18 january 2013 volume 1 no. 17 he bellwether -...

Bellwether

he Fortnightly on Market Action and Outlook

18 January 2013Volume 1 No. 17

STOCK WATCH

u ORIENTAL PENINSULA’S EARNINGS ACCELERATE

u STI MAY PLEASANTLY SURPRISE ON SCHOOL ACQUISITION

Corporate earnings will sustain

Room for yield curve drop

18% Growth in 20122012 corporate earnings were 18% above the previous year, at least for the 9mo2012 period. See table 1 on page 3. Will company earnings rise more this year and PSEi valuation (PEs) go lower, making the Philippines still a buy?

Earnings likely to follow GDP GDP growth is seen to accelerate to 7%-8% in 2013 from 6.5% in 2012, laying down the basis for stronger corporate earnings. For the profit momentum to gain speed, the country should have more of the positives that it already had last year. Economists call it the reinforcement of existing growth drivers.

Industry will benefit Among the beneficiaries of the reinforced growth

GSM PM CLOSEJanuary 11, 2012

1.50yr 1.00% unchanged3.90yr 3.60% unchangedDealt @ 3.585% to 3.57% for Php1.243Bn5yr 3.715% unchanged9.12yr 4.275% (0.05 bps up)Dealt @ 4.25% for Php180Mn9.28yr 4.275% (0.075 bps up)18.78yr 5.465% (0.01 bps up) Dealt @ 5.4525% to 5.4625% for Php7.097Bn

GSM PM CLOSEJanuary 11, 2012

23.19yr 5.56% (0.005 bps up)Dealt @ 5.55% to 5.555% for Php2.500Bn

RTB TradesJanuary 11, 2012

25yr 5.525% (unchanged)Dealt @ 5.52% to 5.525% for Php3.592Bn

Note: GSM is Government Securities Market

The yield curve will flatten further, with a bias to downshift and move within a range of 2 to 3 basis points (bps). Three drivers: 1) more inflows (net foreign direct investment --FDI-- up 32.6% to $1.3bn as of last November and OFW remittances up 6% for the year 2012); 2) money from Trust accounts moving to wealth management with the removal of tax advantage of the latter, also last November and 3) the strong fiscal position.

Continued to page 2.

Continued on page 2.

drivers will likely be consumption and industry as in 2011. The industrial sector was the highest earner last year, with corporate net profits up 52% year-on-year (y-o-y). See table 1 on page 3. GDP-wise, the industry sector posted the 2nd highest growth of 6.3%, next to the services sector’s 7.5%. Companies in power, water, oil, gas, utilities, manufacturing, and construction comprised the industrials. Among these are companies we like such as Aboitiz Power Corp. (AP), Semirara Mining Corp. (SCC), Energy Development Corp. (EDC), First Gen Corp.(FGEN), La Farge Republic Inc. (LRI), Manila Electric Co. (MER), Manila Water Co. (MWC), San Miguel Purefoods Company Inc. (PF), and Pepsi-Cola Products Phils. Inc (PIP).

u ATLAS BEATS 2014 DEADLINE FOR OUTPUT

Peso Yield Curve

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15 January 2013 | Volume 1 No. 17

(Will corporate... continued from page 1)

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Expensive but not too expensiveAlready, PSEi was the most expensive among the ASEAN five, having posted the fourth highest annual return among Asia-Pacific’s 23 stock markets. Still, PSEi’s valuation of 18.5x at 2012’s close of 5812 though was far lower than the 26x PE seen prior to the Asian financial crisis. PSEi has risen 34% in the last 52 weeks as of 2012, according to Bloomberg. PSEi was up 0.83% as of January 2, 2013 and by another 1.3% to the year’s second record high of 5934.05, (January 3, 2013). So far, the year’s high was 6171.71, hit last January 21, 2013. Consumption to lead growth The drivers of the Philippine economy will be reinforced in a bigger way this year. There will be more of what we had last year, economists predict. Consumption, whose locomotives are BPO income and OFW remittances, will be propped further by election spending. BPO income is expected to be up 15% in 2012 to $12.6bn and to keep growing this year, by another 15% based on the forecast of the Contact Centers Association of the Philippines. Last year, OFW remittances were expected to slow, hitting 5.5% in 9mo2012 year-on-year, but were up 6% for full year 2012. Thus we like consumer-oriented stocks which essentially fall under industrials and holding companies.

