Gus Cosio says so

Ideas on the Philippine Stock Market

Stand up for your rights

9:31 Thursday  17 December 2009   Philippine Stock Exchange Index opening at 3035.89

Two stocks and a warrant has been catching my eye over the last couple of days.  These are FGEN and MEG, both of which have been moving up; and the warrant MEGW1 which opened unreasonably high on its first day of trading last Monday.  What these stocks have in common is a rights offering.  For MEG, the rights offering came sometime in June this year, and the listing of the shares arising from the rights happened on the 11th of this month.  While investors as a rule approach rights offering conservatively, with these two recent issues, people were quite up-beat.

With MEG, I reckon that a lot of people like the story on the stock which is really their strength in pre-selling upcoming developments to overseas Filipinos.  They have a strong track record in this market, and they’re also doing credibly among domestic buyers.  At yesterday’s close of 1.46 places the price-earnings ratio at 7.8X and its price to book at 0.8X – valuations that are not at all demanding.  Considering the prospects in the affordable housing (high-rise) sector and with interest rates very low, MEG is a stock that can outperform the market.

Looking at the warrants, MEGW1, these warrants are exercisable to new shares at a price of Php1.00 per share.  Because these are new shares, any exercise would result in some dilution of earnings per share as more shares would be entitled to the same earnings.  In theory, the shares as they are trading should be factored for some dilution should warrants are exercised.  Fortunately, the exercise dat will not be until 3Q2011.  Anyway, I think that yesterday’s closing price on the warrants of 0.67 was on the expensive side.  This implies a cost of owning the shares at 1.67 while the price is currently trading at 1.46.  This means that the warrant buyer thinks that MEG should trade at least 1.68 to make a profit on the trade.  While this price is surely viable, there will be opportunities for the warrant price to go down with the ups and downs of the market.  In my personal assessment, given a price of 1.46 on MEG, my threshold in buying the warrants would be 0.56 to 0.58.  That is the level I’d be waiting for unless of course MEG sky rockets to 1.70 at which case I will re-compute my target on the warrants.  Bottom line, I would tag it at a premium around 10%  (total cost of exercising) of the underlying price.

As to FGEN, it appears that the fund-raising will be able to wipe out a lot of debt and bring down more cash to bottom line earnings.  Power companies are usually good payers of dividends given the nature of the business.  I do not yet have the valuations adjusted for the total outstanding shares after the rights issue but the fund managers I talk to seem to think that EPS will move up significantly.  As a matter of strategy, I think with patience, you can get to buy this stock closer to 15.  I would wait for the dilution then trade it when it trades ex-rights which I think is on December 22.


December 17, 2009 - Posted by | Financial markets in Asia


  1. Hi Sir Gus,

    If FED/Central Banks started increasing interest rates, where will the money go? I mean, why would financial institutions would opt to take their money out of equities and put it somewhere else?


    Comment by Oliver Mia | December 18, 2009 | Reply

  2. Rising interest rates have the aggregate effect of putting a drag on equities in general because it raises the yields on fixed income investments. Do not forget that this is a dynamic relationship, meaning, when stock prices drop to levels where they become reasonable or even cheap to bonds, then they start to rise again. Institutional investors do not sell all their stocks in their portfolios. They just adjust the amount they allocate to stocks in proportion to their allocation to bond and even cash.

    Comment by Gus Cosio | December 21, 2009 | Reply

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