September 29, 2012
Investment Grade

In a report in the “Economy Section” of BusinessMirror last September 26, 2012 entitled “Philippine seen getting investment grade next year” regional banking giant Development Bank of Singapore (DBS) had backed the country to finally received its coveted investment grade status.

The country is currently experiencing booming economy and excess liquidity as supported by the benign inflation, stronger than expected economic data and strong appetite for the government securities as evidence by the drop in the yields of the said investment products. For the first half of the year the Philippine economy had expanded by an average of 6.1%, third fastest among the Asian countries behind China and Indonesia. With the improved economic fundamentals such as better debt management as reflected by the improved debt to GDP ratio of 50.9% from a high of 74.4% in 2004, the country is now being cited as one of the next Asia’s tiger economy. As the economic profile of the country improves, the economic managers of the current administration and even the local and foreign bankers are now gunning in and knocking on credit rating agencies to revisit the credit standing of the Philippines and to possibly consider the possibility of granting the country an investment grade status. The Philippine economy is currently sitting on a one notch below investment grade credit rating from two agencies namely Standard & Poors and Fitch while Moody’s gave the country two notch below investment grade but with a positive outlook. According to the economists and market traders and this can be reflected by the market, the country is currently perceived as an investment grade country in the debt markets as its yields are at historically low.

What does an investment grade credit rating means to a country like the Philippines? Many of the investment funds such as foreign mutual funds, private equity groups and many others are restricted to place their investments in a country wherein it is being rated as a sub-investment grade. Being granted an investment grade status is like having a pandora’s box but with a positive consequence. Another benefit of being an investment grade is having to tap the debt market at a low cost. As investors do perceive the issuing party as having a remote chance of defaulting from its obligations.

Investment grade alone will not solve the economic woes of the country, the government must continually improve its competitiveness in terms of its economic profile by making its economic policies more predictable and feasible for investors. Lots of things are needed to be done, in order to sustain that status and eventually making the Filipino feel the benefits of an improved economy.

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August 25, 2012
It’s been a while since I blogged

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May 4, 2012
Why Wall Street fears a Socialist French leader

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April 21, 2012
Being big is not always that good

If we are to observe the banking industry of our country, we’ll find BDO Unibank (BDO) as the largest bank in the country with a total resources of close to Php1.1 Trillion, but finds it at third place in terms of the market value with a market value of just Php179 billion trailing Metrobank Trust Group (MBT) with Php191 billion and the market leader Bank of the Philippine Islands (BPI) with Php268 billion.

The reason why BPI leads in the market value table despite ranking third in the total resources table is that it has been able to deliver industry leading performance.

Numbers speaks for itself. Investors doesn’t care how big you are, what do they care about is your ability to deliver profits for the company along with rewarding them with the dividends being paid by the company to them.

Financial Performance

In terms of the ability to deliver profits, BPI is the industry leader. In 2011, BPI booked a profit of Php12.8 billion with just total resources of Php752 billion thus delivering a solid performance with a ROA and ROE of 1.6 percent and 15.2 percent respectively. While MBT ranked second with a profit of Php11 billion that translates to a ROA and ROE of 1.2 percent and 11.17 percent respectively. BDO on the other hand had booked only Php10.5 billion in profits despite having more than a trillion pesos on its balance sheet thus translating to a ROA and ROE of 1  percent and 11.4 percent respectively.

Financial Operations


In terms of managing its resources prudently, BPI once again is the industry leader. Its 30day and 90day Non Performing Loans (NPL) Ratio is below the industry average. The NPL are the loans that are considered at risk and close to a default. BPI’s NPL for 30 days and 90 days is  1.9 percent and 2.5 percent respectively.

Thus BPI only recognized Php2.150 billion as impairment charge in 2011 compared to the Php3.823 billion and Php6.144 billion impairment charge recognize by MBT and BDO respectively.

Dividends


Investors are very much attracted to those companies which pays regular dividends and not just regular dividends but huge dividends. BPI among the top three banks in the country is the most generous in giving up dividends yearly. BPI had given up Php21.289 billion as dividends for the past three years while MBT and BDO had paid Php5.859 billion and Php6.263 billion as dividends respectively for the past three years.

Stronger Capital Structure

The reason why BPI manages to pay that big in terms of dividends is because it has a more stable capital structure than the other two MBT and BDO. Retained earnings is vital component of the Tier 1 or Core Capital Ratio along with the share capital of the company. It’s a domino effect as you pay dividends you’re Tier 1 ratio gets depleted and will be replenish through the recognition of profits. 