US and China recovery story 4Q2012 China GDP growth is seen to hit 8% from the multi-quarter low of 7.4% in 3Q2012. Consensus 2013 China GDP projection is at best 8%. This bodes well for the country’s mining sector, bulk of which is nickel, copper and gold bound for China’s steel sector. Local gold is increasingly sold offshore, in lieu of the BSP. We like Atlas Consolidated Mining and Development Corp. for its copper output ramp-up. In the nickel and gold mining space, we prefer names like Nickel Asia for its 2nd HPAL facility to raise shipments and deliveries regardless of the nickel price outlook. We also like Lepanto and Benguet for the continuing firm price outlook for gold as hedge against the uncertain US fiscal and debt outlook.

Key event risk is externalNext month, US GDP growth is forecast at 2% for 2013 with the fiscal cliff avoided. However, next month the $16T US debt ceiling needs to be raised. It is a key risk to global markets as it could again roil US politics & risk another credit rating downgrade as in 2011. An event risk like this has tended to raise prices of certain asset classes and thus open investment opportunities.

Gold, oil and US dollar could rally Gold prices shot up when the US credit rating last August was downgraded. Investors chose gold last year to hedge against the political turmoil. See chart 1 on page 4. The charts below highlight how markets across asset classes and geography reacted in 2011 as U.S. politicians bickered and failed to reach an agreement on the debt ceiling. Three asset classes rallied --gold, the US dollar and oil. See charts on page 4. The MSCI dramatically unraveled, showing how much equities were hurt.

US growth prospects better with fiscal cliff averted With the fiscal cliff averted, there’s reduced risk of a US recession and instead an improved US growth outlook. The fiscal cliff deal was behind the exuberant showing of the Dow Jones last night, up 1.4%. It is possible US GDP will grow by 2%, based on the OECD forecast. But economists are this early asking if the US can continue to service its growing debt in the long-run without risking steep inflation. US debt to GDP ratio is likely to stay at the current 80% for at least a decade, New York-based Moody’s said in a statement.

Shifting investor sentiment may put the US on the brink of a financial crisisThe US budget deficit is the root of the problem, with the Federal government spending more than it is collecting in tax revenue. Two factors will ensure spending and debt will rise: rising health care costs and aging population. The turning point could be a shift in investor sentiment that can put the US on the brink of a financial crisis, according to Harvard Professor N. Gregory Mankiw, who is adviser to Mitt Romney in the 2012 presidential campaign. Please see Bloomberg Chart 7 on page 5.

Tepid growth in EuropeHowever, there will be continuing tepid growth in Europe, 0.1% and 0.2% GDP growth in 2013, based on the European Commission and the IMF, respectively. RP’s minimal exposure to EU is through exports at 20% of total.

Fiscal space supports infra program momentum There are eight infrastructure projects under PPP,

PSEi DataPrice (Php) 6,087.78Market Cap (Php Bn) 2,360.00Volume (Mn) 320.92PE 2013E (X) 15.46Price to Book (X) 2.82

Source: Bloomberg

The long-end of the curve is around 15 bps away from record lows while the Treasury bills and the belly are trading at record lows with limited debt supply on a much improved fiscal deficit, likely at a lower 1.2% of GDP. Government borrowing volume and implementation will be in late 1Q2013. There will be no auctions this week as the 7-year

debt sale will be auctioned next week. Government security yields recovered last Friday (January 11, 2013) while the market was liquid and investor sentiments were optimistic. The biggest decline was from the short end of the curve as the 91-day Treasury bill (T-bill) went down 32.38 bps to 0.0512% and the 182 day T-bill went down

26.54 bps to 0.3496%. The medium term debt papers also recovered with the 3-year Treasury bonds (T-bonds) leading the decrease at 11.00 bps down to 3.1750%. For the long end of the curve, 20-year and 25-year debt papers went down 4.92 bps to 5.5500% and 7.36 bps to 5.5353%, respectively.

