April 18, 2022

NIKL, DMC, SCC, Foreign Exchange Rate

I've been observing the PHP/USD exchange rate and have noticed that the PHP grew weaker year on year since 2013. The current trading price is now at 52 PHP/USD from a low of 40 PHP/USD back then. Historically, the PSEi has been moving the opposite way. The index is known to move upwards when PHP is strong and downwards when PHP is weak. In a weak PHP environment, companies that have anything to do with export or have operations outside the Philippines are the usual winners because they take advantage of these high exchange rates. On the other hand, companies that rely on imports to operate (e.g., oil) are the losers such as airlines, food and beverage manufacturers, and restaurants. Companies that have foreign debt and are using PHP to pay for it are losers as well. Other sectors remain neutral such as banks, properties, retailers, telcos, construction, and utilities.

NIKL, DMC, and SCC have been tagged in this discussion due to the fact that most of their sales are through product exports specifically nickel and coal in which they take advantage of the foreign exchange rate. DMC and SCC however are not purely in the mining business. They're also engaged in power (utility) and construction in which the earnings will remain neutral because the cost will be passed on to consumers.

DMC, SCC, MPSA

The DENR (Department of Energy and Natural Resources) granted MPSA (Mineral Production Sharing Agreement) to SCC a month ago. This gives SCC the right to mine limestones on government property in Antique for a period of 25 years. In exchange, a portion of the limestones will be given to the government.

SCC is not known to sell limestones. However, limestones are one of the ingredients in the production of cement. At least two years ago, SCC had planned on building a cement factory but the project has been shelved a year ago due to the uncertainties of the pandemic.  It makes sense because coal is used as an energy source in cement production. With that said, the probability of SCC reopening the project is highly possible. It is advantageous for DMC since they can get their cement from their sister company SCC. With SCC producing its own cement, mining its own coal and limestone will open up more opportunities and partnerships with other companies in the construction sector. This however is all speculative and something to keep an eye on.

April 11, 2022

Inflation Rate, Interest Rates, REITs, and Stocks (Update)

It has been reported that our current inflation is at 4%. I did a write-up 2 weeks ago on the implication of a high inflation rate relative to REITs and stocks. Quick recap: (1) BSP will raise interest rates, (2) a higher interest rate means the yield of newly offered bonds is better or at par with REITs/stocks making it attractive since it carries a lower risk, and (3) high-interest rates are not good for companies that are highly leveraged on debt.

A few or almost all of the REITs at the moment are moving sideways or in a downtrend even if the fundamentals of the business remain intact. It could be that high inflation is playing a role leading to higher. Historically, the high inflation rate does not last long. Asian Development Bank (ADB) projected that our inflation rate can go as high as 4.2% for the year 2022 due to the global oil and commodity prices. Inflation however is expected to go as low as 3.5% for the year 2023. When that happens, REITs will be more attractive by then and whoever bought the dips will be rewarded with price appreciation in addition to the dividends. Though this is just a forward-looking statement since projections are speculative and if it didn't go as planned then investors are rewarded with just the dividends.

Meanwhile, dividend investors reduce their exposure to dividend stocks that leverage on debt. High-interest rates will affect their earnings such that more of it will be used to pay for debt and less for dividends. A company using more of the earnings for paying out dividends rather than meeting their obligations usually raises a red flag.

SGP

The proceeds from the FOO have been finally used by SGP to purchase preferred shares from NGCP. That said, this makes SGP a direct holder of NGCP. The preferred share does not give voting rights but rather can share with the dividends paid out by NGCP. The preferred share has no higher priority in terms of dividends but rather is equal among common shareholders. The preferred share has no fixed dividend yield and redemption date. Technically speaking, the preferred share is like a common share with no voting rights but NGCP can buy those shares back if they have to.

Nevertheless, SGP shareholders will have a higher share of dividend income in addition to the dividends they are already receiving from the subsidiaries One Taipan and Pacifica 21. Note that One Taipan and Pacifica 21 are direct shareholders of NGCP and the dividends they give to SGP are from NGCP as well.

