2012 Jul 30

PSB: HIGHER SHAREHOLDER

VALUE CREATION

TEL: BUY PLDT ON EASING

INDUSTRY COMPETITIVE

PRESSURES HELPING EBITDA

MARGIN AND VALUATION

BELOW REGIONAL PE OF 20X

AP: RECOMMENDING A HOLD (FROM BUY) DUE TO STEAM SUPPLY AND ELECTRICITY SALES CONTRACT EXECUTION RISK

Interest Rates Sideways to Down The peso yield curve moved lower by an average of 6 bps week-on-week (wow),

with the long end seeing a drop of 12 to 13 bps. These movements sustained the

flatness of the yield curve, fueled by talk of a likely Bangko Sentral ng Pilipinas

(BSP) policy rate cut on Thursday (July 26, 2012). Following suit were the drops in

the T-bill rates in last Monday’s auction (July 23, 2012) across the board with the

91-day T-bills slipping to 1.8%, 20 bps lower than the last auction. Rates for the six-

month and one-year papers fetched 2.117% and 2.279% respectively, lower by 5

bps and 20 bps than the last auction also due to the policy rate cut speculation (bet

of 25 bps to 50 bps). Other factors were the good fiscal data, lower inflation rate

of 2.8% last June 2012 versus the month-ago’s 2.9%, Government’s strong cash

position as suggested by the year-to-date May 2012 budget deficit of Php23bn,

only 8.16% of the full year target of Php279bn. Pronouncements of the BSP reflect-

ed a confidence any future monetary easing is not likely to stoke inflation, which

registered in the sharp rate fall seen to bounce back (10 bps at most) once the BSP

meet disappoints bets on a rate cut. Toward yearend, the long-end of the curve is

seen lower by 30 bps.

F IRST METRO INVESTME NT CORPORAT ION

Bellwether Market Stats

GSM PM CLOSE July 20, 2012

23.57y 25s8 5.74 (-.04)

Dealt @ 5.725 to 5.80 for 2.352Bn

24.36y 25s9 5.825 (-.045)

Dealt @ 5.86 for .050Bn

RTB Tranche July 20, 2012

15:15Y 5.36 (-.09) Dealt @ 5.325 to 5.365 for .920Bn

20y 5.6175 (-.0325)

Dealt @ 5.61 to 5.64 for 6.812Bn

Continuation on Page 2

Volume 1 No. 7

Fortnightly on Market Action and Outlook

PS Bank: Higher Shareholder

Value Creation

he

Record income in past 3 years enable record divi-

dends. Net income target for 2012 is Php2.2bn, 10%

higher than last year's Php2bn and above the previous

year's Php1.8bn. Last year's ROE was 15% and this

year's earnings are seen to maintain that, net of a record

Php3.00/share regular dividends. The Bank raised its

dividends from Php0.60/share paid each quarter at

Php0.15/share to Php3.00/share this year, regular divi-

dends, for a cash yield of 3.4%, the industry's highest.

PS Bank is 76% owned by Metrobank. In 1H2012, the

earnings were Php1.3bn, 50% higher year-on-year pri-

marily on gains in its investments as well as strong

growth from its loan portfolio. The bank's PE is 9x the

2012 earnings, artificially cheap versus the industry's

average of 15x. PS Bank should look into improving its

public ownership float. Price to book ratio is 1.25x on

projected book equity of Php16.9bn, net of dividends.

Long track record in thriftbanking and growth is

helped by the Metrobank franchise. The bank cele-

brates its 52 years in business this year in an expansive

mode. Its branch network, already the industry's largest

at 200 by end 2011, will grow by another 20. Total num-

ber of branches as of 1H2012 was 211. In addition, the

bank has 520 ATMs, 298 of which are off-site. Location

will be in the unrestricted regional growth centers outside

of Metro Manila, especially in Southern Luzon and Visa-

yas, as it aims to expand its presence in this area.