(Room for yield curve... continued from page 1)

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under PPP, six of which will start construction in 2013 namely: Daang Hari-SLEX Link Road Project, School Infrastructure Project Phase I, NAIA Expressway Phase II, LRT Line 1 Cavite Extension and O&M, Modernization of Philippine Orthopedic Center, and Rehabilitation, O&M of Angat Hydro-Electric Powerplant Auxilliary Turbines 4 & 5. The PPP momentum will define the country’s infrastructure (infra) program. The infra space will get support from the Government’s fiscal stimulus leeway, enhanced by a decade-low budget deficit to GDP ratio at 1.7%. See chart 1 on page 4. The power sector, utilities (electricity and water distribution), companies in construction of rail, roads, tollways, airports and tourism and educational-related facilities (classrooms) could flourish more. Thus we like Metro Pacific Investments Corp. (MPI) and DMCI Holdings, Inc. (DMC).

Excess system liquidity to keep cost of funds low, but not low enough to usher negative real interest rates and fuel a property glut Excess system liquidity is not only causing a peso yield curve downshift but also fueling construction and real estate development. However, the BSP is not seeing a property bubble developing and bursting. There are non-banking sources of funding for the property sector such as those from holding companies with property subsidiaries and corporate notes and bonds. But the BSP is vigilant. It increasingly sees the need to see a fuller picture of real estate lendings whose definition for banking reporting purposes will now include those intended for property rentals, buying and selling and socialized and low-cost housing development. Monetary authorities are making it clear interest rates will not fall low enough to pull down real interest rates to negative territory. Thus, we have confidence in property issues and holding companies that are rich in rental income, with exposure to retail space, malls, tourism, gaming horizontal development such as housing and BPO space leasing. These issues include Alliance Global Inc. (AGI), DMC, JG Summit Holdings Inc., Vista Land and Lifescapes Inc. (VLL), Filinvest Land Inc. (FLI), Empire Ease Land Holdings Inc. (ELI), Global Estate Resorts Inc. (GERI) and Robinsons Land Corp. (RLC). Both FLI and RLC have BPO space leasing,

hotels and condotels. AGI is into gaming, property development and consumer-oriented businesses. JGS, which still has low valuation, owns relatively more expensive issues such as RLC and Universal Robina Corp. (URC). Philippine banks are strong and will mirror Philippine progress, but net interest margin compression and Basel 3 are key challengesAs we see reduced risk for banks of a property-related meltdown, we continue to like the sector. Capital adequacy ratio (CAR) is above regulatory minimum at 16.85% on a solo basis and at 18.01% on a consolidated basis. Balance sheet quality through non performing loans (NPL) ratio has been improving, (even below the pre-Asian financial crisis average of 3%) at 2% from 2.54% a year ago. Non performing assets (NPA) fell by 8.39% to Php176.6bn from Php192.88bn. Restructured loans

also fell 16.12% to Php34.27bn from Php40.85bn last year. Industry loan growth has been double-digit, reaching a high of 16% as of 10mo2012. Efficiency ratios have also improved. Philippine financials will mirror Philippines progress and its consumption-driven growth. We like banks with a branch network expansion program such as consumer loan-heavy East West Banking Corp. (EW), which has doubled its branch network to 242. Others include Philippine Savings Bank (PSB) and Security Bank Corp. (SECB), the latter has acquired Premiere Bank, now named Security Bank Savings. We also think sentiment will be in favor of names with big banking franchises and likely to be in the merger and acquisition fray such as Philippine National Bank (PNB), BDO Unibank Inc. (BDO), Metropolitan Bank and Trust Co. (MBT) and Rizal Commercial Banking Corp. (RCBC). There’s been emerging research coverage for RCBC given above trend earnings and operating performance metrics results. p

