Gus Cosio says so

Ideas on the Philippine Stock Market

Peso-cost averaging

7:05 pm  Monday  16 August 2010  Philippine Stock exchange Index  3479.67 (+0.29%)

Last week, the BSP published loan growth data which showing its fastest pace in June at 9.6%YoY. Loan growth in May was 8.1%YoY marking some acceleration in the pace of loan production.  Some analysts were nurturing a bullish view on bank earnings and the data supports favoring the sector in the next 12 months.

Earlier today, MBT reported that 2Q2010 profit rose 43% to Php 1.7 billion from improvement in operating income improved and declines in non-performing loans.  Net income for 1H2010 rose 36% to Php 4.2 billion.  Operating profits for the period before provisions rose 15% to Php 9.8 billion. Net interest income reached Php 13.1 billion in 1H2010, while  other earnings( including treasury and investments) rose 43 percent to 10.3 billion pesos. NPLs in the six-month period were reduced by 4.5 billion pesos, and the bad debt ratio dropped to 3.2 percent from 4.8 percent a year ago.  MBT set aside Php3.8 billion additional provisions for doubtful accounts.  Capital adequacy ratio came to 15.5percent following the Php 5 billion share Placement in May.  Tier 1 ratio rose to 11 percent.  The MBT disclosure follows positive disclosure from BDO and BPI last week confirming analysts positive recommendation of the sector.

I think that MBT is the most appropriate surrogate for the sector as a whole.  There were more positive news as remittances in June grew at the fastest pace in five months increasing 8.3% to $1.62 billion.  Growth in May was 6.5% indicating some acceleration.  A Singapore based economics think tank forecasts up to 10% growth in succeeding months.

I was thinking that stock prices would slip a little in today’s session.  They were actually quite strong.  MBT, for instance, saw huge value turnover as the big foreign brokers line up a lot of crosses indicating that placements among large institutions are going on.  It does not surprise me since the macroeconomic outlook has somehow improved given the strength of remittances.  I had mentioned a while back that the banking sector was a buy and that MBT should be worth at least 70.  I still maintain that view.

The Lopez shares have moved quite strongly in the past few day led by LPZ.  Some of the companies in the group have announced buy backs – FPH, FGEN and ABS.  I guess investors continue to move up to LPZ which is the parent of them all.  My only problem with share buy-backs is what happens when the company stops buying; who will be doing the subsequent buying to hold up prices.  They cannot keep buying back indefinitely so enjoy the ride while it lasts.  Fundamentally speaking, I think EDC will be the best performer of the lot due to the strength of its geothermal business.  FGEN should also do better though my money is on EDC.

For DGTL followers, I do not think that it is a short-term play.  In buying DGTL, you are taking a view that its value will emerge due to its turn around in business results and possibly sustained earnings from here going forward.  That is a view that I am willing to take.  It make take a bit of a wait, but it is a wait worth doing if I see at least a 40% move.  It is like my view on PNB last year.  I have the same sentiment for MPI.  For this reason, my strategy for both these stocks is to accumulate rather than buy my position all at once.  I am willing to be patient and even peso-cost average until returns are substantial.

Generally, I am still wary about being fully invested.  I don’t really mind the market moving higher.  I just do not want to be without cash if the market tanks on account of external forces.  The big day for our market is actually August 26 when they release 2QGDP.  If that is a good number, I will not mind being close to fully invested.


August 16, 2010 - Posted by | Financial markets in Asia


  1. Sir Gus,

    Your thoughts on the Lopez group is interesting especially in that the several business they had did not succeed and are now with MPI and seems growing and expanding.It might be easy for us comment on how certain company should be run, but to start and grow a company, very few succeded.

    Hence, decades of performance will be a strong guide in how that company will move in the future, the culture being ingrained in the people running it.For example, if corporate officers are receiving lower pay compared to other similar companies but the company grow way ahead of competitors, then that company is surely steps ahead of competition.

    In an Aug 16 issue of the business mirror it states that First Philec Solar needs $100m and started borrowing from PNB as it will be expanding its business. Genlemen, the Lopez group is said to be awash with cash, had been buying back shares but its subsidiary with good growth prospects will need to borrow to expand and pay interest?