CREIT, AP

ACEN and Citicore disclosed a joint venture solar plant project. The solar plant situated in  Pampanga is operational and is now starting to export power to the grid. Citicore disclosed a forward-looking statement that the solar plant is being prepared to be infused into CREIT in the coming months.

What's surprising is how fast solar plants are built since it only took them less than a year to build and get things ready. The sentiment toward renewable energy remains a clear path. If there's a common plan and platform between the people running for President then that would be renewable energy. This might look like a threat to businesses that produce energy using traditional means but we can't ignore the fact that renewable energy is not sustainable as a baseload. By 2030, the Philippines is expecting a 35% share of renewable energy and 50% by 2040. It will take that long to replace or reduce traditional energy. AP made a deal with IFC (International Finance Corporation) to do an in-depth joint study to assess whether renewable energy can be a source of baseload power. Time will tell so we'll have to wait for the findings of the study.

One of the issues of renewable energy and most especially solar plant is that they are most useful for a certain period. For instance, the common strategy being employed at the moment is that solar operate during the day and traditional energy during the night. Citicore has plans of building special batteries to solve such a problem but it seems like AP is ahead. A joint venture between AP and Scatec has been made to build a battery energy storage system. Scatec is a Norwegian company that specializes in renewable energy solutions. Using such a system is the common practical answer and many have asked why it is not commonly used. There can be many factors but most probably it will boil down to cost which eventually will be passed on to consumers. Time will tell whether the use of batteries will be a cost-effective solution without burdening consumers.

SCC

This discussion does not have the intention to capitalize on the situation in Ukraine and Russia but we cannot ignore the fact that it is already affecting our economy negatively. Russia has withdrawn its forces to some cities in Ukraine and there were multiple signs and evidence of war crimes. That said,  western countries have pushed for more sanctions against Russia. The sanction package will include a ban on Russian coal and oil imports. This will eventually affect global commodity prices which SCC's coal business will sustain or better. On the downside, the geopolitical tensions and sanctions will push our inflation rate further or keep it at a high for some time since we rely on oil imports.

MREIT

MREIT disclosed a week ago that they will be infusing four prime PEZA-accredited grade A properties. The acquisition has a total gross leasable area of 44.5k square meters. How much the dividend yield will increase is uncertain since they paid out a few quarterly dividends so it's hard to forecast something including the NAV (net-asset-value). One thing that is sort of certain from analysts is that the dividend yield for 2022 is 1 PHP/sh and that was when MREIT planned to infuse assets last December 2021. Now that a new infusion is taking place, then we can safely say that the dividend for 2022 is at least 1 PHP/sh. MREIT had plans of infusing 100k square meters of gross leasable space for 2022. With 44.5k square meters on their way for planned infusion, we should be expecting an additional 55.5k square meters of the gross leasable area to be infused later this year.

April 4, 2022

DivY (Dividend Yield Index)

The much-awaited dividend yield index has been published by PSE. It consists of dividend-paying stocks that had been listed for at least a year (6 months for REITs), have at least 15% free float, are highly liquid/traded, and have good financial standing. Out of which, only 20 companies are chosen with the largest 3-year average dividend yield. Stocks in the dividend yield index should not have more than 10% in weight. With that said, the top 5 stocks from the list that constitutes 50% weight of the dividend yield index are MBT, TEL, ICT, BPI, and MER. Like other indices, rebalancing will happen from time to time depending on the performance of the stocks.

The fact sheet released by PSE showed a 10-year performance comparing PSEi and DivY (Dividend Yield Index). The following is some notable information:

(1) DivY performed better than PSEi 5 out of the 10 years. In some years, the difference in volatility between the two is significant. For example, in the year 2019, PSEi made a total return of 6.5% and DivY is -3.5%. Meanwhile, for 2021, PSEi made a total return of 1.6% and DivY is 22.5%. 

