Gus Cosio says so

Ideas on the Philippine Stock Market

Cebu, my favorite destination

5:30 pm  Thursday 14 October 2010

Here are my thoughts on Cebu Pacific after reading analyst Kenneth Nerecina’s research report.  I am convinced to pick up the issue for the following reasons:

1. Its main market, the Philippines is an archipelago and air travel has become the most dependable and safe method of travel.  From 2005 to 2009, sea passengers dropped 3.2% while air passenger traffic rose by 19.4%.  This is because the comparative price of passage with sea travel has closed up substantially to something like a difference of 15%.

2. There is a lot of room for growth in Asia-Pacific regional travel as the Philippine economy grows.  Low cost carrier penetration from the Philippines is only 16% vs. 27-35% for other regions based on Center for Asia-Pacific Aviation data.

3. Cebu’s domestic airline passenger market share has risen from 28% in 2005 to 51% in the first half of 2010 which makes it the dominant player in Philippine air travel.

4. Cebu has a very young fleet and registered the 4th lowest cost per available seat kilometer (CASK) of US$ 0.048 and has the highest margin among global low-cost carriers which is US$0.0071.  Low cost producers of goods and services tend to grab bigger market share over time.  Having the highest margin gives comfort that operations will be profitable over the long run.

5. Mr. Nerecina values Cebu between Php 67.2B to Php79.7B.  Using 2011 forecast PE of 10.7X and EV/EBITDA of 8.1X for comparable low cost carriers, we derive equity values of Php74.4B and Php67.2B.  Discounted cash flow places value at Php79.7B which translates to a 2011F PE of 11.5X.

Essentially, I think that Cebu Pacific is neither cheap nor expensive.  However, being the dominant player in this market, I believe that it can command a premium because it is effectively the only decent exposure that investors can have in the transport sector.  Also, low-cost carriers are in fashion among portfolio managers around the globe because of its growing market share even for business travel.  Finally, given that the market is fundamentally bullish and there is very little supply of good stories in our market, demand will outstrip supply of the issue.  There will be very little compulsion for people to sell it down.  Given that JGS has sold a good portion of their holdings, should the price fall below IPO price, they have good reason to buy it back while new buyers will really have no reason to sell.

The risk reward outcome of buying Cebu will either be even money or positive return which makes it compelling to buy the issue.

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October 14, 2010 - Posted by | Financial markets in Asia

43 Comments »

  1. Being the first IPO for the last 2 years, all eyes are upon this issue. Hope more companies go public and months to come!

    Comment by Topmace | October 14, 2010 | Reply

    • Yes, this IPO is so much in demand just got 5% of what I subscribed for

      Comment by Foreign Investor | October 14, 2010 | Reply

      • I got 100% of what I subscribed for. Minimum lang kasi. 😀

        Comment by Sonn | October 14, 2010

      • Hello,
        I am a foreign investor that spends a lot of time studying and investing in the Philippines market. Fascinating and lucrative to say the least. My broker was able to fill my position of 1000 shares for Cebu Air. I am small time so I don’t know how I got lucky………or unlucky as the case may be. No, I believe in some solid short time gains to be made on this IPO. Long term the jury is still out for me. I need to go over the terms of lease or purchase on Cebu Air’s new fleet in detail.

        What I love about investing in the Philippines is that 87.9% of the population doesn’t have a clue what you are talking about or thinks you are a gambler and could do better off betting at sabong. But really, you are smart people and you all know that there is money to be made in the PSE, or else you wouldn’t be reading this blog. You Filipinos are very nice people and I wish you all the best with your investments. Mr. Cosio, thanks for all your insights and taking the time to educate novice traders.

        Regards,

        Comment by Juanito | October 17, 2010

  2. Hi sir,

    Is it a good idea to place the funds I have allocated for Cebu pac to JGS? It seems that I wont be getting my complete subscription due to the really high demand.

    Comment by Ria | October 14, 2010 | Reply

    • I have re-allocated some of my fund to JGS for short term because – majority of shares for this IPO are “secodary” (aka shares held by existing holders).

