Trade smart. By HENRY ONG | August 31, 2021
It has been a roller coaster ride for the Philippine stock market so far.
After losing by as much as 18 percent from a high of 7,432 in January to a low of 6,080 in May, the PSE index has been slowly recovering towards the 7,000 level.
The market has regained more than half of its losses this year but it is still down by five percent from its level at the start of the year.
Investor confidence remains low as fears of another meltdown caused by uncertainties from the ongoing pandemic crisis continue to hound the market.
About 52 percent of all listed stocks in the market are down by an average of 14.7 percent.
Despite the gloomy market outlook, there are a few selected stocks, mostly small-cap stocks, that have managed to outperform the PSE Index.
For purposes of ranking stocks with good market liquidity, we shall only select stocks with a net income of at least P1.0 billion based on their financials from 2020.
Here are the top five best performing stocks this year so far and how you can possibly profit from them:
1| GMA Network, Inc.
Year-to-date Gain: +128.7 percent
GMA Network (PSE:GMA7) is the leading broadcasting company in the Philippines, operating a network of 47 VHF and 41 UHF TV stations, as well as 24 radio stations throughout the country.
About 89 percent of its revenues comes from television and radio airtime while the remaining 11 percent comes from production and other media-related businesses.
Earnings of GMA7 have grown by an average of 7.3 percent per year from P1.6 billion in 2012 to P2.6 billion in 2019 on the back of annual revenue growth of 4.5 percent prior to the closure of its closest competitor, ABS-CBN Corporation (PSE: ABS).
Last year, after ABS went off air, GMA7’s total revenues grew by 17.2 percent, which boosted its net income by 129 percent to P6.0 billion.
This year, GMA7’s total revenues for the first six months continued to soar, growing by 58 percent to P10.6 billion from P6.7 billion in the same period last year.
The strong revenue growth more than doubled GMA7’s net income from P1.4 billion last year to P3.7 billion by end of the first half.
It is expected that revenues will continue to grow by year-end, as election season nears. At a conservative annualized net income of P7.3 billion, GMA7 is only trading at 6.3 times Price-to-Earnings (PE) ratio.
This is very low compared to the stock’s pre-pandemic historical PE ratio of 11 times.
If we price the stock based on its normal PE ratio, GMA7 should trade at least at P23.96 per share, or 74 percent prospective gain from its current share price.
GMA7 has been a consistent dividend payer for the past years. This year, the company paid a cash dividend of P1.35 per share, which gives the stock a current yield of 9.8 percent.
If GMA7 continues to maintain the same cash dividend next year and its stock price increases to P23.95, its prospective dividend yield would still be attractive at 5.6 percent.
Prospects of GMA7’s higher earnings growth next year, with bigger market share in the long-term, despite a slowing economy, should support long-term capital appreciation of the stock.
2| Ginebra San Miguel, Inc.
Year-to-date Gain: +113.4 percent
Ginebra San Miguel Inc. (PSE: GSMI) is the maker of the world’s largest selling gin, Ginebra San Miguel, and is a part of San Miguel Corporation, the largest conglomerate in the Philippines.
GSMI’s core brands Ginebra San Miguel and market leader in Chinese wine, Vino Kulafu, comprise about 94 percent of the company’s revenues.
Prior to the pandemic, net income of GSMI had been growing by an average of nine percent for the past 10 years from P701 million in 2009 to P1.7 billion in 2019 on the back of annual four percent growth in revenues.
Last year, despite the impact of pandemic lockdown, total revenues of GSMI increased by 24.5 percent from P29.1 billion in 2019 to P36.2 billion in 2020.
The surge in GSMI’s total revenues boosted its net income by 65 percent from P1.7 billion in 2019 to a high of P2.8 billion.
This year, GSMI’s revenues for the first six months continued to climb, increasing by 36 percent to P20.2 billion from P14.8 billion in the same period last year.
Again, the strong revenue growth increased GSMI’s total net income by 66 percent from P1.3 billion last year to P2.1 billion by the end of the first half of 2021.
Historically, GSMI’s first half earnings represent about 46 percent of its total income. If we annualize this net income, assuming the company will enjoy the same strong growth of the rest of the year, we can estimate GSMI’s net income for 2021 to hit P4.5 billion.
At this target net income, GSMI’s prospective PE ratio will only be 6.4 times, which is comparatively low against its pre-pandemic average of 9.2 times.
If we price GSMI at its average PE ratio, the stock should trade towards P151.5 per share, a potential capital gain of 43 percent.
With alcohol being historically resilient during tough economic times, GSMI should be able to deliver decent earnings growth this year.
3| Converge ICT Solutions, Inc.
Year-to-date Gain: +110.1 percent
Converge ICT Solutions (PSE:CNVRG) is the largest high-speed fixed broadband operator in the Philippines with a 55 percent market share for download speeds of 25 Mbps and higher.
CNVRG has been dominating about 60 percent of the new fixed broadband subscriptions over the past three years. About 77 percent of its total revenues is contributed by its residential business, while 23 percent comes from its high-speed fixed broadband solutions to companies.
CNVRG’s total revenues have been growing rapidly by an average of 69 percent per year from P1.9 billion in 2016 to P9.1 billion in 2019.
This growth in revenues has enabled the company’s net income to increase by an average of 49 percent per year from P574 million in 2016 to P1.9 billion in 2019.
Last year, CNVRG’s total revenues continued to skyrocket, rising by 71 percent to P15.6 billion. The huge increase in revenues boosted its total net income to grow by 72 percent to P3.4 billion.
