Manila Electric Company (MER) Stock Analysis

Manila Electric Company (MER) is a private distribution utility organized on May 7, 1919 which holds a congressional franchise under Republic Act (RA) No. 9209 effective June 28, 2003.

RA 9209 granted MER a 25-year franchise valid through June 28, 2028 to construct, operate, and maintain the electric distribution system in the cities and municipalities of Bulacan, Cavite, Metro Manila, and Rizal and certain cities, municipalities, and barangays in the provinces of Batangas, Laguna, Pampanga, and Quezon.

The principal business of MER is the distribution and sale of electric energy through its distribution network facilities in its franchise area. The Company’s market is categorized into four sectors such as residential, commercial, industrial, and streetlights.

MER sources the electricity it distributes from 11 power suppliers including the Philippine Electricity Market Corporation and National Power Corporation. The franchise area of MER over specified areas in Luzon is approximately 9,337 square kilometers, covering 36 cities and 76 municipalities. This includes Metro Manila, industrial estates, and suburban and urban areas of the adjacent provinces.

The Company’s subsidiaries are;

Meralco Industrial Engineering Services Corporation
Corporate Information Solutions, Inc.
Meralco Energy, Inc.
e-Meralco Ventures, Inc.
Meralco Financial Services Corporation
MRAIL, Inc.
Clark Electric Distribution Corporation
Republic Surety and Insurance Company, Inc.
Lighthouse Overseas Insurance Company, Limited
Meralco PowerGen Corporation
Comstech Integration Alliance, Inc.

On January 7, 2016, MER signed a joint venture agreement (JVA) and shareholders’ agreement (SHA) with Repower Energy Development Corporation (REDC). Under the JVA, MER and REDC shall put up a joint venture company through which the Company and REDC will jointly pursue and undertake the development of various hydroelectric Power projects; while under the SHA, the Company shall have equity stake equivalent to 49% of the authorized capital stock of the proposed joint venture company.

Sector Details:

Sector: Industrial
Subsector: Electricity, Energy, Power & Water

source: PSE Edge

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Value Screen Scorecard

Piotroski F-Score

Altman Z-Score

Estimated Growth Rates

Intrinsic Value Calculations

Valuations By Top Leading Brokers

Value Screen Scorecard

Stocks are scored based on Profitability & Growth, Financial Health, Quality, Dividends and Valuation. Each criterion in the list is scored based on financial data for a total of 100 points. Stocks are ranked from 1 to 5, 1 being the highest.

Read this post to get more information on how the value scorecard works.

Scoring Criteria:

Rank # 1: Extremely good company
Rank # 2: Good company
Rank # 3: Average company
Rank # 4: Needs further study and research to identify the company's weaknesses
Rank # 5: Risky company

Value Scorecard (1-27-2017 3Q2016)

Criteria	Values	Score
Criteria # 1: Market capitalization	321,195,000,000	1
Criteria # 2: Profit margins (5-yr. Average) Gross profit margin Operating profit margin Net profit margin	22.33% 9.32% 7.26%	4
Criteria # 3: Net income consistently growing for the last 5 years		1
Criteria # 4: Revenue consistently growing for the last 5 years		1
Criteria #5: Cash & equivalents consistently growing for the past 5 years		1
Criteria # 6: Operating cash flow consistently growing for the past 5 years		1
Criteria # 7: Earnings per share consistently growing for the past 5 years		1
Criteria # 8: 5-yr. EPS growth rate	6.01%	1
Criteria # 9: Return on equity 3-yr. average 5-yr. average Previous year's ROE YoY growth	24.19% 24.04% 2.39%	5
Criteria # 10: Return on invested capital 5-yr. average	17.26%	2
TOTAL POINTS		18/30

Criteria	Values	Score
Criteria # 1: Debt settlement capacity Free cash flow Long-term debt Current ratio D/E ratio Interest coverage ratio Working capital to total debt ratio	25,752,000,000 27,004,000,000 0.79 0.39 20.19 -0.52	3
Criteria # 2: Cash to current assets Current Recent	0.47 0.49	2
Criteria # 3: Inventory to current assets Current Recent	0.04 0.03	4
Criteria # 4: Accounts receivable to current assets Current Recent	0.33 0.31	4
Criteria # 5: Accounts payable to current assets Current Recent	1.00 0.94	-4
TOTAL POINTS		9/25

Criteria	Values	Score
Criteria # 1: Piotroski F-Score	6	6
Criteria # 2: Altman Z-Score	2.32	5
TOTAL POINTS		11/20

Criteria	Values	Score
Criteria # 1: Dividend payout ratio	47.40%	5
Criteria # 2: Dividend yield	2.75%	3
TOTAL POINTS		8/10

Criteria	Values	Score
Criteria # 1: PEGY ratio	1.97	0
TOTAL POINTS		0/15

Stock Rating	Score
Final Score	46/100
Stock Ranking	3

Piotroski F-Score

The Piotroski F-Score is a financial metric model that's helpful in spotting turnaround businesses. For more information, you may read about it here.

