Gus Cosio says so

Ideas on the Philippine Stock Market

Lock, stock and safety deposit boxes

7:25  Wednesday  21 July 2010  Philippine Stock Exchange Index  3418.71 (+0.38%)

I spoke to some people on the PSE trading floor and there seem to be some wariness being felt about the new trading system.  There are misgivings about putting on larger trades because money could get stuck if there are system failures.  of course, there will always be those who would rather pass up some opportunities rather than risk losing money.  I don’t blame them.  The value of this information (traders’ skepticism on the new trading system) is that it deflates some of the positive market outlook in anticipation of technical hurdles in the trading system.  This tells me that people’s view of the market is positive but not too positive.

I interpret market action today to be that of rotational buying.  You have the large cap stocks like TEL, MBT and BPI down a shade, and you see the likes of PNB, MEG, DMC and SCC continuing to surge.  All told, we are seeing a very healthy market.  There are people who appear to be trading the range, and you can see it today in stocks like MPI, EDC and MER.  Then, there is the accumulation that seem to be going on in stocks like DGTL and SMDC.

When I see different strategies and movements simultaneously going on, then I see a market that is surely deepening.  I think that is very positive for everyone involved.  It may be a slow process, and it probably took the 2008 global financial crisis to do it, but the deepening of the Philippine market may just be happening this year.

This is all good philosophically, but the bottom line is how to make money.  For those who were lucky enough to bet on the PNB bandwagon early, there is scuttlebutt that makes me believe that the story has a long way to go.  Rumors have been flying about potential M&A activity in PNB.  The story is getting stronger; and concrete steps, I hear, are going on behind the scene.

I look at PNB as a pure play on the company’s fundamentals which are: a strong banking franchise, high customer recognition, wide distribution network, skilled management and staff, a balance sheet that has gotten stronger over the last 10 years, and a strong return to profitability.  Anyone who has the money will be willing to buy PNB lock, stock and safety deposit boxes.  Will you be chasing prices if you bought at 38?  I don’t think so.  It boils down to the question as to whether you think this stock is worth 38 or higher.

Another stock which has been going great guns is SCC, but at 98.50 people may just be wont to shy away from the stock.  After all, at the beginning of the year, SCC was only 35.  Then again, I hear that cash flows from the recently acquired Calaca power plant is much higher than the company even anticipated.  again, it boils down to whether people believe that this stock is worth higher than 98.50.  I personally think so, but to be safe, I decided to place my bet on DMC which owns a good chunk of SCC.  Either way, I think both stock will continue to do well.

Of course, the latest favorite is DGTL.  I am sure that there are a lot of arguments against buying this stock.  I welcome all of them, and I will probably not answer most of them for fear of being repeating myself too often.  The price action in DGTL simply tells me that more and more people are getting convinced as more primary research comes out.  I must stress, the decision must come from research because you can never substitute rumor for hard facts.  If DGTL slowly claws its way up to 2, I would be the least surprised.  It is probably the only telco play for the time being although my strategy is to asset allocate between DGTL and TEL.  TEL has the yield and DGTL has the growing market share.  I think together the portfolio result will be more that satisfactory.

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July 21, 2010 - Posted by | Financial markets in Asia

17 Comments »

  1. Sir,
    Did pretty well on PNB and managed to rack-up 40% profit at 38. Been trying to get DGTL at 1.48 but did not manage. I still have 20% cash waiting for a buy and EDC/MER 40% portfolio waiting to be sold and replaced with DMC and AP. With cash on hand and with current prices of DGTL, DMC and AP…what do you think will be the order of priority to maxmize yield if you were in my position.
    Thanks…Mark

    Comment by Mark Anthony | July 21, 2010 | Reply

    • Mark,
      My sequence would be DGTL, AP, DMC in that order.

      Comment by Gus Cosio | July 22, 2010 | Reply

      • Thanks Sir. bought DGTL. Still have 50% cash just sitting and waiting.

        Comment by Mark Anthony | July 22, 2010

      • Thanks Sir. got some DGTL and still sitting with 50% cash waiting to be invested.

        Comment by Mark Anthony | July 22, 2010

  2. Good Day Sir Gus!

    What do you think of MPI? I don’t think it’s very healthy having to incur additional debt to pay off the old ones, what do you think?

    Comment by WitcH | July 22, 2010 | Reply

    • WitcH,
      Remember MPI is essentially an infrastructure company. Long term debt is the essence of the capital structure of infrastructure plays.