PSEi Value % w-o-w Change

Closing 5,210.89 -0.07%

High 5,297.99 -1.01%

Low 5,179.35 -0.21%

Value T/O (in mn Php) 24,506.52 4.38%

Foreign Activity (mn USD) 76.58 -77.96%

Top Gainers Top Losers

Stock Price % w-o-w change

Stock Price % w-o-w change

MER 265.00 5.41% PX 21.40 -7.56%

BDO 63.85 2.74% AC 429.80 -5.54%

AP 34.55 1.77% URC 59.45 -4.11%

JFC 105.80 1.73% MEG 2.15 -3.15%

SMPH 13.60 1.64% JGS 32.05 -1.99%

For the week ending July 20, 2012

GSM PM CLOSE July 20, 2012

1.67y 5s67 2.725 (unch)

3.67y 7s48 4.325 (unch)

4.27y 10s42 4.55 (+.05)

9.50y 10s55 4.975 (unch)

Dealt @ 4.97 for .150Bn

9.65y 10s54 4.975 (unch) Dealt @ 4.90 to 4.965 for 1.072Bn

19.15y 20s17 5.565

Dealt @ 5.55 to 5.61 for 22.194Bn

Note: GSM is Government Securities Market

Page 2

(PS Bank...continued from page 1)

Metrobank's long-standing brand equity and financial

backing had helped PS Bank duke it out versus the

country's largest thrift bank and key rival BPI Family as

well as aggressive foreign banks in the very competitive

industry's bread and butter: the mortgage market. Big

local and foreign banks have at one time pushed hous-

ing loan rates to a low of 5.5% last year.

Positioned in the fast-growing consumer lending

business. PSBank's loan portfolio of Php67bn of

largely auto loans, 42%, will be balanced by mortgage

growth whose share is a lower 31% of the loan book. Its

affiliation with the Metrobank group creates a synergis-

tic advantage as the unibank owns 30% of the car as-

sembler Toyota Motor Philippines. GT Capital, the

parent of Metrobank, owns 21% of Toyota Motor Philip-

pines and also owns Federal Land, the holding compa-

ny's real estate development arm.

Overall bank loan growth is seen at 12%-15% in the

next two years, matched by the deposit growth of the

same. While this is low versus the commercial banking

industry's 20% in 1Q2012, the business is expected to

pick up speed given the strong demand in auto loans

and mortgages this year. Rising per capita income,

falling oil prices and favorable demographics were

among the factors behind the consumer lending indus-

try growth. Loan to deposit ratio of 72% is still below the

industry, underscoring the room for greater growth.

Total Philippine commercial banking system (KB) con-

sumer loans were P563bn as of 1Q2012, higher 17%

year-on-year (YoY) with 41% in real estate loans, 26%

in auto loans and 23% in credit card receivables. Indus-

try real estate loans grew 21% to P231bn while auto

loans grew 17% to P144.8bn in 1Q2012 versus year

ago levels. PS Bank is highly exposed to these two

segments with about 73% of its loan book in auto and

mortgage.

Total Philippine KB loans and real estate loans were a

third and 15% of GDP, respectively; the latter was lower

than the BSP’s 20% cap on real estate loans. RP also

had a lower share of loans to GDP compared to peers

like Indonesia at 31%, Thailand at 91%, and China at

140%. In terms of household debt to GDP ratio, RP

also had the lowest in the Asian region at 4.1% as can

be seen in the chart on page 3.

Consumer loan market metrics upbeat. Philippine

passenger car sales have already started recovering by

4.4% YTD end-June, 2012. This was after supply set-

backs from Thailand, Toyota’s manufacturing hub in

Asia, caused more than a 20% decline in volume sold

last year. Moreover, Chamber of Automotive Manufac-

turers of the Philippines Inc. (CAMPI) expects car sales

to rise more than 8% this year.

Also, liquidity is still high in the banking system as

Special Deposit Accounts (SDAs) were at P1.6Tn un-

derscoring the sustainability of low interest rates.

Strong balance sheet. Asset quality in terms of the

NPL ratio at 3% shows the pay-off of a tighter rein on

credit screening. A personal loan book clean-up was

also concluded with the bank taking advantage of its

positive tax base. NPL cover was 103% as of end-2Q12

while total CAR stood at a high 17.96% and tier 1 capi-

tal ratio was at 14.15% after a tier 2 Php3bn capital

issuance.

