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Stock Picks for the week (Oct 17 - 20, 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.

7

3 Undervalued Stocks That Will Actually Make Your Portfolio Green

undervalued stocks to buy september 2017

This September, I decided to buy 3 stocks that I think are undervalued. These stocks are Cosco Capital, Inc. (COSCO), Alliance Global Group, Inc. (AGI) and Metro Pacific Investments Corp. (MPI). This post will walk you through my decision-making process including a brief discussion of their intrinsic values and why I decided to buy them at those prices.

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If you're looking for suitable investment ideas, or want to get an opinion of the company's intrinsic values, then you might want to read this post.

I'm bullish that these stocks will make my portfolio greener and brighter in the future. And if you ever decide to buy these stocks, I hope yours will too!

Intrinsic Value Assumptions

The intrinsic values of the three companies I mentioned where calculated on two different approaches.

The first is a straightforward approach using the previous year's book value and the average 5-yr. return on equity as basis to come up with a 3-yr projected book value. This book value is then multiplied by its current price to book value multiple to come up with a fair value estimate.

The second method is estimated using DCF calculations projected by 10 years. We take the average free cash flow for the last 5 years and use CROIC as our growth rate. CROIC by the way is calculated by dividing the average FCF with invested capital. Invested capital is calculated as the sum of the short and long-term debt plus the book value. The fixed variables include a discount rate of 12% and terminal growth rate of 1%.

I then compared both values and arrive with a decision of whether to buy the stock or not.


Cosco Capital, Inc.

cosco capital inc.

My Intrinsic Value Estimate

COL Fair Value Estimate

9.68

11.90

COSCO holds a diversified group of businesses with interests in grocery retailing, real estate, property leasing, liquor distribution, specialty retailing and oil & mining. Lucio Co owns 31% of the company followed by his wife, Susan Co who owns about 24%.

What interests me is in its grocery retailing business - COSCO owns Puregold (PGOLD), S&R Membership Shopping and the slowly expanding Lawson Convenience Stores.

I like PGOLD's fundamentals but the price I think is already trading at a premium. COSCO on the other hand, I think is still trading at a discount to its value. Let me show you why.

Return On Equity And Book Value Estimates

COSCO's FY2016 book value attributable to the parent company is at Php 50.329 billion. The average return on equity for the last five years is found out to be 8.0%.

If you project the book value using the average ROE for 3-years, this equates to a book value of Php 63.401 billion or Php 8.88 on a per share basis. I bought the stock last week at 17% premium to its book. If the P/B ratio stays that way for three years, the estimated potential intrinsic value would be Php 10.39 per share. an upside of 26.3%.

This means that in theory, I can grow my my capital at 8.1% a year and ultimately get a return of 26.3%.

This is a low return but the reason I invested in COSCO is because I'm bullish on it's grocery retail business and it perfectly makes sense for the company to be fairly priced at those levels.

DCF Calculations

Back checking through my DCF model shows similar values. From 2012 to 2016, the average free cash flow was calculated to be Php 1.501 billion. Using a growth rate of 2.34%, intrinsic value calculated turned out to be at Php 63.944 billion, or Php 8.96 on a per share basis.

I took the average of the values I got and arrived at an estimated intrinsic value of Php 9.68 per share.

These numbers convinced me that the stock is undervalued even though COSCO is already trading at premium to its book. It still makes sense to buy at these levels because the company is easy to predict.


Alliance Global Group, Inc.

alliance global group inc.

My Intrinsic Value Estimate

COL Fair Value Estimate

​19.11

18.34

AGI which is majority controlled by the Tan Family, is a conglomerate that owns many businesses which includes Megaworld (MEG), Travellers (RWM) which owns Resorts World Manila, Emperador (EMP) and Golden Arches Dev't Corp. which is engaged in the restaurant business under the McDonald's brand.

I like MEG because the company is undervalued when it was trading at around Php 4.xx/share. But at current prices, I think MEG is now trading at a premium. But like COSCO, AGI is still undervalued.

Return On Equity And Book Value Estimates

AGI seems to have a lot of upside. I bought this stock at 4% premium to book. With a book value of Php 147.1 billion and an average ROE of 13%, this gives the company a potential intrinsic value of Php 212.3 billion or Php 20.85 on a per share basis; or if you pay an additional 4% premium, that would be Php 21.69 per share.

This gives me an upside of 44.2% or a compounded annual growth rate of 13.0% for the next three years.

DCF Calculations

This method puts the intrinsic value of the company at a much lower valuation of Php 168.3 billion or Php 16.53 on a per share basis. Average free cash flow is at Php 2.1 billion and growth rate at 0.62%.

The reason for a low growth rate is because the company is highly leveraged. Total debt turns out to be Php 186.8 billion and equity at Php 153.9 billion thus giving it a D/E ratio of 1.21.

Adding debt and equity equates to invested capital and this puts it at Php 340.8 billion. And this capital only generates Php 2.1 billion excess cash on average.

Getting the average of the two intrinsic values puts it at an estimated value of Php 19.11 per share.


Metro Pacific Investments Corp.

metro pacific investments corp.

My Intrinsic Value Estimate

COL Fair Value Estimate

​9.15

8.45

I made a lot of valuations about MPI in the past but the rise of the PSE index made me think to re-evaluate MPI and come up with my latest valuation of the company.

Return On Equity And Book Value Estimates

Out of the three, I bought this stock at 36% premium to book but even though I did that, it still makes sense to me. This is because when I projected the 3-year book value on its average ROE of 8.0%, this put the potential value of the company at Php 191.5 billion or Php 6.37 per share.

But since people are willing to place a higher premium on MPI given its strong and predictable earnings growth, this puts the company at a valuation of Php 8.66 per share.

Based on my current purchase price, this gives me an upside of 25.8% or an annual compounded growth rate of 8.0%.

DCF Calculations

Using DCF, I calculated the intrinsic value to be Php 9.65 per share using an average free cash flow of Php 15.4 billion and a growth rate of 4.76%.

The average of the two values gives us a final estimated intrinsic value of Php 9.15 per share.


Final Thoughts

it's hard to find undervalued stocks nowadays considering that just recently, we saw how the PSEi rallied above 8,200 levels. I'm bullish about their potential upside and let's just see what it will do to my portfolio these coming months.

What stocks have you invested recently? Have you invested in these stocks as well? Let me know your thoughts in the comments section below.

Happy investing!


Disclaimer: I own shares of COSCO, AGI and MPI at the time of this writing and may buy more if an opportunity presents itself. The figures are sourced out and calculated using data from Morningstar.com

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