    How about instead of the several billions for share buy back, the Lopez group bought a bank and got another steady stream of income, year after year?


    Comment by alex | August 16, 2010 | Reply

    • alex,
      you have a very good question but i think the princple of borrowing money from the bank to finance a business expansion is a sound practice since as you have said they are awash with cash. it is sound because interest expense is a deductible item from a taxable income. 2nd reason an expansion tru financing{provided they have a lower interest rate and favorable terms}is one barometer in gauging the performance of your enterprise, why? because you must earn more than the interest you are paying.3rd reason since they are awash with cash they buy back their share to enhance the shareholder value and to maximize the dividends pay out if any{buy back shares do not earned dividends they are held as treasury stocks}for the time being these treasury stocks are potential source of a big fund because when their stock prices rises they will sell it again to the market.i think it is one of heir idea why the lopez group behave this way. the only dilemma they are facing now is what if there stock prices didnt rise to their expectation and along the way they encounter a problem in liquidating their loans. remember their margin of safety in their loan are the cash they held in their treasury stocks. as i can remember the lopez empire problem is loan managemnt particularly their dollar denominated loan. it is good they learned their lesson they borrow from the local bank now. this is just my idea in fact i have no any share position yet in any lopez group but i am planning now to have may be on edc.

      Comment by richard | August 16, 2010 | Reply

      • Very insightful comment.

        Leverage, or the act of borrowing money and making more money than the interest expense that one pays out, can technically give you infinite returns. Imagine one borrowed $1 to buy a gallon of oil, and resell it for $2. One practically got $1 out of thin air. So using $0 you get $1 – that’s a return of infinity! This is also the reason why some tiange in 169 mall can sell practically with no mark up. Once they got the cash from their borrowed inventory (A/P), they invest it on something else.

        However, most large business are never that simple. And one has to gauge companies based on many more factors than just numbers or ratios.

        Anyway, I don’t want to type too long. To the readers, I’ll leave a parting quote from Warren Buffett:

        “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

        Comment by critic | August 16, 2010

      • Thanks for your thoughts Richard.

        My point is, if a lower and therefore cheaper share price is not attractive to investors at the moment, why are they going to buy it at a higher price bought about by share buy back? Pls remember that the P5B budget for FPH buy back is for 2 years. Granted, the EPS will rise a bit after share buy back, but give investors the notion that you are selling again and they may just get out again.

        Noted your points on interest expense and tax deductibility, but isnt it that they are trying to reduce loans and interest expense to add to income and therefore returns to shareholders?

        By the way they borrowed in US $ from PNB.


        Comment by alex | August 17, 2010

      • If all those books I read are to be believed – share buybacks are one of the leading indications of a good stock.

        But well, lets hope they don’t blow it this time at least (I have some interest in EDC). But Gus’s comment that MVP is succeeding where the Lopezes failed was penetrating.

        Comment by jasper | August 17, 2010

      • Jasper,
        You are correct – share buybacks are one leading indications od a good stock. If you read further, buybacks are done when there is a permanent surplus of capital and not merely to prop up the shares. In my view, I would be more impressed if they avoided debt instead and did the buy back at a later date when the share capital of the company is much larger. Then again, that is just my opinion.

        Comment by Gus Cosio | August 17, 2010

    • FGEN is very undervalued and trades at, if I’m not mistaken, FY 2010 .6x book value. So by buying back their own shares, and financing their expansion through loans (interest rates are extremely low right now) they are actually earning.

      If they succeed with their expansion plans, the value of the shares that they bought will surely increase, and they can use these shares as collateral for another loan haha.

      Comment by Warren | August 17, 2010 | Reply

  2. hi gus

    >The big day for our market is actually August 26 when they release 2QGDP

    A new thing!!

    I think I’ve accumulated all the DGTL I’m gonna need for this quarter. Ave price of 1.41. I think its not so bad.

    Now EDC, MPI, and VLL needs to follow suit so I can load up on them. Then I can stop looking at the quotron all morning and maybe actually start doing some work :/

    Comment by jasper | August 16, 2010 | Reply

    • Jasper,
      I think you’ve got the rhythm right. Just do not ignore watching price actions and volume indicators because that reveals the real sentiment in a stock. More power to you.