      From my “guestimate”, looks like around 16-20% (4-5 Billion) of the proceeds will be used for Cebu Pac’s operation; the rest will go to JGS.

      I dont know, but the recent move in JGS seems to be a shakedown in preparation for something =)

      Comment by Raymond | October 14, 2010 | Reply

      • That’s a good idea, Raymond.

        Comment by Gus Cosio | October 15, 2010

  3. When is the IPO again? I hope people pull money from their other issues and place it there so I can go bargain hunting.. hehe

    Comment by jasper | October 14, 2010 | Reply

  4. Hiya buds,

    Seeing that “FINAL” on the status for my CEB shares really made me smile. hehehe Well, better to have 200 shares than nothing. The demand for the stock is more than 2x over the supply. Lets see what happens on Oct. 26. Greed is goooood.

    Comment by Gordon Gekko | October 14, 2010 | Reply

  5. HI Gus,

    thanks for telling me about the First Metro Securities launching. I went and had a lot of fun. Even won a laptop.
    Im thinking of opening an account with them soon. I like that you can easily link your metrobank savings account to your trading account.

    Comment by rodimus | October 14, 2010 | Reply

    • Hey rodimus,
      you are very fortunate. Be sure to open an account. I’ve been using it and it is really much better than my previous on-line broker.

      Comment by Gus Cosio | October 14, 2010 | Reply

      • sell your laptop then buy a stock hehehe..it could multiply exponentially! that is, if you don’t need the laptop…(“,) congratzzz…Citisec kelan kaya mamimigay ng laptop hehehe

        Comment by alssy | October 14, 2010

      • indeed sir rodimus you are very fortunate…. that’s how it is with the big family of “you’re in good hands”…

        Comment by tatels | October 15, 2010

  6. Hello Gus. Thanks for your thoughts on Cebu Pacific. My brother has been thinking of getting shares. But, although the prospects are good, I hesitate because some traders are expecting the price to go down. I’d want to get some shares but maybe after a few weeks of it release.

    Also, since you’re into mining. Do you have any thoughts on TA? I’ve been keeping this stock for some months, averagng 1.30 and I’m not sure if i should buy some more or keep it as it is. Meanwhile, I preparing to buy some ORE, like what you suggested and hold it.

    Comment by BornOnChristmas | October 15, 2010 | Reply

    • BornOnChristmas,
      I respect your view and strategy on Cebu Pacific. Good luck on your trading. Unfortunately, TA is a stock that I do not have information on nor do I have access to. As for ORE, I am still willing to take a risk on the stock based on the information I have. Do not forget that investing is all about sound information or information digested soundly.

      Comment by Gus Cosio | October 15, 2010 | Reply

  7. By the way, I’m a long term holder usually. You mentioned VLL as something you’re willing to hold for months. May i ask why?

    Comment by BornOnChristmas | October 15, 2010 | Reply

    • BornOnChristmas,
      I have read research note that put VLL at single digit PE and a price to book of less than 1 which makes me willing to hold it until it catches up with some of the other property stocks.

      Comment by Gus Cosio | October 15, 2010 | Reply

  8. Hi Sir Gus,

    Do you have an update on the visit that was done by Fund Managers on ORE? Hope to hear from you..Thanks!

    Comment by Blogspot | October 15, 2010 | Reply

    • You’ll have to be patient, Blogspot. They left yesterday, they’re probably in the mine site today, and I reckon they will try to enjoy the beauty of Palawan over the weekend. I wouldn’t expect any comments from these guys until the middle of next week. Furthermore, I think if what they see suits them, they will probably do some buying before they make any comments.

      Comment by Gus Cosio | October 15, 2010 | Reply

      • Thanks Sir! Hope you could give & share us once there is an update on their assessment..Thanks & More Power!

        Comment by Blogspot | October 15, 2010

  9. Sir, Any thought on PX loosing Tampakan on SMC. Thank you so much.

    Comment by jaayem | October 15, 2010 | Reply

    • Jaayem,
      I think PX can stand on its own with or without Tampakan. From what I gather, Tampakan is not yet a done deal with SMC.

      Comment by Gus Cosio | October 15, 2010 | Reply

      • Thank you sir.