Table 2.0 Banking Sector Valuations

Bank Price EPS Growth 2013/2012 PE 2013 PB 2013 ROE 2013

MBT 105.40 21.10% 17.30 1.94 11.65%PNB 91.00 27.93% 15.93 1.36 9.28%BPI 99.00 29.63% 22.07 3.62 17.20%CHIB 55.40 -11.71% 14.77 1.65 11.49%RCB 61.00 15.89% 13.06 1.69 13.55%UBP 114.80 13.92% 9.88 1.60 17.17%SECB 165.40 46.16% 11.95 2.30 21.38%EW 29.60 20.81% 17.94 1.84 12.07%BDO 75.60 8.72% 19.49 1.84 10.53%PSB 101.00 15% 9.18 1.30 14.13%Average 89.92 18.75% 15.16 1.91 13.85%

Source: Bloomberg as of January 18, 2013

Table 1.0 Net income in bn Php9M2012 9M2011 % Change

Net Income* 377.1 320.0 17.9%Industrial Sector 112.8 74.1 52.1%Financial Sector 68.8 54.4 26.6%Holding Firms Sector 93.1 75.9 22.7%Property Sector 34.1 29.4 16.1%Services Sector 53.4 51.1 4.5%Mining and Oil Sector 14.8 35.0 -57.7%

Source: PSE *For 229 out of the 252 listed firms

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Chart 1. Philippine Budget Deficit as % of GDP

Source: BloombergChart 3. Chart 4.

Chart 5. Chart 6.

Chart 2. Philippine GDP and EPS Trend (10 years)

Source: FMIC-IAG Research

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While reversing major components of the fiscal cliff may dramatically increase the deficit in the long-run, it would support GDP growth in the short-term.

Chart 7.

Oriental Peninsula Resources Group, Inc.’s (ORE)earnings accelerate

Record shipments this yearWe expect ORE to end 2012 with 87 shipments or 4.8m tons. This level is above the target 3m tons or 54 shipments for the year and a record high since ORE started commercial operations in 2011. We estimate 2012 earnings to reach Php962mn based on our estimated nickel ore selling price guidance of $11/ton for its entirely low-grade shipments for the year. We also assumed a $6/ton all-in cost assumption based on the 9mo2012 financial results. But we are inclined to discount our estimate by 20%. The take-off point of our 2012 earnings estimate is the 9mo2012 earnings of

Php642mn, which represented slightly over 3m ton shipments, based on information disclosed to us by management. Since 2012 total shipment is 4.8m tons, the 4Q2012 will represent a likely 1.6m tons. Using a net profit margin of $5/ton, we calculate total 4Q2012 earnings of Php320mn or $8mn. If the entire Php320mn profits for 4Q2012 is reported, ORE could pleasantly surprise and catalyze a share price recovery. Combining the 9mo2012 and 4Q2012 results, our full year net profit estimate will be worth Php962mn, for an EPS of Php0.66 or PE of 5.26x. But if Php770mn is reported, EPS is Php0.53 for a PE of 6.55x.

Loading its 80th shipment for 2012 The nickel ore miner with operations in Palawan has just loaded its 80th shipment in early December and sees a total of 7 shipments for the month of December alone; 3 from the Toronto mine in Narra and 4 from the Pulot mine in Espanola. Narra and Pulot are ORE’s two nickel mines, both of which are rich in high grade nickel ore deposits of 1.8-2.0g/ton ore, but have low grade nickel as overburden.

