July 18, 2022

GLO

GLO made a press release 2 weeks ago that they will be creating the largest PH health tech play in the country. They will be creating a super-app that will combine KonsultaMD, HealthNow, and AIDE. KonsultaMD is a teleconsultation system that allows patient diagnosis or treatment remotely (online). HealthNow provides various health care services such as medicine deliveries. AIDE on the other hand handles home healthcare services including laboratory and diagnostics. When these 3 are combined, they will have a total user base of around 2 million. The super-app is projected to go live in the first quarter of 2023.

Looks good but does it add significant value to GLO though? Some investors do not find it a catalyst because KonsultaMD, HealthNow, and AIDE have been operating under GLO before. Meaning to say, the consolidation of the 3 groups might not increase the revenue. Out of the 39 billion PHP service revenue that they have gained recently from the 1st quarter report, non-telco revenues (e.g., Fintech, Financial Services, Lifestyle Services, Healthcare Services, etc) contributed only 790 million PHP.  What made it worse is that KonsultaMD and HealthNow did not contribute revenue last quarter and made a net loss of 8 million PHP and 27 million PHP respectively. For context though, GLO only invested around 40 million PHP to KonsultaMD and 70 million PHP to HealthNow in exchange for 50% ownership. The figures are not that high as compared to other non-telco investments like Mynt (GCash) or KarmanEdge (Data Centers) in which GLO invested around 8 billion PHP each in exchange for 36% and 49% ownership respectively.

Energy and Power Sector (AP, MER, SGP, SCC, SPC)

Lawmakers have filed 10 bills to slash electricity costs and one of which is the System-Loss Limitation Act of 2022. The said bill aims to limit the customers shouldering of the cost of system loss from 9.5 percent to 1 percent.

System loss happens during the transmission and distribution of electricity. This implies that a proportion of the power dissipates due to heat and noise. Power systems are on standby to deliver power but are technically losing power even though no power is being drawn out from it. Turning off the power system is the only way to solve system loss which of course is not possible.

The cost of system loss is passed on to customers but is currently capped at 9.5 percent. Lowering the cap to 1 percent means that businesses in the power sector will have to shoulder the cost. If the bill has been passed and if system losses do not improve, this will eventually affect the income of businesses in the said sector

Meralco has been doing its part to reduce system loss. They were able to lower it to 6% in 2020 from a high of 13% in 2004. To lower system losses, bigger wires have to be used for households. This however is a capital-intensive process in which the cost is passed on to consumers through raising their power rates. For context, Meralco will need approximately 65 billion PHP of funds to lower system loss to 5%. Electric cooperatives on the other hand will have to spend a separate amount on their part to fix their system losses as well.

The future with regards to approving the bill is still uncertain and to be thought upon since there are possible consequences. Understandably, the purpose of the bill is to lessen power rates but analysts don't see that the price of fuel that is needed to produce power is going to go down anytime soon. For context, prices in WESM (Wholesale Electricity Spot Market) have increased this June due to low supply and due to the surge in prices of oil, coal, and gas. That being said, there were a series of red and yellow alerts in the Luzon Grid. The government pushing all the burden to energy companies will probably make the supply and demand of energy worse.

SGP

Renewable Energy businesses keep on coming. A month ago, 9 renewable energy projects were endorsed to NGCP for a system impact study. A total of 60 projects have been endorsed for this year. These renewable energy projects are owned by various energy companies. Upon approval of any of these project means they will use NGCP to transmit their energy to MER for distribution. Of course, the more projects connecting to NGCP the better the income. 

We should be expecting more renewable energy projects to come as they are prioritized and incentivized by the government such as (1) the energy produced by these projects is bought first in the market before others, (2) income tax holidays and carbon tax exemptions, (3) tax reduction on purchased equipment to produce renewable energy, (4) and VAT exempt.

July 4, 2022

Nothing much has happened for the past two weeks except inflation is expected to increase. In response, the interest rate has increased. Another round of interest hikes will likely happen around August of this year. Our current interest rate is now standing at 2.5% and few analysts forecasted that it can go as high as 4% by the end of the year if the geopolitical tension between Russia and Ukraine will not subside. The global market is cutting Russia for gas and oil supply. Since Russia holds a large market share of these in-demand commodities, pushing them out of the market will continue to push commodity prices higher as well.

In addition to the negative outlook of our inflation rate, the US dollar is getting stronger against the Philippine peso. Medalla, the new governor of BSP, mentioned that the depreciation of the peso against the US dollar is not due to our economic stability but rather the US dollar is just getting strong. This is mostly due to the US Fed increasing their interest rates due to inflation as well. When that does happen, many investors will move their money to the US and invest in fixed-income securities.