        Comment by jaayem | October 15, 2010

  10. Sir Gus,

    Do you still own a substantial amount of DGTL shares?
    If so, how much percentage wise does DGTL consist in your overall portfolio, What is fair value for DGTL?

    thanks & regards

    Comment by steve | October 15, 2010 | Reply

    • Steve,
      20% of my portfolio is in DGTL.

      Comment by Gus Cosio | October 15, 2010 | Reply

  11. Hello Gus,

    Do you think Px is a good buy at current levels? I think it is very cheap right now.

    Comment by Cathy | October 15, 2010 | Reply

    • Cathy,
      I bought my PX at below 12 and I am holding and was not compelled to sell at 16 because I think metal prices should be more buoyant next year. Many portfolio managers are constructive on metals.

      Comment by Gus Cosio | October 15, 2010 | Reply

  12. HI SIR,

    What about MBT any recommendation for us? Do you think this is the best price to buy or need more time? Many thanks..

    Comment by ronaldo | October 15, 2010 | Reply

    • Hi Ronaldo – Gus answered in his previous article.

      “MBT is ripe for consolidation. It challenged the 75 level three times but failed a significant break-out. Such an action normally persuades position holders especially momentum traders to take profits. In my view, MBT could go as low as 65 which may be too strong a support because the stock will be too cheap at that level.” – GUS

      Comment by Joey deleon | October 15, 2010 | Reply

  13. hi sir, i bought mbt at 69 due to its graphs but im just wonderin why foreigns sold a huge vol. is it bec of possible dilution from the sro? thank you.

    Comment by newbie | October 15, 2010 | Reply

    • Newbie,
      You are absolutely right. It is initially because of the rights offering which comes as a surprise to foreign holders considering they just had a private placement 5 months ago.

      Comment by Gus Cosio | October 15, 2010 | Reply

      • and I’m in red with MBT hoping it would reach back @75 🙂 possible before new year ?

        Comment by Joey deleon | October 15, 2010

      • before month end

        Comment by rodimus | October 16, 2010

  14. what to do with 200k gain? which stocks? any suggestions appreciated.

    Comment by Joey deleon | October 16, 2010 | Reply

  15. Hi Sir Gus.

    Thank you very much for providing readers a glimpse of what you think about the Cebu Pacific IPO.

    Is is true that CEB shares has a Par Value of P1 despite selling their shares at P125 each? What are the possible ramifications of this offer? Thank you.

    Comment by BJ Evangelista | October 16, 2010 | Reply

    • BJ,
      after a company is organized, the par value is not so important. It becomes important again only when a company undergoes reorganization.

      Comment by Gus Cosio | October 17, 2010 | Reply

      • Thank you for your reply Sir Gus.

        Comment by BJ Evangelista | October 17, 2010

  16. Would anyone like to guess what will CebuPac’s opening price be on Oct 26? My guess is (if it is 2 x oversubscribed) it will only open at around P140 to P160.

    Comment by Nivla | October 17, 2010 | Reply

  17. finance manila is a good gauge. they polled that over 80% of the local retail do not want this, hence it will go up

    i heard some otc in big blocks only: 150

    Comment by traderboy | October 17, 2010 | Reply

  18. Sir, just an observation sph, vll, ani, most ipo’s fall after a few weeks. Unfortunately for me, I’ve never been lucky with ipo’s.

    Comment by jeffrey | October 18, 2010 | Reply

  19. Sir,
    Whats your thoughts on ORE today? Volume 20day high and w/ NFB. Is it time to firm-up commitment or strenghten position at bit w/ this stock? Have accumulated a few at P3.03
    Thanks.

    Comment by Mark Anthony | October 18, 2010 | Reply

  20. Im new to trading and I have read diff blogs but what I like in your comments are the insight sabi nga nila may science na kasama.Is it true that bulk of the P22B fr Ceb IPO will go to Gokongwei’s and only abt P3b to the operations?

    Comment by jack | October 23, 2010 | Reply

    • Jack,
      I think the company disclosure statement will give you the most accurate picture. Please try to find it there.

      Comment by Gus Cosio | October 23, 2010 | Reply


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