Scoring Criteria:

7 to 9 points: Wonderful business
5 to 6 points: Average business
1 to 4 points: Weak business

Piotroski F-Score (1-26-2017 3Q2016)

Piotroski F-Score	Values
Profitability:
1: Net income 2: Operating cash flow 3: Return on assets 4: Quality of earnings	1 1 0 1
Leverage:
5: Long-term debt vs. assets 6: Current ratio 7: Shares outstanding	1 0 1
Operating efficiency:
8: Gross margin 9: Asset turnover	1 0
Piotroski F-Score	6

Altman Z-Score

The Altman Z-Score is a bankruptcy prediction model that's helpful in spotting low quality companies. More information about it can be found in this post here.

Scoring Criteria:

Z > 2.99; “SAFE” Zone (Healthy business)
Z < 1.81; “DISTRESS” Zone (Troubled business)
1.81 > Z > 2.99; “GREY” Zone (Warrants more investigation)

Altman Z-Score (1-26-2017 3Q2016)

Altman Z-Score	Values
X1 (Working capital / Total assets)	-0.0724
X2 (Retained earnings / Total assets)	0.1766
X3 (EBIT / Total assets)	0.0877
X4 (Market capitalization / Total liabilities)	1.4756
X5 (Revenue / Total assets)	0.8951
Altman Z-Score	2.32

Estimated Growth Rates

Estimated growth rates are calculated using exponential chart trend line formula.

Estimated Growth Rates (3Q2016)

Growth Rate	3-yr. (%)	5-yr. (%)
Revenue	-4.90%	-1.20%
Net income	2.93%	6.02%
Earnings per share	2.92%	6.01%
Operating cash flow	0.59%	3.16%

Intrinsic Value Calculations

The figures and all other variables used in order to get the intrinsic value are listed in detail below for reference purposes so that cross-checking can be made to verify the values obtained.

Intrinsic Value Calculations (1-26-2017 3Q2016)

WACC Variables	Values
Risk free rate Stock beta Market risk premium Cost of equity (Re)	4.350% 0.91 8.10% 11.72%
Shares Price Market value of equity	1,127,000,000 285.00 321,195,000,000
Interest rate Tax rate Cost of debt (Rd)	3.11% 21.41% 2.44%
Debt book value Adjustment Market value of debt	40,114,000,000 1.20 48,136,800,000
Total capital Weighted average cost of capital (WACC)	369,331,800,000 10.51%

DCF Variables	Values
Free cash flow	25,752,000,000
Projected growth rate	6.02%
Shares outstanding (diluted)	1,127,000,000
Discount rate (WACC)	10.51%
Perpetuity growth rate	2.60%
Margin of safety	25%
Intrinsic value per share	94.52
Adjusted intrinsic value per share	70.89

P/E Valuation Model Variables	Values
Input data:
Earnings per share (TTM) P/E ratio (TTM) Growth rate Discount rate	16.52 17.25 6.01% 10.51%
Calculations:
Year	EPS x Growth
1 2 3 4 5 6 7 8 9 10	16.52 17.51 18.57 19.68 20.86 22.12 23.45 24.86 26.35 27.93
Value in 10 years	481.91
Margin of safety	25%
Intrinsic value	177.37
Adjusted intrinsic value	133.03

Valuations By Top Leading Brokers

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Manila Electric Company (MER) Stock Analysis

Value Screen Scorecard

Scoring Criteria:

Value Scorecard (1-27-2017 3Q2016)

Profitability & Growth

Financial Health

Quality

Dividend Assessment

Valuation

Final Score & Ranking

Final Score

46/100

Stock Ranking

3

Piotroski F-Score

Scoring Criteria:

Piotroski F-Score (1-26-2017 3Q2016)

Altman Z-Score

Scoring Criteria:

Altman Z-Score (1-26-2017 3Q2016)

Estimated Growth Rates

Estimated Growth Rates (3Q2016)

Intrinsic Value Calculations

Intrinsic Value Calculations (1-26-2017 3Q2016)

Weighted Average Cost Of Capital (WACC) Calculations

Discounted Cash Flow (DCF) Calculations

P/E Valuation Model

Valuations By Top Leading Brokers

We love to hear your thoughts! Share them on the comments section below. Happy investing!

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