price competitive.  We see a switch by the consumers to EMP’s “premium” product.

As of year-end of 2016, revenue fell by 6.02% yet revenue increased 10.54%.  This means margin is improving.  In 2018, we see volume growth and revenue growth from the switch. We see no factors that can cause an increase in the costs of EMP so we believe margin will be sustained.  Revenue growth with a sustained high profit margin will result to a much more improve bottomline of EMP.

Another factor that will shore up the valuation of EMP, is its buy-back program.  EMP maybe committed to buy-back up to 480 Million of its shares, but so far as of December 29, 2017 only 45.2 Million shares have been bought-back from the market.  Of the total 5 Billion Pesos appropriated for the buy-back, only 0.32 Billion has been spent purchasing its own shares.  Further exercise by EMP of the buy-back is expected to increase the stock price of EMP.

We believe EMP at below 8.0 is a good buy.

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.