Gus Cosio says so

Ideas on the Philippine Stock Market

A stock I continue to like

1:10pm  Monday 21 December 2009  Philippine Stock Exchange Index  3020.56 (+0.12%)

The market is really winding down as investors and traders become more preoccupied with their Christmas holiday plans than trading the market.  I think that it has been an exceptional year for most people.  There are very few years where rallies were pretty obvious and this year has been one.  I think anybody who got involved in this market made money one way or another simply because the market plunged to very cheap levels.  What I define cheap is not just absolute price, but price which reflects excellent forward yields.

This is why I’m sharing notes from a recent buy recommendation from a banking analyst in a major broker.  Another reason why I’d like to share it is because, personally, I like the stock – PNB.

This broker says that they raising forecast of Philippine National Bank’s (PNB) 2009 and  2010  earnings  by  55%  to  P1.68b (EPS: P2.54) and 25% to P1.71b (EPS: P  2.58), respectively, with key drivers pointing in the right direction.  They reckon that its 9M09 earnings (after amortization of impairment losses) were up  135% to P1.57b YoY, exceeding the analyst’s previous expectation for the full year, as trading profits reached P1b, a turnaround from an P890m trading loss in the same period last year.  Net loans improved, albeit marginally, QoQ in contrast to declines posted by many of its competitors.  Its 19% YoY loan growth is also 3.2x faster than that industry’s 5.9%, and this analyst thinks that it lays the ground for future growth.

NPLs are down to P9.7b in Sept from P10b at the end of 2008 defying the analyst’s expectation for an increase to P11.8b this year, suggesting PNB is managing very well through this year’s economic downturn.  Lower NPLs should increase its asset yield and reduce provisioning requirements next year.

PNB’s  retained  earnings turned positive as early as June 2009, thanks to its  improving  profitability.   By  the end of the year, this analyst  expects PNB to have built up a modest sum of P625m, a watershed moment considering it has  been  in  a  deficit  for  the  last 11 years.  This also brings it a step  closer  to being able to declare cash dividends.  Now it needs to build up  enough  surplus  to be able to do so.  It is this analyst’s understanding that a 2002  restructuring agreement with government agencies prohibits PNB from paying  out  as  cash  dividends  an estimated P1.9b of retained earnings.  By this analyst’s  estimate,  PNB should be able to beef up its earned surplus to well beyond  the P1.9b  level  by  2011  when retained earnings are expected to reach P4.5b.  This means it could be in a position to start paying dividends by 2012.

Alongside  the  increase  in his forecasts, he is also raising his target  price  on  PNB  shares  by 34% to P43/share or 0.9x its 2010F BV.  This is  equivalent  to  its  average  P/BV over the last five years.  His previous  target  was set in 4Q08 when sinking bond prices was seriously undermining PNB’s profitability.   Hence, he  factored  into  the  target price an earnings shortfall  of  as  much  as  50%.   Not only did this not pan out, but PNB actually beat the forecast for the full year by 45% just in the first nine months.   Separately,  retained earnings  for  9M09  coupled with smaller mark-to-market  losses on available for sale securities, added P3.20/share  to PNB’s book value from end-2008.

I have been bullish on PNB all along although it has been underperforming the market in 2009.  My view is that in 2010, this will really be a stock to own.


December 21, 2009 - Posted by | Financial markets in Asia


  1. hi sir gus, I have seen how money is multipied exponentially through investing in the stock market. And it seems PNB is a no brainer choice in that category. It is still trading way below PAR value which is 40. And with the upcoming blockbuster merger with Allied Bank, this is in fact a stock to watch out for next year. My question is this sir….would you bet you house on this stock since it has all the potential of a 2-3 bagger =) I’m still thinking if i should do that….Thanks

    Comment by Richie | December 21, 2009 | Reply

    • Richie,
      while i like PNB very much, I wouldn’t bet the house on it. In my portfolio which I diversify into 5 or 6 stocks at 20% weighting normally, I’ve raised my weighting on PNB to 30% precisely because it is a very good bet. My recommendation is overweight 20%, 30%, 40% or even 50%, it’s up to you. as for my portfolio style, I’d probably max out at 40%.

      Comment by Gus Cosio | December 22, 2009 | Reply

  2. Sir I agree with you on PNB, I have been buying and will continue to accumulate PNB this week. I think this stock has bottomed at 23.

    Sir, what do you think should I do with my FPH? I already have a substantial paper loss in this stock but I have been holding on to it thinking that once MPI actually buys the MER shares at 300, then it should be worth at least 75 (total cash from sale divided by number of shares sold). However, I am worried that fund managers might sell them in January because it has been very weak all month. What do you think, should I just cut my losses or add to my position while its cheap or just hold what I have?

    Any thoughts on ISM? Thanks



    Comment by Warren | December 21, 2009 | Reply

    • On ISM, I think it has gone expensive already.

      Comment by Gus Cosio | December 22, 2009 | Reply

  3. Warren,
    Personally, I think FPH had seen its top 58 for the time being. It could rebound to above 50 between now and end January as people realign portfolios. From what I gather, MVP is going to extend the option when March comes. If you bought this for a trade, I don’t think you should hope for a 75 in the next 6 months, although on a longer horizon, it is possible to get there especially if this market turns further bullish. In other words, I wouldn’t hold my breath for FPH. I’d rather hold my breath for PNB going to at least 35.

    Comment by Gus Cosio | December 22, 2009 | Reply

    • in relation to MVP sir gus.. what’s gonna happen to MPI if MVP exercises the option to further acquire MER shares at 300? What happens to MPI if he decides to abandon the option? Thanks!

      Comment by J | December 22, 2009 | Reply

  4. Hello Sir Gus,

    What can you say about AGI? 😦 Why is it going so low? 😦

    Comment by wren | December 23, 2009 | Reply

    • I think that the large supply of MEG arising from the recently paid and listed rights issue is bearing down on AGI. Secondly, the anticipated earnings from the joint venture with the owner of Star Cruises has not yet filtered into earnings. I think analysts have not yet revisited the future earnings of AGI. Personally, I think AGI is cheap here and I am actually a buyer at these levels. Could it go down? Perhaps, a few cents more, but I think earnings will bear it out later.

      Comment by Gus Cosio | December 23, 2009 | Reply

      • Thanks Sir Gus for your insight 🙂 I’m still at a loss with AGI lol.

        Comment by wren | December 23, 2009

      • Warren,
        I know how you feel. I’m losing on the stock too. If I bought it only for a trade, I’d have cut my position already; but I bought it for the story which is still unfolding. So, I’m holding on for maybe a month or two more until I see it bounce.

        Comment by Gus Cosio | December 24, 2009

  5. J,
    One thing for sure is that MVP will exercise the option. In case he abandons the option, he will have to ask FPH to pay him back the concessional loan that he gave them. If they can’t pay him, he’ll foreclose on the collateral which are MER shares. So as you see, wherever the ball bounces, MVP through MPI will own control of MER.
    What will happen to MPI? MPI would have owned most of its shares at an average of around 135 to 140 pesos. Remember they bought bulk of their holdings at 90. The last 2 tranches were around 300. In my view, it can only add to MPI’s NAV. Furthermore, MPI will eventually benefit from equitized earnings of MER although cash earnings will be based on dividends received.

    Comment by Gus Cosio | December 23, 2009 | Reply

    • Thank you once more, Sir Gus. Merry Christmas to you. 🙂

      Comment by J | December 23, 2009 | Reply

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