With fresh capital from its IPO, CNVRG sustained its strong growth momentum this year as its total revenues for the first six months increased by 81.6 percent to P11.8 billion from P6.5 billion in the same period last year.
This surge in revenues almost doubled CNVRG’s total net income to P3.2 billion by the end of the first half, almost surpassing its whole year income in 2020.
If we follow the same historical contribution of CNVRG’s first half earnings to total net income for the year in 2020 at 37 percent, we can target CNVRG’s net income to hit P8.8 billion by year-end.
At this expected earnings, CNVRG’s prospective PE ratio will fall to 26.8 times.
CNVRG’s pricing multiple, being a high growth company, is obviously not comparable to traditional telecom companies like PLDT (PSE: TEL) or Globe Telecoms (PSE: GLO), which have revenue growth of less than 10 percent per year.
A more aggressive pricing model is the use of PE to Growth or PEG ratio where the level of PE of a stock is referenced to its average earnings growth.
If we get the compounded earnings growth rate of CNVRG from 2016 to 2020, we will derive an annual growth rate of 56 percent.
Making CNVRG’s PE ratio equal to its average growth rate of 56 times means that its share price can possibly double to P62.6 per share over the long-term.
4| Emperador, Inc.
Year-to-date Gain: +56.8 percent
Emperador, Inc (PSE: EMP) is the biggest liquor company in the Philippines and largest brandy manufacturer in the world with market presence in 55 countries across Asia, the Americas, Europe, and Africa.
The company manufactures and distributes some of the biggest liquor brands in the world such as Emperador Brandy, Andy Player Whisky, Smirnoff Mule, Whyte and Mackay Blended Scotch Whisky, and Fundador.
EMP’s revenues, which mainly come from brandy sales contributing about 73 percent of the total, have been growing by an average 10 percent per year for the last five years from P32 billion in 2014 to P51.5 billion in 2019.
Its net income, however, grew only by an average of two percent per year, from P6.2 billion in 2014 to P6.7 billion in 2019 due to rising cost of operations that have lowered its profit margins.
Last year, despite the pandemic crisis, EMP managed to grow its total revenues by 2.5 percent to P52.8 billion, which also increased its net income by 18 percent to P7.9 billion.
This year, EMP’s total revenues for the first six months increased by 17.6 percent.
The increase in revenues coupled by improved margins and lower operating costs boosted its total net income to grow by 55 percent to P5.1 billion from P3.3 billion in the same period last year.
If we annualize this first half income, we can derive a target net income for EMP at P12.5 billion by year-end, which gives a prospective Price-to-Earnings (PE) ratio of 20 times.
Although the stock’s pricing may be higher than market average, EMP, being a global player in the alcoholic industry, deserves to trade at premium.
Compare this pricing to Diageo Plc, a leading alcoholic beverage company based in London, which has a forward PE ratio of 27x, EMP still has the potential to appreciate further in the long run.
5| Sta Lucia Land, Inc.
Year-to-date Gain: +51.5 percent
Sta Lucia Land (PSE: SLI) has been in the business of lot development for residential subdivision and horizontal housing for over 40 years. It has developed more than 200 subdivision establishments including Greenwoods and Acropolis Libis.
In 2007, SLI became a public company when its controlling shareholders acquired listed company Zipporah Realty Holdings via backdoor listing.
Over the years, revenues of SLI, which mainly came from sale of real estate properties, have grown more than 10 times in 11 years, from P603 million in 2008 to P7.8 billion in 2019, with an average growth rate of 26 percent per year.
This growth in revenues translated to a 44 percent annual growth in net income from P31 million in 2008 to P1.7 billion in 2019.
Last year, despite the fall in revenues which decreased by 12 percent from P7.8 billion in 2019 to P6.9 billion in 2020, as a result of the COVID-19 crisis, SLI still managed to keep its net income almost flat at P1.71 billion on lower cost of sales and operating costs.
This year, with the reopening of the economy, SLI’s total revenues recovered strongly by 63.3 percent to P3.9 billion from P2.4 billion in the same period last year.
The solid recovery in SLI’s revenues almost doubled its net income for the first half from P757 million last year to P1.4 billion.
If we are going to annualize this income, we can estimate SLI’s total net income to reach P3.3 billion by yearend.
At P3.3 billion net income target, SLI’s expected PE ratio at the current share price will be 7.4 times, which is comparatively low against market and industry average of more than 15 times.
The other way to price this stock is by looking at its net asset value. In a recent independent appraisal conducted in 2019 by Colliers International, SLI’s property holdings were valued at P62.5 billion against book value cost of P20.7 billion.
If we were to conservatively use the appraised value of SLI’s property holdings from 2019 at current balance sheet, we can derive a net asset value of P49.5 billion or P6.03 per share.
At a net asset value of P6.03 per share, the current share price of the stock at P3.00 per share offers a huge 50 percent discount or a potential upside of 100 percent.
Although, historically, actual share price of a stock seldom trades at par with its net asset value (NAV), the large discount simply tells us that the SLI, being grossly undervalued, has room to appreciate further.
Over the long-term, the market value of SLI’s land holdings should further increase once all the government’s infrastructure projects are completed.
With the market slowly recognizing the potential of SLI, the fundamental outlook of the company, in terms of earnings growth and land price appreciation, should eventually manifest in the share price.
Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice firstname.lastname@example.org or follow him on Twitter @henryong888