October 9, 2023

AP

A few weeks ago, FTSE rebalancing happened in which AP got removed due to lack of liquidity. A few weeks after that, AP decided to initiate a share buyback program that would cause their public float to fall below the 20% threshold, an action that gives an implication that AP does not care about being part of any of the indices. It is within the PSE’s rule that stocks that are in the index should have a public float of at least 20% otherwise they will get removed. Nevertheless, AP continued the share buyback program using their internally generated funds, a move that has been controversial to some investors after seeing many companies in the PSE voluntarily delisting. In addition to the controversy, everybody knows that a stock being removed from an index will cause the share price to possibly drop within significant levels since institutional investors that track the index will have to dump their shares at whatever price is in the market. That being said, investors question whether AP is looking at the welfare of its shareholders considering that AP is one of the low-risk and conservative options for investment due to its historical record. AP, however, clarified that they intend to stay in the PSE and that the buyback program is due to reasons that their share price in the market does not reflect the intrinsic value of the company and its future business prospects. They claimed that the share buyback program would further create shareholder value.

To understand AP’s claim, we’ll have to see possible scenarios of how the share buyback program would add value to shareholders. Share buyback programs would reduce the number of outstanding shares being traded in the market. Whatever net income AP will achieve from hereon is going to be equally distributed to a fewer number of shares hence the earnings per common share will increase. With fewer shares that are backed by a fundamentally sound company, it will attract higher demand that would possibly lead to higher chances of capital appreciation. On the other hand, in terms of dividends, it is going to be equally distributed to a smaller number of shares hence the dividends per share will also increase. With the current state of our market, at least from a long-term investor’s point of view, we can’t expect earning from capital appreciation these days. Foreign investors, who have always been moving the PSE stock share prices, are slowly reducing their exposure in our market. However, for dividend investors, this may not be much of an issue.

AP has a dividend payout policy of paying 50% of its net income. The last dividend payout amounted to at least 13.5 billion PHP or 1.87 PHP/sh and that was when there were approximately 7.3 billion outstanding shares in the market. AP has been buying back shares for a few weeks already and currently, there are approximately around 7.2 billion outstanding shares left in the market. If we assume that AP will distribute another 13 billion PHP of dividends next year, then the dividends would have increased to approximately 1.90 PHP/sh. We are, however, putting an assumption here that AP’s earnings will sustain or grow moving forward which is very much likely since we are still in an environment where power supply margin is low, demand is elevated, and rates are high.

Nobody knows when will AP stop the share buyback program hence the above-mentioned projected dividend may still change. We can, however, at least gauge how long this share buyback program will last based on their recent financial report. As of the 2nd quarter of this year, AP approximately has 60 billion PHP in cash. AP has already spent 4.3 billion PHP in share buybacks and on average, AP spends 45 billion PHP quarterly for operational expenses. Having those as given, we can conservatively assume that AP is left with 10 billion PHP that they can use to do more share buybacks. But then again, we can’t assume that AP will use everything for share buyback because they still need to leave cash for the declaration of dividends next year. AP needs at least 13 billion PHP to sustain the previously declared dividends which they do not have right now as per computation. That’s okay because we haven’t factored in yet the performance for the 3rd and 4th quarter of the year which we expect AP to do fine or at least do better due to market conditions.

September 18, 2023

GMA7

The 1st half earnings of GMA7 this 2023 are not looking good as compared to the same period a year ago. The earnings are down by at least 70% and it seems like inflation is hitting them hard as per their disclosure. If we put an assumption that the earnings in the 2nd half of 2023 are the same as a year ago, then GMA7 will end up with an annual net income of 2.63 billion PHP which is down by at least 50% from a year ago. The problem is that hitting those quarterly earnings from a year ago is unlikely because revenue mostly came from political advertisements. Now that the presidential campaign is over, GMA7 had to go back and source its revenue from big advertisers. Unfortunately, these advertisers have cut back television ad time since they are moving their resources to digital advertisement. GMA7 may have been monopolizing the broadcasting segment in the Philippines but ad money nowadays is mostly found in the digital space in which they are facing lots of competitors. Inflation may have been going down but it’s not going down as fast as it could hence will continue to negatively affect GMA7’s profitability. The high inflation environment causes lower consumer spending hence giving reasons for GMA7’s clients to further cut ad spending. What’s unusual from their last quarter report is that they suddenly incurred a short-term debt amounting to 3.5 billion PHP whereas historically, they never had a debt this high since 2016, not even reaching a billion PHP. We don’t exactly know where they will use the proceeds from this debt but for sure it’s a hefty price to pay because interest rates are currently high and would affect GMA7’s future net income. 

