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Stock Picks For The Week (Sept. 18 - 22, 2017) By First Metro Securities

Check out the Stock Picks for the week by First Metro Securities in this special report which you can find only here in PinoyInvestor.

22

FPH Stock Review: Is Today’s Price Worth The Buy?

President Duterte’s commitment of the government to increase infrastructure spending and the move towards cleaner energy prompted me to look at First Philippine Holdings Corporation (FPH).

FPH is a 54-yr old diversified holding company with principal interests in the areas of energy, infrastructure, real estate and manufacturing.

Basic common sense tells me that YES, the government will have a significant impact on FPH.

But the real question I want to answer is; Is FPH the right company to invest in?

Let’s take a good look into it.

Valuations

Look how FPH’s P/E and P/BV ratios in the last 10 years. FPH has been undervalued ever since.

fph stock review

Fig. 1 P/E & P/BV Ratio

The stock looks undervalued but I want to know how the earnings performed for the last 10 years. Honestly, I was a bit disappointed how the earnings performed.

fph stock review

Fig. 2 10-yr Earnings Per Share

The Net Margins are also disappointing. Just look at the years 2008, 2011 and 2013. The earnings are almost at break even point.

fph stock review

Fig. 3 Net Profit Margin Results

I like how the Revenue has increased consistently. But the Net Earnings isn’t as consistent as the Revenue. The earnings are unpredictable that’s what I can say. There’s a point where in 2010, EPS and Net Margins went up as high as 40.62 and 38.66% respectively then would drop at 3.07 and 3.01%. Now, I wonder why it is like that.

Further research indicates that the Net Income (attributable to equity holders of the Parent) in the above mentioned years decreased because of these reasons:

  • 73% decrease in 2008 due to high finance costs in connection with the acquisition of a controlling stake in Energy Dev’t Corporation (EDC); and foreign exchange losses which came from the restatement of dollar-denominated transactions pertaining to the Parent and First Gen Group.
  • 91% decrease in 2011 due to full impairment provision on NNGP assets, lower earnings by the Group’s associates, the discontinuance of equity method of accounting for investment in Meralco and the absence of the gain on sale of investments in an associate (Meralco) which was recognized in 2010.
  • 75% decrease in 2013 due to absence on the gains of sale of investment in equity securities and related to business combination, high foreign exchange losses and lower total revenues.

These losses are not directly connected with the company’s main operations but it greatly affects the bottom line. This makes the company’s earnings unpredictable to me.

I investigated their finance costs and found out that FPH carries a lot of debt.

fph stock review

Fig. 4 Interest Expense to Operating Profit Results

Interest Expenses are historically high in the 10-year period. In 2008, FPH paid a large 76% of their Operating Profits to Interest Expenses (due to EDC acquisition). Last year, FPH paid 40% of their profits and these are caused by increase in their loan balances.

Debt to Equity is not healthy either.

fph stock review

Fig. 5 Debt To Equity Ratio

Because of their high long-term debts, this makes FPH look like a not-so-ideal company to invest in.

Although the D/E ratio looks bad, the historical Current Ratios indicate that short-term liabilities are effectively managed.

fph stock review

Fig. 6 Current Ratio

This is also evident when you look at their Cash. Cash is always greater than the amount of short-term debt for the given period except in 2007 and 2008.

In these years, FPH made major acquisitions and took on loans that resulted to a decrease in cash and increase in debt. These are:

  • FPH’s increase in stake in Meralco
  • First Gen’s 60% controlling interest in EDC
  • EDC’s availment of P2.0 Billion short-term loans to augment working capital changes
  • Prime Terracota, a subsidiary of First Gen, availment of unsecured short-term loan amounting to P1.9 Billion to pay down debt incurred by Red Vulcan in connection with the EDC acquisition.
fph stock review

Fig. 7 Cash vs. Short-Term Debt

I looked at their debts in a different perspective and I saw that the Total Debts are higher compared to their Retained Earnings.

Fig. 8 Retained Earnings vs. Total Debt

Fig. 8 Retained Earnings vs. Total Debt

The only exception is the years from 2010 up to 2012. All I can say is that FPH has a lot of debts and I don’t like it.

If you’ll ask me what I like about FPH, it’s the company’s Cash Flow.

fph stock review

Fig. 9 Cash Flow Results

It is evident that they pay out their loans and their FCF has always been positive except in 2014 where Capital Expenditures amounted to P30.1 Billion versus Cash From Operating Activities amounting to P26.3 Billion. The way cash flows in the company is healthy. They always maintain a surplus of Cash.

Management Effectiveness

Here are the Historical RoE, RoA and RoIC.

fph stock review

Fig. 10 Management Effectiveness

FPH showed an average10-yr RoE, RoA and RoIC of 14%, 4% and 10% respectively but if you’ll look at the last 3-yr average, the company performed poorly. You can also see the inconsistencies. There are periods when the returns are high and there are periods when it’s overly low which is not good in my opinion.

What I think About FPH

FPH is a good company to invest in if you want to bet in the energy and the infrastructure sector for the next 6 years of the Duterte administration.

Here’s what I like about the company;

  • The stock has traded cheaply for the past 10 years.
  • They manage their cash well.
  • The fact that FPH owns shares in Meralco and FGEN which are good companies too.

Here’s what I don’t like about FPH;

  • High debts.
  • Unpredictable earnings.

In my opinion, I think the best price to buy this stock today is at around P69.41/share. This is based on the 10-yr average Return on Equity of 14.06%. But if you’ll base it on the recent 3-yr average, this puts it at a valuation of P145.01/share which is almost the same as COL Financial’s fair value estimate of P140/share.

Today’s closing price is at P71.75/share which equates to a 13.70% rate of return. I recommend accumulating shares around these price benchmarks.

This concludes my FPH stock review. Do you think that FPH is a promising stock because of the bullish sentiment on infrastructure and energy sector? Do you think that FPH has a huge upside potential? I want to hear what you have to say.

Please don’t hesitate to leave your comments below.

Happy investing!

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