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MPI

Business papers reported on 27 April 2011 that Metro Pacific Holdings (MPHI) opted to convert its Metro Pacific Investment Corp. (MPI) Bonds to MPI Common Shares.

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It means MPHI wants to increase its ownership share in MPI beyond its current 55.6% stake.

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The transaction involves MPHI giving up Php6.6 billion worth of MPI Convertible Bonds (that MPHI currently holds) in exchange for 2,030,769,230 MPI common stocks — roughly Php3.25 per share (remember this price — at this price, Php6.6 billion worth of MPI shares were bought).

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According to the amended disclosure by MPI dated 26 April 2011, the common stocks to be issued to MPHI will come from the increase in authorized capital which MPI is currently applying for approval.

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However, if within 30 days the application for the increase in authorized capital is not approved, MPI will get the 2million+ common stocks from its unissued authorized capital.

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As of end-2010, MPI has 20,155,464,522 shares outstanding or in the hands of its owners/investors.  Out of that total, MPHI owns approximately 55.57% of MPI through its holdings of  11.201 million shares (20,155,464,522 x 55.6%).

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After conversion, the total outstanding common stock will be = 20,155,464,522 + 2,030,769,230 = 22,186,233,752

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If currently MPHI holds 11.201 million MPI common stocks,  the additional MPI common stock resulting from the conversion (approx. 2.03 million shares) will result to MPHI owning 13.231 million shares of MPI common stocks.

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Thus, after conversion, MPHI will own approx. 59.64% of MPI (13.231/22.186).

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Is this the reason why the share price of MPI plunged -4.11% on Apr. 26 (announcement date) and -3.48% today (Apr. 27)?  Is now the time to sell MPI stocks?

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Could it be that a majority owner wanting to own more of the company a bad thing?

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Apparently, the worry of investors can be traced to the “dilution” of earnings per share.

Simply put, it means the share of current stockholders in the company’s net profit will be less after additional stocks are issued.

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What is earnings per share? Think of it this way, assume a company’s net profit is Php100 and 10 people have one (1) common stock each.

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With this example, each person owns 10% of the company. How much is each person’s share in that Php100 net profit?  This is what we call earnings per share (or EPS) = Php100 / 10 common stocks = Php10/common stock.

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Since each stockholder owns 1 common stock, then each of them is “entitled” to the Php10 EPS.

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If there were 9 stockholders (one owning 2 common stocks; the other 8 owning 1 common stock each), the stockholder who owns 2 common stocks will be entitled to the Php20 out of Php100 net profit. (EPS of Php10 x 2 common stocks = Php20)

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Now, imagine if the company issues additional 1 common stock. If before we divide the profits into 10, we will now divide into 11.

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If before EPS is Php10 (Php100/10 shares), EPS will now be Php9.09 (Php100/11 shares). That is why it is said to be “diluted”.

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In our example, the outstanding shares increased by +10% (from 10 to 11). EPS was diluted by -9.1% (from Php10 to Php9.09).

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As a shortcut, we can calculate EPS dilution as:

[1 / (1+%increase in outstanding shares) ] – 1

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In the transaction between MPHI and MPI, additional shares will be issued by MPI in exchange for (or effectively paying) the Php6.6 billion worth of Convertible Bonds.

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MPI will increase its outstanding shares by, incidentally, +10% (from 20.155 million shares to 22.186 million shares).

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How much will be the EPS dilution? Again, incidentally, approximately -9.1%.         [1 / (1 + 10%) ] – 1 = -9.1%

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So, is it time to sell MPI shares because of concerns on EPS dilution?

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Maybe not.

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For one, the stock has so far lost -7.45% two days after the announcement of the conversion.

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Also, again, could it be that a majority owner wanting to increase its ownership stake in the company a bad thing? I don’t think so.

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And how about the savings from not paying interest on the Php6.6 billion bonds anymore? Although I am not sure if the bonds to be converted bear a stated interest rate.

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Are people reducing their use of electricity distributed by Meralco? I doubt it, and MPI owns 17% of Meralco.

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Would people from the west concession cut their use of water supplied by Maynilad? Again, not a chance, maybe the other way around. MPI owns more than 50% of Maynilad.

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Is it possible for those going to North Luzon to just use alternate routes and opt not to use the North Luzon Expressway (NLEX) because of higher fees? It can happen. But how probable would that be? MPI owns 99.85% of Metro Pacific Tollways Corp (which owns 67.1% of Manila North Tollways Corp. and 46% of Tollways Management Corp.)

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Aside from these major investments, MPI owns Makati Med, Cardinal Santos, Davao Doctors and Riverside Medical Center in Bacolod.

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With that, is it time to buy MPI stocks? As always, in a disciplined and strategic way.