If we assume that GMA7 miraculously achieves the said annual net income of 2.63 billion PHP in 2023, it is unlikely that it will be able to sustain the last declared dividend amounting to 1.10 PHP/sh. The last time that GMA7 earned this much was in 2019 and they declared a dividend of 0.30 PHP/sh which only yields 3.63% at the current trading price of 8.25 PHP/sh. To be fair, the dividend of 0.30 PHP/sh was only at a 45% dividend payout ratio relative to the earnings per share during that time. GMA7 has a 5-year average dividend payout ratio of 85% hence can probably sustain a dividend of up to 0.66 PHP/sh which yields around 8% at the current trading price of 8.25 PHP/sh. 

If the high inflation environment is indeed greatly affecting GMA7’s performance, then shareholders will have to take a deep breath because there are no clear indicators that things are getting better at the macroeconomics level. Due to elevated inflation, analysts are not expecting the BSP to cut the interest rate until the middle of next year. That being said, some risk-averse dividend investors have already sold their positions due to the said uncertainties. They are, however, assuming GMA7 to underperform hence waiting for GMA7 share prices to drop at specific price points (margin of safety) that would give them a good dividend yield relative to the forecasted 2023 annual net income and the same time beat the inflation rate. On the other hand, some investors are not buying GMA7 shares until they see innovation and diversification of income. For context, 95% of GMA7’s revenue is from advertisements mostly through TV. The next foreseeable catalyst of GMA7 is the next presidential election campaign which is 5 years from now. But then again, is the majority of the population still into TV when that time comes?

September 4, 2023

PLC

LOTO’s share prices have been on a roll lately. It has been heavily traded due to a disclosure a week ago about a 1-year trial run for a web-based application betting platform (WABP). For context, gambling is rampant here in the Philippines, and making it available online is a profitable business. Looking back, Atong Ang’s E-sabong (Online Sabong) which was suspended a year ago raked in around 800 million PHP per month. On the other hand, PLUS’ net income in the 2nd quarter of 2023 is up by at least 50% due to their online Bingo platform. With that said, LOTO’s WABP has a high chances of raking in huge income potential as well.

PLC directly owns 50.1% of LOTO hence it was also actively traded when the said disclosure was released. Since this is a “Direct Ownership”, PLC will own 50.1% of LOTO’s earnings. If we put an assumption that the WABP is successful after the trial run, then dividend investors of PLC will surely benefit. PLC usually gives out 80% of the net income as dividends to shareholders.

 

August 21, 2023

LTG

LTG’s first-half earnings in 2023 are down by as much as 15% compared to the same period a year ago. The tobacco segment’s performance which used to be at least 70% of the overall income is now down to 45%. This is due to lower sales volume caused by higher taxes and competition against smuggled cigarettes. The question running now in the head of dividend investors is whether dividends would be sustained.

LTG’s performance recently might seem looking bad but not to the point that they’re losing the business. Looking at their recent financial statement, they still have a significant amount of cash in the balance sheet. Although as for LTG’s case, this is not a good basis if dividends would sustain. Historically speaking, LTG was mostly cash-positive but they declared lower dividends once a year. It was just in 2019 that they hit a net income of at least 20 billion PHP and started to give out dividends every quarter. From thereon until today, their trailing twelve-month net income is still above the 20 billion PHP threshold hence the declaration of quarterly dividend is sustained. However, I could be wrong about the basis of dividend sustainability. This is just a speculation based on current and historical data disclosed to the public. I do not have insider information as to why LTG became generous in giving out dividends. It is also valid to say that LTG might be returning shareholder value through increasing dividends since there is a minimum upside to share price appreciation due to a lack of growth.

As of the moment, the future of LTG remains uncertain. The tobacco segment that drives LTG’s core income is on a decline. Research data reported that smokers of at least 15 years old is down to 20% in 2021 from a high of 30% in 2009.  Starting next year, there will be a 5% increase in cigarette tax annually as per the Philippine Republic Act. This could further lower the sales volume of LTG and affect the dividend sustainability. For context, most of the dividends being distributed by LTG are earnings from the Tobacco segment. The earnings from LTG’s other business segments are not enough to offset the losses from the Tobacco segment. PNB, the banking segment and 2nd largest contributor to LTG’s net income should not be relied on for dividend sustainability because they do not pay dividends. For some investors, they believe PNB is just there to prop up the balance sheet of LTG. Without PNB, the financials of LTG might not be looking good.