The Tier 1 ratio of BPI is much stronger than BDO with a Tier 1 ratio of 13.1percent compared to the Tier 1 ratio BDO of 10.2percent. Although MBT’s Tier 1 ratio of 13.7 percent is higher than BPI’s Tier 1 ratio, BPI has more retained earnings than MBT with a Php41.643 billion compared to the Php35.986 billion of MBT. That’s the reason why BPI managed to pay more dividends than MBT.

Even in the United States, it shows that being big will not always please the investors as JP Morgan the number 1 bank in terms of assets trails Wells Fargo as the most valuable financial institution in the US.

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April 19, 2012
Alternative move for MVP to acquire GMA7

In recent months, news have been circulating that MVP wants to acquire GMA7 given his desire to add the media company into his media holdings through the PLDT Beneficial Trust Fund, the retirement fund of the PLDT Group.

GMA7 based on its historical performance is making around Php2-3 billion annually with a current P/E ratio of 16x.

It has been said that MVP is willing to pay around Php45-B but the families behind the GMA7, the Gozons, Duavits and Jimenezes, are supposedly asking for a Php60-B price tag. With the supposed offer of MVP his offering a 50 percent premium to the shareholders at a Php13.5 per share, what the families behind GMA7 supposedly want is a 100percent premium for the firm thus they are asking for a close to Php18 per share. 

Based on the data provided by the PSE on the public float level of GMA7, the company has a public float level of 32percent. The public float level represents the shares readily available in the market.

If MVP chooses to hold a hostile takeover of GMA7, this will not prosper without the blessing of the families behind the GMA7. Despite having a 32 percent free float level, there is no guarantee that MVP will all get those 32 percent.

Reason why? Primarily because based on the 2010 Annual Report of the GMA7, the families behind it effectively controls 92.40 percent of the company. Meaning only 7.60 percent of the company can be actually purchased outside the holdings of the families behind the GMA 7. 

And it will never be a good move to acquire a company through a hostile takeover because it will result in tedious litigation proceedings. Thus both the acquiree and the acquirer will suffer from the negative effects of the hostile takeover. 

The Digitel Roadmap Strategy

If MVP really wants to acquire the company and please the families behind GMA7, it would be better for him to follow his strategy in acquiring Digitel from the Gokongweis. 

When he acquired Digitel, he executed a share-swap deal between PLDT and Digitel parent JG Summit. Thus besting the offer of the Ayala-led Globe telecom.

It is not unknown to us that PLDT Group is currently suffering from a capital structure defect given by the SC decision regarding what constitutes capital.

If PLDT chooses to execute share-swap agreement, it will definitely cure its capital structure defect given that the owners of the GMA7 are Filipinos. 

The problem that shall arise inside the PLDT Group is that, are the shareholders of the PLDT Group willing to accept a dilution on their current holdings in order to accommodate the families behind the GMA7?

As PLDT Group is planning to cure its defect by issuing voting-preferred shares to the PLDT Beneficial Trust Fund in order to maintain the current structure of the firm as it will not dilute the power of the current shareholders given the fact that they have the full control of the PLDT Beneficial Trust Fund. 

So they still has the power on how they will vote for the shares of the PLDT Beneficial Trust Fund.

It will never be an easy task for MVP to acquire GMA7 instantly without comprising the interest of the PLDT Group.

The Digitel Roadmap Strategy remains to be the best alternative for MVP in order to entice the families behind the GMA7 to cash in already with their investments.

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March 14, 2012
Mitigating the crisis

In business, in order to protect your interest and survive the competition you need to have an access and control on the supply chain. Input factors are very significant in the success or failure of a certain business.

Apple has been successful not only because of its great products but also with its great supply chain. It manage to control the supply chain for its products and the reason behind Apple didn’t felt the slowdown in the heights of the tsunami effect on the supply of electronics parts.

SMC is trying to copy that business model by acquiring struggling airline company Philippine Airlines and integrating its operation with that of its own petrol company Petron.

On why should the Government copy that business model?

Instead of pouring in billions of pesos as a short term solution for mitigating the effects of oil price hike on the transport sector why don’t just the government set-up a fund from those billions of pesos that will enable the transport sector to establish its own oil company in order for it to compete with the big oil players.

Let’s play their cards, big oil companies thinks they can circumvent the oil deregulation law by colluding on their price fixations. I real competition should be establish in order to stop the abuse of the companies.

The government should therefore think as a pro-active one and not just by reacting on what was happening. 

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February 20, 2012
Philex open to government plan on ‘equitable’ sharing

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February 20, 2012
It’s been a while since I blogged about the economy.

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January 24, 2012
MVP group buys additional Meralco stake for P8.85B

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January 12, 2012
JPMorgan Has Wells Fargo Nipping at Its Heels

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