Improving the funding mix. PSBank's funding mix is

skewed in favor of high cost funds with a share of 80%

and this will be balanced by more CASA growth from

the extended branch network. There is thus scope for

mitigating margin compression as funding cost im-

proves. PSBank's commercial loans account for 19% of

the loan book, split into 25% share SMEs and the rest

under the Large Enterprises Group (LEG) or RP's top

1,000 corporations. LEG exposures are partly participa-

tions in its sister company's, FMIC, underwriting activi-

ties and invitations for the same from outside the group.

PSBank's personal loans are still small, worth Php5bn

or 7% of total loans. The bank is also building a motor-

cycle lending book with Sumisho Corp., a local subsidi-

ary of Sumitomo Corp. of Japan, with six branches

nationwide. PSBank does not have a credit card portfo-

lio, the Metrobank group does through Metrobankcard

Corporation (MCC).

NIM trend is flat to downward, treasury income to

drive earnings. Inclusive of other interest bearing

investments, the bank's total earning assets stood at

Php108bn as of last June on which it earned a net

interest margin (NIM) of 4.77%, T12months ending

1H2012. The NIM trend is expected to be flat to down-

ward in 2H2012, which is true for the entire industry,

reflecting the low interest rates resulting from slower

inflation and falling oil prices. The bank has been un-

loading its AFS portfolio, realizing gains in 1H2012,

leading to a trading-gain-led earnings growth in

1H2012.

Steady earnings growth. PS Bank’s earnings have

grown at a CAGR of 19% for the past 5 years and com-

pany guidance was 10% in the medium term.

Valuation. The bank's PE is 8.8x 2012 earnings, cheap

versus the industry's average of 12.7x. Price to

book ratio is 1.26x on projected book equity

of Php17bn, net of dividends, below sector price to

book valuation average of 1.6x. Our price target is at

P144.74, derived using a Gordon Growth Model. We

used a 12.5 % cost of equity based on a capital asset

pricing model with a risk premium of 5% and beta of

1.2 for liquid bank stocks. For the sustainable growth

rate, we used 10.22%, driven by the 14% ROE and

27% dividend payout ratio. The 18% 1H2012 ROE of

PS Bank is higher than the industry’s 2012 and 2013

averages of 13.4% and 13.81% respectively. This is in

line with the company guidance of 10% earnings growth

per year in the medium-term. Our valuation will primarily

be driven by the dividends arising from increased profit-

ability. BUY.

Stock Data

Price (Php) 86.00

Market Cap (Php Bn) 20.66

Outstanding shares (Mn) 240.30

Book Value/Share (Php) 64.69

Price to Book (X) 1.26

Recommendation BUY

Source: Bloomberg

Fundamental Indicators

In bn Php 2011A 2012E 2013E

Net Profits 2,029 2,200 2,420

EPS Php 8.44 9.72 10.32

PER (X) 10.19 8.84 8.33

Source: FMIC-IAG estimates

Page 3

Table 1. Comparative Valuation

Table 3. P&L

Figure 1.

Source: Bloomberg and FMIC-IAG Research estimates; Note: Earnings forecast 2012, 2013 don’t include provisions for loan losses.

Table 2. Balance Sheet Ratios

Source: Bloomberg and FMIC-IAG Research Estimates

Source: PS Bank data; BusinessWorld 1Q12 Banking Report

Source: Bloomberg

Page 4

Figure 2. Figure 3.

Figure 4. Figure 5.

Figure 6. Fig-

Source: Bangko Sentral ng Pilipinas Source: Bangko Sentral ng Pilipinas

Source: Bangko Sentral ng Pilipinas

Source: Bangko Sentral ng Pilipinas Source: Bangko Sentral ng Pilipinas

Source: Chamber of Automotive Manufacturers of the Philippines Inc.

Page 5

Transition Supply Contract (TSC) with MERALCO

may be extended anew. AP may push for the continu-

ation of the 467MW Tiwi-Makban's TSC with Meralco

for a still unspecified period when it expires this year-

end. It is our understanding that the features of this

contract will give AP some flexibility in avoiding a po-

tential margin squeeze when steam fuel cost is in-

dexed to coal prices come 2013 per agreement with

Tiwi-Makban's steam supplier and steam field operator

Chevron 3 years ago.