SCC, DMC

The revenue of SCC and its parent company DMC declined in the first half of 2023 as compared to the same period a year ago. The decline in revenue was within expectation due to lower coal prices. The power segment of both SCC and DMC is doing great due to tight power supply in the country but unfortunately, it was not enough to offset the losses from the mining (coal and nickel) segment. Even though revenue has declined, their recent income is still the 2nd best first-half earnings to date.

What’s worrying would be the pessimistic outlook in the 2nd half of the year. Although coal prices will remain elevated, the power segment of SCC and DMC which is supposed to at least offset some of the losses from the mining segment will be facing some headwinds. SMC’s Ilijan 1200 MW power plant will be reintegrated back into the grid hence increasing supply and leading to lower power rates. Moreover, 3 of SCC’s power plants will undergo planned shutdown and hence will not be able to participate in the power spot market.

What’s odd in the past few trading days is that the share prices of SCC and DMC have not declined but rather gained high volumes of buying of shares above the average. Many market participants are speculating that SCC and DMC will declare another round of special dividends this coming September or October hence traders and investors are positioning early. For context, SCC needs at least 15 billion PHP to declare a special dividend of 3.50 PHP/sh and DMC needs at least 10 billion PHP to declare a special dividend of 0.72 PHP/sh. SCC and DMC are currently sitting on cash amounting to 27 billion PHP and 38 billion PHP respectively which is more than enough to cover the special dividends. The management has not made disclosures of incoming special dividends but the probability of it happening is high due to (1) SCC does not have much capital spending and the board of directors usually votes to give away the earnings as dividends and (2) the management has been accumulating shares which they usually do before any good disclosures comes out.

SCC’s prospects remain uncertain but one thing for sure is that their coal operating contract is set to expire in 2027. They plan to renew the contract if they are permitted by the Department of Energy to do so. Looking back, SCC entered the renewable energy space and we are yet to see the results in 2026. Moreover, SCC had plans to put up a cement plant in Semirara Island, a project that has been shelved due to the pandemic. Now that the country is reopening, the cement plant project is on the table as an option for diversifying outside the coal business.

DMC on the other hand is waiting for inflation and interest rates to ease. The real estate segment of DMC is suffering from high real estate sales cancellations and fewer real estate sales. Meanwhile, the construction segment remains stagnant because projects they have submitted bids are on hold. The developers who own these projects are in a wait-and-see mode due to the high-interest environment.

August 7, 2023

TEL

Before the year ended a year ago, TEL committed that strengthening its balance sheet is its goal for 2023. This was due to the budget overrun issue that caused their annual net income to drop to as low as 10 billion PHP from a high of 26 billion PHP. Now that we are already past the first half of 2023, it may seem like TEL’s dedication to meeting its promise is materializing. Looking at their recent first-half financial results of the year, their core net income of 17 billion PHP is almost the same as the first half from a year ago. It may not seem like good news since it didn’t grow, but it is an indicator that the earnings may have found its bottom and not drop further. That being said, whatever TEL has been doing to turn things around is probably working. 

TEL recently announced their first tranche of regular dividends for this year which amounted to 49 PHP/sh. Last April, I wrote that the dividend of TEL is something to be concerned about due to the drop in their net income caused by the budget overrun issue. To sustain the regular dividends, they have to at least shell out 19 billion PHP and the problem back then was they only netted 10 billion PHP in 2022. The better news today is that the recently declared 49 PHP/sh dividend is only 60% of the core earnings they made in the first half of 2023. If they continue to maintain their earnings for the next half of this year, then most likely the 2nd tranche of dividend is sustained as well.

Going back to the budget overrun issue, the management made a firm statement that they will continue giving out dividends while they fix the mess. They are open to tap their credit line and take out more debt if necessary. TEL’s debt has increased, but on a positive note, the maturities of this debt have been spread out evenly, at least 50% will mature in 2029 and onwards. This implies that TEL’s dividend payout has a higher chance of being sustainable for as long as they maintain their earnings.

Somehow, it does not make sense for a business to give out dividends and at the same time incur more debt. We can probably safely assume at this point that TEL is trying to return shareholder value through dividends. After all, TEL’s focus at the moment is not to grow earnings but to achieve a positive free cash flow, hence the probability of the share price going up is minimal. As for the first half of 2023, TEL’s free cash flow is still in negative territory. 