      Comment by Gus Cosio | August 17, 2010 | Reply

  3. Buy the Good News sell the Rumor….

    Comment by Benny | August 16, 2010 | Reply

  4. hi sir gus,

    thanks for your insights and tireless sharing of ideas to your readers.
    with the DGTL, i do hope it will be a double bagger like PNB.

    Comment by tatels | August 17, 2010 | Reply

    • The Best strategy in DGTL is to sell down to 1.32 so weak hands will sell in panic then buy it up to 1.5…LPZ was sell down july1 -july 9..then BUY UP frm 3.4 to 3.8…imho

      Comment by Godo | August 17, 2010 | Reply

  5. hi sir gus, at what level is it ok to buy AGI? I remember it was 5.5 back then when you were saying that it was a good buy. But I didnt listen. 😦 thanks

    Comment by jan | August 17, 2010 | Reply

    • Jan,
      I have no idea whether this stock will decline at all. It could. If I were you I’d buy a small position now and add slowly particularly on the occasions when it drops.

      Comment by Gus Cosio | August 17, 2010 | Reply

    • Sir Gus,

      I’ve read the previous disclosure of FHP and FGEN re their buy back program, but I have not read any disclosure regarding its actual exercise. Does this mean that they have yet to start buying back or are they allowed to not disclose their acquisitions on the same trading day and just report their activities, say … every quarter?




      Comment by Warren | August 17, 2010 | Reply

      • Warren,
        They have to disclose but I do not know the frequency.

        Comment by Gus Cosio | August 17, 2010

  6. VLL’s +5%, MPI +1%, EDC, +2.58%

    Each time I decide to buy, the price goes up :grumble2x:
    In case of VLL, it seems to make large jumps like this. Well, BVPS is closer to 4, so i guess its still cheap in a way..

    btw: I’ve decided to keep SHNG for the moment. I really like the mall 😦 I guess this is a case of me liking the product enough to hold onto the stock even if its not that sexy.

    Comment by jasper | August 17, 2010 | Reply

    • MPI had better volume today but after bouncing it went down again.. We have to observe for a few days. DGTL has been unstable in the past few days. I rather sell right now as it is moving towards the downside

      Comment by Foreign Investor | August 17, 2010 | Reply

      • Ram,
        I’m not going prevent you from selling. As for me, I appreciate this downturn in DGTL because now I am picking some up cheaply.

        Comment by Gus Cosio | August 17, 2010

      • That would be good that’s why I just had bought a small portion of shares to start off and see the movement in the volume then buy back once it would be increasing and buy it cheap
        Thanks sir

        Comment by Foreign Investor | August 17, 2010

  7. Sir Gus,

    what are your thoughts on AP? Is this a gem? thanks and more POWER to you!

    Comment by WARRIOR PRINCESS | August 17, 2010 | Reply

    • Should I address you as Warrior or Princess?
      Anyway, AP is indeed a gem for future growth prospects. So far, I reckon the full year EPS to be around 2.75 which means it is trading at only 7X 2010 earnings. I hold the view that its capacity will grow further in 2011 implying higher EPS for 2011.

      Comment by Gus Cosio | August 17, 2010 | Reply

      • basically, does this mean that AP at present levels is still cheap? or is it just right?

        Comment by jasper | August 17, 2010

      • Still cheap, for sure.

        Comment by Gus Cosio | August 17, 2010

  8. Hi Sir Gus,

    Lopez companies is performing well. Would it be wise to grab FPH or LPZ, I am little bit hesitant with LPZ because it is high right now, i’ll wait till it consolidates. I was surprised with MEG right now, you are correct when you said it’s difficult to trade it. I feel sorry coz I just sold my position the other day when it suffers a beating…We’ll lessons learned.

    Comment by Cliff | August 17, 2010 | Reply

  9. Hello Gus,

    DGTL’s 1st half report reflects a P189M loss in Q2, reversing a turnaround reported in Q1…i suspect this is the result of big players matching DGTL’s offerings….what do you think?

    Comment by glacier | August 17, 2010 | Reply

  10. LPZ still holding on, marching till 7-11……Many take profits..(hehehe)….. today i think they sold to early…seven-eleven…7-11….

    Comment by Godo | August 17, 2010 | Reply

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