ORE Stock DataPrice (Php) 3.64Market Cap (Php Bn) 5.29Outstanding shares (Bn) 1.45PE (X) 5.26Price to Book (X) 2.03

Source: Bloomberg

Strategy in 2013If nickel prices don’t improve next year, the target of 4m tons shipment may produce flat earnings. But if the LME should rise above $20k per ton, it is likely ORE will ship the high grade which it has been reserving to sell in the event of an LME price recovery. The LME nickel price recovery is the upside of next year’s operations. ORE will sell the high-grade stockpiles only when the LME rises above $20k/ton, which should translate to a selling price of $50/wet metric ton or better depending on the grade (1.8%, 2.0% or 2.2%) and negotiated payable factors.

China-led LME RecoveryHowever, the LME nickel price outlook would be largely dependent on China’s industrial-led recovery, especially the manufacturing sector’s demand for steel inputs. That is not yet materially visible now, although best predictions on China’s GDP growth next year is as high as 8.4%, driven by a combination of local consumption and exports led by domestic policy intervention and global economic recovery scenario.

Continued on page 9.

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15 January 2013 | Volume 1 No. 176 |

Atlas Consolidated Mining and Development Corporationbeats 2014 deadline for output ramp up

Higher tonnage earlier than scheduleAtlas hopes to hit its target 60k daily tonnage ahead of schedule from the current 40k tons. Company-set deadline for the higher tonnage was 2H2014, but Atlas expects it will achieve the higher daily throughput as early as 2Q2013.

Higher resource and greater efficiency More positive developments in 2013 are expected:

• Exploration results from the higher grade Carmen Copper Corp.’s open pit Toledo copper mine deposits are to be certified by a competent person and made public in 2013.

JORC certified resource currently stands at 460m tons with reserves estimated at 320m tons. Mine life is 16 years on the expanded output rate of 60k tons per day.

• We believe the updated exploration findings will make the capacity ramp-up credible in terms of the higher feed-in copper ore.

• There’s likelihood of a higher copper grade (above the current is 0.33%/ton cu) from the abovementioned as mining operations transition to Carmen from the Lutopan mine where commercial operations began. • The impact of all of these on earnings will be captured at the Atlas level with the 100% ownership of Carmen from previously half. Atlas is mostly about Carmen Copper, the copper producing subsidiary and its lone key earnings driver.

• There will also be higher metal recovery rate of 85% from current 82% based on company guidance.

• Efficiency measures are being put in place

AT Stock DataPrice (Php) 20.50Market Cap (Php Bn) 42.52Outstanding shares (Bn) 2.07PE 2013E (X) 8.53Price to Book (X) 1.25

Source: Bloomberg

to cut cash cost to $1.50/lb. in 2014 from the current $1.80/lb. to cushion copper concentrate selling price risks.

• Copper prices are not seen to make a substantial rebound but to stay stable, $3.60/lb. in 2013 or $7,900/ton, the realized average selling rate of Atlas this year and its own internal forecast. See figure in the lower portion of this report.

(Atlas also has gold credits of 5% of topline, but remains largely a copper producer).

2012 Earnings Already, some positive developments this year are underway that will raise earnings. We estimate 2012 earnings of Php2.6bn (to equity holders) or EPS of Php1.30, PE of 14.5x, below the consensus estimate of Php3.7bn. We based our estimate on 90m lbs. of copper sales volume at $3.6/lb. selling price (foreign exchange rate of Php40/USD) and a net profit margin of 21%. The sales volume improves from last year’s 71m lbs. as well as cash costs/lb. See discussion on the next page:

The downside is a continuing nickel price slump or LME nickel price staying in the range of $15k-$16k/ton. This is a scenario nickel miners are preparing for in terms of shifting mining focus on the high-volume, low-grade, high iron nickel mining for the China market. 2012 earnings, double the 2011In effect, our unadjusted earnings forecast this year for ORE is a 93% improvement over last year’s Php498mn. Selling prices

were generally weak the entire year of 2012, prompting ORE to sell mostly low-grade nickel ore. Average selling rate was only $11/ton from the previous year’s average of $31/ton, a dramatic decline of 65%. Since the production costs comprised simple earth moving activities as mining is largely on the overburden given the low grade nickel as the key product, the all-in cost of ore is stable at $6/ton, net of taxes, such that the net profit per ton is $5/ton or Php200.