      Comment by Gus Cosio | July 22, 2010 | Reply

  3. Sir Gus,

    I agree with your assessment with DGTL re: improving revenues. They still have 1 Billion deferred tax which means they will not pay income taxes for the next 3.5 billion net income in 2 years. This can be the next PLTL after being acquired by TEL. DGTL has a good business model. Lower prices will mean more customers to enjoy the services!!!

    However, my only concern is the possibility to convert the $ bonds payable of 15 billion causing dilution. At maturity, this will balloon to 28 billion that can be converted to DGTL shares at 1 peso redemption amount for each 1 DGTL shares. Even if they convert only half of their holdings, that will e a huge dilution.

    DGTL has increased its revenues for the past 3 years and has net operating cash flows.

    Comment by alex | July 22, 2010 | Reply

    • Alex,
      I will choose to focus on your last point on DGTL’s net operating cash flow, if I were you. With such improvement, there should be no problem in rolling their debt. Lenders may even be queuing up for it this time around.

      Comment by Gus Cosio | July 22, 2010 | Reply

    • Alex,
      At whose option the $ bonds can be converted to equity? Is it DGTL management or the bondholders? I ask this because there might be a dilution if it is at the option of the bondholders and the bondholders will choose to exercise their option.

      Comment by Nel | July 22, 2010 | Reply

      • It is at the bondholder’s option and majority may have been to JGS. This is disclosed in the 2009 annual report.

        DGTL is a recovery play.

        Comment by alex | July 22, 2010

  4. Hi Sir Gus,

    Any thoughts for MBT today as it dives down? Is it a buy at 57.5? Also DMC at 19.25, will it be good to chase this price?

    Thanks.

    Comment by Cliff | July 22, 2010 | Reply

    • Cliff,
      I see no reason why MBT went down today. I can only surmise that it is related to the potential PNB M&A activity. I maintain my view that MBT is worth 70 so when prices stabilize, I would put money back into MBT. For DMC, it is tough to get in at 19.25 if you do not belive that it is worth much more. If I were you, I’d continue to follow it and if it dips or stands still, you could consider getting in.

      Comment by Gus Cosio | July 22, 2010 | Reply

      • Hi Cliff, sir Gus:

        The price decrease of MBT is mainly due to some select brokers (e.g. ATR Kim Engg, Macquari) selling heavily (perhaps in anticipation of possible uncertainty due to new trading system to be implemented next week). These brokers are also selling there shares in PNB, AP, MPI and other heavily traded stocks today. Good thing with PNB, there are willing buyers and the selling did not drag down its value.

        Interestingly, the selling and buy dynamics of the volume coming from the public (126 and 203) in MBT and PNB are visibly correlated. Selling action in MBT evntually translates to buying action in PNB after several minutes of delay! The correlation is so visible that by simple visual inspection you can pinpoint that both the volume and time delay are consistently related. I have no doubt that many of these traders feel that PNB is now a more favored stock than MBT, at least by virtue of momentum.

        From the looks of it, i think PNB will have a very good price action tomorrow and i will not be surprised if it will shaprly increased if market sentiment is positive. ASide from the 94th anniversary of PNB being celebrated this week, a disclosure about US Fed announcing hte approval of selling of Oceanic shares this evening will give PNB a big big leap. SHarp increase tomorrow will put fireworks to this week’s remarkable price action of PNB.

        Comment by Chris M. | July 22, 2010

      • Thanks Chris M. for the good observation. Hope your words will be a reality tomorrow as I am also holding 25% of PNB thinking to lock my profits tomorrow.

        Comment by Cliff | July 22, 2010

      • nice prediction brother!!! finally you learned from me…hahaha joke

        Comment by draco23 | July 23, 2010

  5. Sir,
    DGTL down at but volume triple vs. yesterday however, large NFS. Any thoughts on this? Is PNB overbought? NFS today larger than I thought.

    Comment by Mark Anthony | July 22, 2010 | Reply

    • Mark,
      NFS in both stocks does not bother me. PNB is worth the risk because of the potential M&A play. With DGTL, I hold on to the adage that volume precedes price. There are no free lunches when you trade stocks. In my opinion, those who dislike the stock are now getting out. In front of them, there are those who have developed a liking for the stock and are now buying, but without ramping up the market. I interpret that as a good sign because a large number have the opinion that the stock is worth buying. I would be more daunted if everybody was saying good things about DGTL.

      Comment by Gus Cosio | July 22, 2010 | Reply


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