No to coal price indexation. At the same time, we

expect AP to do its best to avoid falling under the coal

price indexation regime as it is not required under the

law. AP will be negotiating with Chevron for a new

steam sales contract to achieve just that. But since the

TSC will expire ahead of the expiry of the steam sales

agreement with Chevron, an extension could be AP's

best option. A future power supply contract replacing

the TSC with Meralco would be based on generation

capacity and require a fuel cost pass-through, resem-

bling in some ways the existing TSC.

Fuel cost re-pricing is expensive. Chevron's steam

supply re-pricing in 2013 risks raising Tiwi-Makban's

fuel cost significantly from the existing Php1.32/kwh

plus capex reimbursement to a level that is even more

expensive than the fuel cost of coal-fired plants such

as Pagbilao's Php2.20/kwh. AP's own estimate is that

Tiwi-Makban's fuel cost could rise by Php0.40/kwh

above that of Pagbilao to Php2.60/kwh, likely to pres-

sure up electricity prices in its next round of power

supply contract negotiation with Meralco. That TSC

was already extended to this year when it expired late

last year. Higher electricity repricing could undermine

Tiwi-Makban's dispatch and backfire on Chevron's

steam sales. We are confident Chevron will recognize

that it is also in its best interest to make sure AP's

electricity prices are competitive. Otherwise, it will end

up just venting its steam when it is unable to sell.

Execution risk for AP. Going forward, we identify

execution risks present in the upcoming Tiwi-Makban's

steam fuel supply and power supply contracts. We

think AP will need to be successful in negotiating with

Chevron for a competitive steam fuel price to support

an equally competitive power supply contract with

Meralco that will replace the expiring TSC by yearend.

Recall that the TSC with Meralco is a generation ca-

pacity based contract, requiring Tiwi-Makban's electric-

ity supply of not more than 240k kwh on an hourly

basis or 2,000GWh per year with a selling price based

on the NPC TOU Luzon grid-based.

Tiwi-Makban is key to AP's profits. Chevron's steam

prices and the structure of Tiwi-Makban's power sup-

ply contract with Meralco would be key to AP's overall

profitability. Tiwi-Makban is one of AP's two largest

recent acquisitions in recent years. The other one is

the 600MW Pagbilao. Tiwi-Makban accounted for 30%

of AP's power generation EBITDA of Php31.7bn in

2011 while its electricity generation is 35% of AP's total

energy sales of 9,422 GWH in the same year. It has

the 2nd cheapest fuel cost in AP's renewable energy

asset portfolio, next to the hydro plants.

Cheap valuation but recommending a hold from a

buy. Earnings consensus estimate for AP is Php22bn

in 2012, flat versus yearago, with a PE of 11.35x. Hold.

Stock Data

Price (Php) 34.50

Market Cap (Php Bn) 253.87

Outstanding shares (Bn) 7.36

Book Value/Share (Php) 10.07

Price to Book (X) 3.43

Recommendation HOLD

Source: Bloomberg

Recommending a Hold (from Buy) Due to Steam Supply and Electricity Sales Contract Execution Risk

Aboitiz Power

In the week ending July 20, 2012, trad-ing was sluggish on the back of a bleak global economic outlook. Investors are also awaiting the second-quarter corpo-rate earnings results. The PSEi lost 0.07% for the week to close at 5,210.89. Foreigners were NET BUYERS by P3.19Bn (i.e. including blocks). In devel-oped markets, despite Friday’ s decline (i.e. sparked by concerns that Spain will not be able to meet its financing needs), US markets managed to close the week with some gains. For the week, the Dow gained 0.36%, the S&P rose 0.43%, and the Nasdaq added 0.58%. Moving forward this week, we see Eu-rope taking center-stage again. IMF is said to stop further Greek aid if Greece fails to meet its commitments. Spanish yields have also hit new era-highs. In addition, concerns over China growth slowdown is also still in the table. Inter-national news flows that might drive market sentiment for the week include US Richmond Fed manufacturing index, new home sales, durable goods, and US 2Q GDP. On the domestic front, market attention will be on today’s State of the Nation Address (SONA), as President Aquino bares plans for the next 12 months. The Monetary Board is also set to meet on Thursday to determine policy rate levels.