(2) In terms of fundamentals, the average dividend yield of stocks in DivY is 3.80% while PSEi had only 1.54%. Moreover, the DivY index has cheaper valuations than PSEi in terms of average company earnings and book value.

(3) In terms of returns in compound annual growth rate for 3 (short), 5 (medium), and 10 (long) years, DivY faired better than PSEi. This is with the assumption that cash dividends have been re-invested. DivY had significantly better returns in the short and medium-term however PSEi is catching up to be at par with DivY's return in the long-term. 

From the looks of it, DivY has the potential on giving better returns than the PSEi but only time will tell since historical data is not a guaranteed indicator of future performance. This is probably a good alternative for FMETF but with dividends returned to investors. There is no ETF for DivY but an investor can replicate and/or customize their dividend portfolio by picking the stocks from the DivY index. Who knows, probably in the future there may be UITFs or Mutual Funds that would track the DivY index.

We should not mistake DivY as a high-yield dividend index. Many stocks offer higher dividend yields than those in DivY. Those stocks weren't included because they failed the criteria of initial screening. Either they had a low free float, dividend-cut happened along the way, were illiquid, shakey financials, or the like. On the positive side, even if the dividend yield of DivY is not that attractive, at least we can be assured that the companies being invested in are the safer ones that we can hold in the long term.

DivY Index Composition: AEV, AP, AREIT, BPI, DMC, DNL, GLO, GMA7, ICT, LTG, MBT, MER, MPI, NIKL, RLC, RRHI, SCC, SECB, TEL, and URC.

Inflation Rate, Interest Rates, REITs, and Stocks

BSP's Diokno has come to accept that the inflation for March will increase. On average our inflation rate is between 3% and 4%. The rise in the inflation rate is due to the surge in commodity prices such as oil and gas. He said that if the average world price of oil is 95 USD, 120 USD, and 140 USD then this implies that the domestic inflation rate is 4%, 4.4%, and 4.7% respectively. James Villafuerte, a senior economist has said that the multiplier effect of oil price inflation is 0.4% basis points. This implies that every 10% increase in oil price will correspond to a 0.4% increase in inflation.

When the inflation rate increases, the demand for loan interest rates also increases. No investor wants to buy a loan whose interest rate is lower than the inflation rate for they need to make money. Diokno earlier reported that he will be increasing the interest rate which eventually is the new baseline for bonds. New bond offerings are coming out lately whose interest rate are peaking more than 5%. For instance, just a week ago, AC is offering a 5-year fixed-rate bond with an interest rate of 6.88%. Meanwhile VLL tapped the debt market (corporate note) for an interest of 6.64%. We should expect soon-to-be offered preferred share to have a dividend yield of the same rate or higher as well.

With that said, we can't ignore the fact that the REIT market is going to be affected. Investors uses REIT primarily for recurring income. If the bond/preferred shares offers a yield that is higher or at par with the REIT, then they would likely opt for bonds/preferred shares because capital is mostly preserved. This implies that investors who still opt to invest on REIT should now be looking at the potential growth of a REIT and never settle with the yield. If we're just chasing the yield but the capital is depreciating, we're better investing on bonds/preferred shares instead. Investing in a dividend-yielding asset  but with depreciating capital is like a person giving his money to someone and is being returned as dividends. That person might not have lost that much money but he lost time. We have to remember that time reduces the value of stale money. If our 100 PHP can buy 100 pandesals today, the 100 PHP is going to be lower number of pandesals in the future because of inflation rate.

In times of high interest rate, we should stay cautious and manage our risk on investing on companies that are highly leveraged on debt. Debts not only lower the value of a company but also lowers the net earnings for they have to pay for the interest rate. This factor is important for dividend investor since dividends mostly comes from earnings.

VREIT

As many would have probably already know, Villar is offering a REIT IPO in which it will be composed of 10 community malls (Vista Malls) and 2 PEZA Accredited office spaces. I went through the prospectus and these are my insights from the perspective of dividend investing.