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Holcim – HLCM

Philippine Daily Inquirer (PDI) reported on 24 April 2011 that Holcim Philippines (HLCM) is planning to invest around US$500 million in a new local cement factory.

According to HLCM’s Chief Operating Officer (COO), the company would either activate their idle plants or build an entirely new cement production line in anticipation of the spike in demand for the coming years.

Public-Private Partnership (PPP) projects, mostly for major infrastructures, as well as private construction activities are expected to be the drivers of demand for cement and other construction materials.

The COO, however, in a report by BusinessMirror on 24 April 2011, said that the company believes that “the PPP projects will not have a tremendous impact in 2011. In the optimistic scenario, we will see its impact in 2012 fully. In the realistic scenario, it will start in 2012.”

In the same report, Holcim’s Commercial Director said that it continues to monitor rising coal and fuel prices which account for roughly 40% of variable cost (since cement production involves various equipments and huge machines which require a lot of energy/power).

In a related report published in Business World on 24 April 2011, Holcim’s COO said that the company currently has 33% market share.

In a disclosure to the stock exchange, HLCM confirmed reports that it will increase capital spending (i.e. amount to be spent on factories, equipments) from Php800 million in 2010 to Php1 billion in 2011.

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Philippine Daily Inquirer, in its 11 April 2011 issue,  reported the statements of a fund manager who specializes in real-estate investments in a recent conference sponsored by UBS.

 

The fund manager is Mr. Brett Gordon, founder of Panna Capital who formerly served as in-charge for real estate investments at Dutch pension fund giant APG investments.

 

Here are some key takeaways:

  • He singled out the affordable housing market as being attractive to investors, along with “pre-IPO opportunities” for growing private developers who have yet to list their shares on the Philippine Stock Exchange
  • The implementation of REIT (Real Estate Investment Trust) will be very interesting for foreign investors
  • ASEAN (or the Association of Southeast Asian Nations) is massively overlooked as a growth story, especially on the residential side
  • He also singled out Indonesia and the Philippines as being attractive real-estate investment markets because “the demographics are ‘to die for,’” referring to the young population with growing disposable incomes and attractive prevailing mortgage rates offered by banks, as well as the high margins earned by developers.

 

 

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Cebu Pacific (CEB) fuel surcharge

Business Mirror (10 April 2011) reported that Cebu Pacific started to re-impose fuel surcharge for both Domestic (since March 23) and International (since March 14) flights.

 

For Luzon-Luzon flights, surcharge is Php50; for Luzon-Visayas and Visayas-Mindanao, surcharge is Php100; for Luzon-Mindanao, surcharge is Php200.

 

CEB VP for Marketing and Distribution was quoted that the spiraling oil prices has an impact, but added that they are managing it.

 

Cebu Pacific was first traded in the PSE at an IPO price of Php125 per share. It reached a high of Php133.50 in its first trading day, but since then saw its price go down to Php83.90 per share as of 08 April 2011 due to concerns on higher oil prices.

 

As of today, 11 April 2011, CEB’s stock price sank to Php79.50 (its lowest price for the day) or a -5.24% drop. Why the huge decline? Partly because today is the ex-date of its cash dividends.

 

Total cash dividends = Php3 per share (Php2 regular, Php1 special).

 

The cash dividend will be paid on 12 May 2011 to those who have CEB shares as of 08 April 2011.

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GSIS scraps GIP – Inquirer

Philippine Daily Inquirer (07 April 2011) reported that the Board of GSIS approved the repatriation of its US$670 million funds under the Global Investment Program (GIP)

 

Apparently, the reason was because local investments are seen to be more favorable and a better use of GSIS funds.

 

Based on the report, GSIS is looking to invest repatriated funds in:

  • Fixed Rate Treasury Notes (FXTNs)
  • Stocks listed in PSE
  • Dollar-denominated PH bonds or ROPs
  • Public-Private Partnership (PPP) projects
  • Real Estate Investment Trusts (REITs)

 

What are the implications?

  • Inflow of US$670 million is huge — this may cause Peso to appreciate (i.e. less Peso needed for every US$), which in turn may dampen consumption since OFW remittances will have less value in Peso terms
    • However, it was disclosed that more than half of the $670 million is hedged (i.e. there is already an outstanding contract to convert the $ back to Peso) and only an estimated $200-$250 million will be affecting the Php/US$ exchange rate
  • More money in the financial markets means:
    • in general, lower market interest rates (primary/secondary GS and lending) rates
    • higher demand for PSE listed companies
    • increased chance for the REIT to succeed
  • More money for PPPs
    • increased likelihood that the projects will pursue, benefiting private partners as well as the general population and, eventually, the economy

 

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