AREIT, RCR, MREIT, FILRT

Due to increasing interest rates, fixed-income securities are becoming attractive. The yield of a Philippine 10-year bond is already reaching 7%. Many of the corporate bonds with 5-year maturity being issued lately are reaching the same levels of interest rate. 

For the past 2 weeks or so, almost all office-related REITs traded low. All office REITs got a taste of being traded below their IPO price. Many investors are choosing fixed-income securities rather than stock equities due to the attractive interest rate at par with the dividend yield of REIT and Non-REIT stocks. Moreover, fixed-income securities offer capital preservation.

Historical data shows that high-interest rates don't last long. It will eventually subside so there is the possibility that prices of office REITs with good valuations at the moment are trading at good prices. The fundamentals of office REITs remain unchanged.  According to Leechiu Properties, the demand for office spaces has doubled this 2nd quarter mostly driven by outsourcing companies. It is expected to pick up as lockdown restrictions ease and many are going back to their offices to work.

Equities including REITs beat fixed-income securities in the long term since interest rates do not stay high. The risk however in equities is higher and many analysts have a negative outlook on our market. Share prices of stocks with good valuations seem like a bargain today but they can go lower. That being said, if we are to continue investing in equities today, a good strategy is not to go "all-in" but rather buy slowly in tranches to distribute the risk.

CREIT, SCC, AP, SGP, MER, SPC, NIKL

With the current economic condition, power-related stocks will probably be among the defensive stocks. This implies that dividends will sustain. Asia Development Bank noted that power rates may increase by 27% in 2025 if the energy supply remains unchanged.

CREIT will remain 100% occupied for the next 20 years or so. Their tenants have slim chances of going out of business since we still have a thin-margin supply of power.  This also implies that SCC and AP's power plants remain critical.

SCC's coal business seems to continue for a while even though renewable energy is the future. Many countries especially in Europe are reactivating their coal plants since they will stop buying gas from Russia for their energy needs. Moreover, SCC continues to benefit from the foreign-exchange rate since it exports the bulk of its coal outside the country. There is speculation going around that SCC will return in the next PSEi rebalancing.

As usual, SGP continues to monopolize power transmission for the next 13 years. SGP has also reported that they are close to interconnecting electricity grids in Mindanao and the Visayas. MER on the other hand will also continue to monopolize power distribution. MER continues to partner with businesses and provides solar power. Two weeks ago, MER partnered with Toyota to install a solar rooftop in their manufacturing plant.

NIKL's renewable energy arm EPI (Emerging Power inc.) forges a joint venture with Shell to own, operate, and maintain renewable energy projects in the Philippines. Although looking at the financial statement, EPI only contributes around 1% of NIKL's overall revenue. It might look small for now but the probability of maximizing its potential sales due to energy demand is probably going to be worth scaling. 

Energy might be in-demand but not all energy-related companies might benefit. SPC's last financial statement was disappointing due to bad business performance. Currently, they are looking for new contracts, working on renewable projects, and targeting to start its battery energy storage project. Nobody knows yet how much this will contribute to the business or when will it become operational. Risks are high since it is highly speculative at the moment. With all this supposedly positive progress going on, one would wonder why Cesar Villegas, SPC's VP of Business Development and Commercial Operations, has dumped his SPC shares. On the other hand, no other insiders added shares.

GLO, TEL

GLO and TEL might look defensive since they are a duopoly in the Philippines but it is uncertain if they will be able to maintain their profitability in a high inflation rate environment. A portion of the population will probably give up the Internet since people will allocate more of their money to food and more important matters especially since everything is increasing in price (e.g., food, fare, oil, electricity, and so on). Telco, as we know, is a capital-intensive business so there's that uncertainty about whether the profit is enough to sustain the business and the dividends. Both GLO and TEL are already leveraging from debt. It was reported a month ago that GLO is planning to raise funds through an SRO (stock rights offering) and sell some of its towers. They will use the proceeds to repay debt and expand their mobile and broadband network. GLO might have decided not to issue more debt since interest rates are already high. The SRO offered by GLO whether it is negative or positive is a mixed bag depending on one's risk appetite. Negative because it can be a sign of weakness in cash flow and positive because it's all for the growth of the company. For a dividend investor, however, we want those dividends sustained or better yet to grow. GLO and TEL might sustain the dividends, the only issue at the moment is that the dividend yields of both GLO and TEL at current market prices do not beat the inflation rate and we can't bank on their growth in a high-interest rate environment.