Greater shipments amid weak pricesWeaker selling prices had to be compensated for by greater shipments and so the higher sales volume this year. Record high shipments also demonstrated ORE’s increased capacity (mining, hauling, loading, port) and reduced execution risk (ability to produce output and ship on time), which was earlier a key concern, it being a start-up. p

(Oriental Peninsula... continued from page 5)

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Valuation improving to reflect 2013 prospectsShare price upticks are beginning to reflect the abovementioned positive developments in 2013. AT has been up 11% on a slow gradual climb from a low of Php16.84 last Dec. 2011. We estimate Atlas’ earnings to reach Php4.98bn in 2013, above the consensus estimate of Php4.7bn; the latter is a 27% EPS growth. Ours is almost a doubling of earnings growth, assuming 2012 earnings hit our Php2.6bn forecast. We don’t believe the 4Q2012 will yield Php1.7bn worth of additional income considering the quarterly earnings of just Php660mn in 9mo2012. Thus the 2012 consensus earnings estimate by analysts of Php3.7bn could be bloated.

For 2013, our estimate is based on higher tonnage, average of 55k per day, and reduced cash cost of only half of AT’s estimated reduction of $0.30/lb. (ours is just $0.15/lb.) such that our cash cost level assumption is $1.65/lb. in 2013. Right now, AT’s cash cost stands at $1.80/lb. coming off from a high of $2.40/lb. in 2011 and $2.00/lb. in 1H2012 on expansion and efficiency initiatives.

• eventual access to 3 x 82MW power plant that should cut electricity cost

• hauling cost reduction on shorter distance from the port of the Carmen copper mine,

• construction of 2 ball mills more on top of the existing 7

The vast improvement in the cash cost is more likely to be realized late 2013 or in 2014 at the target of $1.50/lb., the global benchmark based on the Bloomberg study with which Atlas is aligning itself.

37% Hike in copper sales volume on ramped-up capacityOur copper sales volume estimate for Atlas next year is likely 124m lbs. at a sales

price of $3.60/lb. That volume represents a growth of 38%. There is a likely higher recovery rate of 85% on steady grade of 0.33g/ton of copper (Cu); our assumption as the upgraded copper resource and reserve estimates are yet to be made public. We predict topline to hit Php17.8bn. Gross profit margin is 54% or Php9.6bn. We expect interest and overhead expenses to amount to Php1.3bn this year and rise next year to Php1.4bn. We add also the full amount of incremental financing cost attendant to the increase in interest bearing debt of Php800mn to Php15.8bn. Atlas cost of debt is 6.6%, effectively before taxes. That’s about the cost of the $300m worth of bonds issued last March. We estimate total net interest expenses to reach Php1.049bn or to rise by Php50mn this year over last year. (Interest bearing debt to equity ratio is 0.47:1, better than yearend 2011 level of 0.57:1). Thus interest expenses and overhead amount to $0.49/lb., raising all-in cost per lb. to $2.14 for a net profit margin of 28%, assuming a 30% tax rate. That’s an improvement from the 9mo12 net profit margin of 21%. We estimate 2013 earnings to equity holders to be worth Php4.98bn, EPS of Php2.50 and PE of 7.56x.