PSEi Sluggish on Bleak Economic Outlook

Page 6

Philippine Long Distance Telephone Company

Earnings Rebound Back to 2010's high of

Php40bn. PLDT sees Php40bn earnings in 2014, a

recovery back to the Php2010 level. This amount is

lower and its realization is much later than reported by

media to be Php42bn in 2013, respectively. The earn-

ings guidance this year is Php36bn on expectations the

worst 2H2011 Php18bn result is likely to prevail in

2012. PLDT denied media reports it gave an earnings

guidance of Php42bn for 2013.

We see easing competition and broadband growth to

be key factors behind the earnings recovery story:

Competition is Easing. The price points for bellwether

competing products of Globe and Smart in the prepaid

mobile market have stabilized. We identify these two

bellwether products to be:

Globe's ALLNET25, bundling unlimited text and 1

hour call across the networks with internet brows-

ing for Php25.

Smart's TRINET 20, 30, 40, (price points of

Php20, Php30, Php40) for unlimited text, unlim-

ited calls with some conditionalities across all

networks.

Price Points Are Moving Upward. Smart has started

to adjust upward the price points for these bellwether

products by introducing trade-offs between unlimited

service features (i.e. call, text, browsing and network

access), a departure from the previously aggressive

unlimited offerings of as low as Php5-Php10 done

through SUN mobile service brand. We think the price

points’ up move in the mobile pre-paid segment is key

to EBITDA margin stabilization. PLDT's EBITDA mar-

gin is seeing its worst level this year, hitting 48% in

1Q2012, coming from 56% in 1Q2011. That margin is

seen to recover next year to 50%, still short of the

1Q2011 high of 56% before the Digitel acquisition.

Digitel is the drag with SUN's EBITDA margin at a low

27% in 1Q2012, first consolidated with PLDT in

4Q2011.

Growth is in Broadband. Broadband subscribers have

grown 43% in 1Q2012 versus yearago, same period, to

2.99m, That base was small versus the 66m mobile

subscribers of PLDT but is the fastest growing versus

mobile and fixed line. It is also a small 14% or

Php5.8bn of the 1Q2012 total consolidated service

revenues. Year-on-year growth of broadband revenues

was 34% or Php1.5bn. The catalyst to broadband reve-

nues is broadband smartphones hitting the $100-$120

"sweetspot," resulting in the shift of subscriber usage

from shared access/internet cafes to the handset.

Debt to Stabilize. We also see continuing debt stabili-

zation at the cap of 1 in terms of net debt/EBITDA ratio.

Such ratio stood at 0.90 as of end-1Q2012. PLDT's

debt discipline is reflected in ePldt's sale of its 27%

stake in gaming affiliate Philweb Corp. for Php4.2bn.

That sale raised cash, an alternative to more borrow-

ings for PLDT. The Php4.2bn cash generation was

deemed more beneficial to PLDT in the short-term than

Philweb's very promising profitability.

(Philweb management had predicted a record doubling

of its 2011 earnings to Php2bn this year. This was

after achieving a 30% earnings improvement in 1H2012

to Php480mn. The gaming outfit made Php940mn in

2011 and just got a 75-year concession to build a casi-

no in Thailand.)

According to Ms. Melissa Vergel de Dios, Philweb was

considered unimportant to PLDT's transition into a

cutting edge broadband multimedia provider.

Higher Valuation is Justified. PLDT's price is reflect-

ing the positive prospects of competition, the broad-

band business and EBITDA margin recovery. PE has

gone up to 16x this year's Php37bn earnings estimate.

We think further share price upside is justified by the

unfolding earnings recovery story and in light of the 20x

regional peers' PE.

Buy PLDT on Easing Industry Competitive Pressures Helping EBITDA Margin and Valuation below Regional PE of 20x

Stock Data

Price (Php) 2,696.00

Market Cap (Php Bn) 582.49

Outstanding shares (Mn) 216.10

Book Value/Share (Php) 639.45

Price to Book (X) 4.22

Recommendation BUY

Source: Bloomberg