(1) At the offer price of 2.50 PHP/sh, the dividend yield for 2022 and 2023 is 5.6% and 6.4% respectively. These however are attainable at a 100% dividend payout ratio. VREIT has mentioned that they will be paying dividends at this ratio for the first 2 years. Note that the minimum payout ratio for REITs is 90% as mandated by law. Looking at a long-term conservative point of view, the dividend yield would be 5.76% at the IPO price.

(2) The weighted average lease expiry (WALE) is 5.09 years. 62% of the rent will expire in 2026 and beyond. There is a high occupancy rate of at least 90%. All of these seem to look good but it does not matter because at least 60% of the tenants are Villar-related businesses like AllHome and AllDay Mart. Even after 2026, AllHome and AllDay will most probably end up in a Vista Mall. Even during the peak of COVID, the malls were operating, AllHome and AllDay Mart were open because they provide essential services. This implies that foot traffic is not the indicator of VREIT's profitability (to be discussed below). 

(3) Large portion of the dividends will be from the community malls thus the major source of dividends will be from AllHome and AllDay Mart since they occupy 60% of the gross leasable space. There's this sense of dividend stability because AllHome and AllDay will be consistent tenants in the long term. The issue however is that these are Villar businesses renting space on a Villar Mall. This means that conflict of interest is highly possible, especially on the rental rate. Ideally, investors and the REIT sponsors should be on the same team against tenants in terms of rental rate pricing. However, since the REIT and the tenants are Villar related, then the rental rate might not be maximized thus affecting the dividend income. 

(4) Up to 50% of VREIT is being sold to public shareholders. This implies that 50% of the voting rights are being left to the public in terms of stirring the future of the company. A company selling at least 50% of its stake to the public casts doubt and shows that the company does not show interest and enthusiasm in growing the business by supposedly holding more of the shares and more of the risk. The growth prospect of VREIT looks slim especially since the prospectus has no detailed information on specific targeted real estate properties that are possible for infusion in the future.

(5) The net asset value (NAV) of VREIT is 4.86 PHP/sh. VREIT is selling shares lower than the NAV which attracts value investors. This also means that there is a possibility that VREIT will use this as a reason for not discounting further the 2.50 PHP/sh IPO price and the fact that dividend yield is at par with other REITs. The Adjusted Funds From Operations per share (AFFO/sh) and price-to-AFFO ratio show that VREIT is cheaper than other REITs. Note that the price-to-AFFO ratio is a metric for REITs similar to the price-to-earnings (PE) ratio which is a metric for common stocks.

With all those said, it is hard to make a conviction whether adding VREIT is good in a dividend portfolio. On one side, VREIT is a good dividend stock because of good valuations, good tenancy rates, and good dividend yield. On another side, it has shakey management and negative sentiment on growth prospects. 

Many speculate that VREIT is going to move like a preferred share since they expect minimal to no growth. The problem is that VREIT is a "Villar" in which historically many Villar stocks end up in a downtrend so capital is at risk. Traders like playing with Villar stocks because of the volatility (most especially during IPO). 

Despite the negative sentiment towards Villar, if we dividend investors have still plans to invest in VREIT for the long-term due to good dividend yield, fair fundamentals, and cheap valuations, then we have to conservatively play it safe to protect our capital. It would probably be best not to subscribe during IPO and wait for the stabilization fund to expire. Afterwhich, we will observe the market sentiment, trend of price and wait for a stable consolidating price before we enter. We have to remember that this happened with DDMPR before. DDMPR had good valuations but it wasn't enough to lift or at least hold market sentiment to protect the capital. Like Villar, DDMPR's Injap has its drama going around it as well but to cut it short, DDMPR is now consolidating at 1.6 PHP/sh from an IPO price of 2.25 PHP/sh. If only investors skipped the 2.25 PHP/sh IPO price, waited for the stabilization fund to expire, observed the sentiment going around it, and entered at 1.6 PHP/sh instead then most probably losses would've been minimal. Never go all-in and buy the dips in tranches.