Sustainable earnings turnaroundAtlas had an earnings turnaround last year (recurring and excluding Php13.7bn gain on previously held interest in 2011). The 2013 prospects plus the capital restructuring that cleaned up the balance sheet of deficit will make profits sustainable, even without a strong rebound in copper prices, but also assuming the absence of a copper price collapse. The latter we think is realistic if we are to go by the prediction of various foreign banks polled by Bloomberg in the price forecast chart below. Atlas net profits were worth PHp1.3bn in 2011, (all of it from Carmen Copper) after net losses of Php847mn and Php2.2bn in 2010 and 2009, respectively. This profit turnaround was also partly facilitated by the entry of the SM Group. Recall that in July 2011, Atlas raised capital to fund its acquisition of the entire equity interest of CASOP Atlas B.V. and CASOP Atlas Corporation in CCC that resulted in its ownership of 100% of Carmen Copper Corp. The financing exercise involved the private placement of SM Investments which covered its purchase of 316,242,331 Atlas shares of stock at the aggregate price of Php6.2bn. p

(Atlas... continued from page 6)

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STI Education Systems Holdings, Inc.may pleasantly surprise on school acquisition

Confidence in profit guidance STI Education Systems Holdings, Inc. (STI) hopes to hit its profit guidance for 2012 worth Php790mn, inclusive of earnings from an investment arm involved in pre-need. The education services group made Php293mn six months to Sept. 31, 2012. Said profits were over revenues of Php742mn. Applying the actual 38% net profit margin on our estimated 2013 topline of Php1.2bn, a 21% growth over a likely Php1bn revenue in 2012, we see earnings growth of 17% in 2013 to Php456mn on the educational services alone. But since STI’s consolidated net profits include an equitized income component representing 20% of a pre-need plan business involved in health care, pension, educational plans called STI Investments, its total earnings could reach Php856mn. The rest or 80% of STI Investments is owned by a major shareholder.

Minimum Php1bn earnings from 20%-owned pre-need arm, STI Investments. Such equity in net earnings of an associate will amount to Php400mn, suggesting STI Investments could make Php2bn. STI’s EPS is Php0.09 for the entire group in

2013 for a forward PE of 12x (on last price of Php1.07). 2013 EPS growth is 13% to Php0.09 versus this year’s Php0.08, but may turn out conservative as this excludes the impact of any acquisition. We think STI’s upside lies in the school acquisition surprise that is already in the works.

14% growth in Enrollment on Wider Course Offerings and Network ExpansionWe believe in the strong demand for Philippine tertiary education and the growth story that STI’s expansion engenders. Enrollment growth is double-digit yearly and will remain in double-digit trajectory (14%

in 2013 in its 90 schools nationwide with a student population of 68k) given strong GDP growth projection. One of STI’s come-ons is its being a mid-price provider not only of tertiary education but also of basic education under JASMS brand (Jose Abad Santos Memorial School) with a student population of 8,000. Estimated tuition fee for a four-year college degree course average Php140k. STI also has an increasingly wide course offerings: expanding into health sciences (nursing), business, information

STI Stock DataPrice (Php) 1.00Market Cap (Php Bn) 9.90Outstanding shares (Bn) 9.90PE 2013E (X) 12.00Price to Book (X) 1.69

Source: Bloomberg

technology and hotel and restaurant management. It has an existing partnership with the De los Santos family of the De los Santos Hospital in Quezon City which operates a nursing school. It also owns Philippine Women’s University (founded in 1909 with two branches) and also Makati-based iAcademy, involved in IT courses and the official trainer of a multinational IT equipment provider.

Enrollment for 2013 will grow by 14% to 78k in its 90 schools nationwide. The school network is being expanded by the upgrade and construction of a total of 9 schools in Cainta, Novaliches, Fairview, Quezon City, including Visayas. Total capex for next year is Php6bn for acquisition and school expansion: Php3bn equity and another Php3bn debt. The money will fund the acquisition of other schools; rumored were Philippine School of Business Administration (PSBA) and Southwestern University in Cebu.

DCF Value RangeOur DCF valuation using the perpetuity growth model assumed a yearly double-digit enrollment that is largely organic and no tuition hike. Revenue per student is Php15k. The implicit price of STI equity is in the range of Php1.39-1.65/share or a PE of 15x-18x 2013 earnings. We assumed constancy of the earnings contribution of the pre-need business at Php400mn, which is currently about half of the consolidated earnings.