TEL’s growth is dependent on the data centers and hyperscalers that they have been constructing. The rate of revenue from their data centers is increasing at a faster rate than all other segments. However, it is only contributing less than 1% to the overall revenue. At least 80% of TEL's consolidated revenue is from the data and broadband segment. Under this segment, at least 47% of the revenue is from the mobile data segment. The SIM registration ended a week ago and TEL was only able to register around 80% of their subscribers. It would be interesting to see how the mobile segment’s profit is affected in the next quarter report.

July 31, 2023

PLC

PLC has maintained its earnings momentum this 2nd quarter of the year. PLC earned at least 600 million PHP in the 2nd quarter after earning more than 500 million PHP in the 1st quarter. This brings a total of around 1.25 billion PHP for the first half of this year as per their disclosure. What’s interesting is that they have earned all this in just 6 months whereas the 1.25 billion PHP is their annual net income a year ago. That being said, there is a high probability that they would hit at least 1.5 billion PHP at the end of the year.

PLC needs at least 1.5 billion PHP to sustain the annual dividend of 0.05 PHP/sh. For the first half of this year, they already have saved 1.3 billion PHP in cash and they’re getting close to the dividend target. If the earnings momentum continues for the next two quarters, then the dividends for 2023 are secured. PLC is currently benefitting from the reopening of tourism hence the improvement in casino operations. The Philippines however failed to be the preferred destination for Chinese tourists as per recent studies and historically they’re the ones who drive the gaming segment earnings. For this year, it is the rapid return of the Koreans that is driving the recovery of the gaming segment. Tourist arrivals from Korea are nearing pre-pandemic levels as per an analyst report 2 months ago.

The dividends are probably secured for 2023 but PLC’s performance in 2024 is something we have to watch out for. PLC mostly gets their dividends from saved cash hence even if they have been earning less than 1 billion PHP since the pandemic, they were able to sustain the dividends amounting to more than what they earn. The 1.3 billion PHP cash that PLC has right now is from the recent earnings and earnings since pre-pandemic which used to be around 3.7 billion PHP. That said, we can see the trend that PLC’s cash is on a downtrend and it was just fortunate that COVID-19 restrictions and quarantine have eased which would at least give time for PLC to recover.

July 17, 2023

FILRT

FILRT share prices have been dropping continuously in the past few weeks. It started when their recent dividend payout has been declared out of the usual schedule. A year ago, the first quarter dividend was declared in April. For this year, the first quarter dividend was declared in June which made it unusual since it was a 2-month difference from a year ago and it was already the first half of the year. This situation has happened before in DDMPR where they missed to declare a quarter of dividends hence causing its share prices to drop. FILRT has not disclosed any information that is surrounding the negative sentiment towards the share price so investors are left to speculate that the delay in the dividend declaration is due to financial issues. It is a safe assumption that investors had to make because FILRT’s occupancy and lease renewal rate is not looking good to start with. To make matters worse, when there is an unusually large selling volume of shares happening in stock, many traders and investors are poised to sell as well. This is because insider trading is rampant in the PSE market where institutions who have insider knowledge with regards to a company have the advantage to dump or pump the shares before information is officially disclosed to the public. Nevertheless, nobody knows if FILRT has insiders, but some shareholders who have no insider information, they’d rather follow and sell instead of incurring more losses. What’s holding FILRT's share price not to drop further is that the annualized dividend yield is reaching at least 8%. The share prices however could still go lower if the dividend income is not sustainable since FILRT’s occupancy rate remains volatile.

In a move to calm investors, FILRT disclosed a week ago that they are in talks with major BPO firms looking to expand their current leases. Moreover, FILRT is going to introduce co-working spaces to meet tenant needs to at least improve their occupancy rate. Having said that, FILRT expects to add 12,400 square meters of new leases if everything goes as planned. The said 12,400 additional square meters of new leases is a significant number but still below the average gross leasable area for all of FILRT’s assets which is at 17,000 square meters.

The addition of the new leases might not offset the expiring leases this year. Looking back in 2021, FILRT disclosed that 18% of leases will expire this 2023. A quarter ago FILRT disclosed that they were able to renew 32% of the 18% expiring leases without mentioning figures in terms of square meters. The recent disclosure however said that around 10,300 square meters were renewed earlier this year. Having those as given, we can calculate from here that a total of 32,000 square meters of leases are going to expire this year. If we sum up the renewed 10,400 square meters of lease and the expected 12,400 additional square meters of new leases, then we get a total of 22,700 square meters of lease which is still not enough to break even with the 32,000 square meters of expiring leases. This gives a low probability that the dividend income will increase. The best situation that investors could hope for is at least for the dividends to sustain.

FILRT investors will have to take a deep breath because next year is going to be a more challenging year where 21% of the leases will expire.