Growing demand for tertiary education fueled by the country’s positive demographics, i.e. young population

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The Bellwether is a fortnightly research on market action and outlook by the Investment Advisory Group of First Metro Investment Corporation. The content of this publication does not represent the official view of First Metro, but those of the author. The content of this publication is for information only, whose accuracy/completeness is not guaranteed. This is not a personal recommendation, offer or solicitation to buy/sell. Any price and company earnings estimate is indicative only.

For any comments or suggestions, please write to the Investment Advisory Group43rd Floor, GT Tower International, Ayala Ave. cor. HV dela Costa St., Makati CityTel: +632 858 7900 | Fax: +632 840 3706www.firstmetro.com.ph

Cristina S. UlangResearch Head

Basil Jason L. GoResearch Analyst

Patricia L. DalusungResearch Associate

Bianca P. AngalaResearch Analyst

MARKET STATSFor the week ending January 11, 2012

Top Gainers Top Losers

Stock Price % w-o-w change Stock Price % w-o-w

change

MEG 3.06 10.47% GLO 1,078.00 -1.28%MPI 4.90 10.11% PCOR 10.40 -0.57%JFC 107.60 5.49% MBT 101.80 -0.20%AC 544.00 5.22%TEL 2,650.00 4.74%

PSEi Value % w-o-w Change

Closing 6,051.75 1.34%High 6,098.14 2.12%Low 5,972.81 2.82%Value T/O (in mn Php) 40,130.08 136.86%Foreign Buying (mn USD) 397.89 620.67%

PSEi continued to trek higher as momentum still favors the bulls

In the week ending January 11, 2013, the Philippine bourse continued to trek higher as momentum remains to be in favour of the bulls, breaching the 6,000 threshold. The PSE index gained 80.3 points (+1.34%) to finish the week at 6,051.75. Average daily value turnover was at Php8.3bn (ex-blocks). Foreigners were net buyers by Php16.2bn (including blocks). In developed markets, US equities also managed to close the week on a positive note. For the week, the Dow gained 0.40%, the S&P rose 0.38%, and the Nasdaq jumped 0.77%.

Moving forward this week, attention will be focused on the release of US 4th quarter corporate earnings result, mainly on the US big banks (i.e., Goldman Sachs, JPMorgan, Bank of America, Citigroup, Morgan Stanley, etc.) On the US economic front, news flows due for the week include the CPI, PPI, retail sales, Empire state manufacturing survey, Fed beige book, housing starts, and jobless claims. On the domestic side, a pullback in the interim is expected as the market is ripe for a correction. The local market is trading on stretched multiples and technical indicators are inching closer to overbought levels.

MARKET REVIEW & OUTLOOK

(STI Education Systems Holdings, Inc. ... continued from page 8)

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Table 3.0 DCF Valuationin mn Php EstimatedCalendar 2012 2013 2014 2015 2016

Revenues 1,057 1,163 1,170 1,177 1,185EBITDA 497 570 632 659 759EBIT 402 465 526 553 652

Less: Cash Taxes @ - (12) (47) (79) (83) (98)Tax-effected EBIT 790 875 906 932 1,019

Plus: Depreciation 95 407 468 589 593Less: Capital expenditures (964) (1,012) (1,065) (1,124) (1,189)

Change in net working capital 269 312 353 371 437Unlevered free cash flow 190 581 662 768 859Perpetuity Growth MethodTerminal Value Undiscounted Discounted

Perpetuity Growth Rate 2.0% Php 17,322 Php 11,7893.0% Php 20,991 Php 14,286

DCF Range (Implied Enterprise) Value Php 14,138 P h p 16,634

Equity Value (a) Php 13,797 P h p 16,293

Implied Price per Share (b) 1.39 1.65(a) Assumes Php341mn of net debt.(b) Assumes 9,904m shares outstanding

Source: FMIC-IAG Research Estimates

18 january 2013 volume 1 no. 17 he bellwether -...

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