September 19, 2022

MER, SCC, AP, CREIT, PremiereREIT

This month, residential customers should anticipate higher electricity costs. The following are what is causing it:

(1) A rise in generation costs brought on by the depreciation of the peso. We are not an oil-producing country and we are relying on oil imports to fuel our power plants. Our weaker peso implies that we will have to shell out more pesos for every barrel of oil we need to buy in the global market. As usual, these costs are passed on to consumers by raising the electricity bills. 

(2) Power demand remains high but dwindling supply due to ongoing gas supply restrictions from the Malampaya gas field. A week ago, the Luzon grid went on red alert causing a power cut during the weekend. There was insufficient power reserve because 7 power plants had forced outages and other plants are only partially working. These 7 power plants are the Dinginin plant of the Ayala-AP joint venture, the Calaca plant of SCC, and the Masinloc and Sual plants of SMC. 

A month ago, SMC’s power generation arm is asking for relief from the government. They are currently operating at a loss due to high prices of fuel to run their power plants. If no relief is given, they will be forced to shut down their power plants which will eventually increase electricity prices due to weakened supply.  Meralco on the other hand is looking for offers from other power suppliers that would replace SMC’s plant if in case they shut down their plants.

That being said, there are still a lot of opportunities in the energy sector. 

Renewable energy penetration is still low in the energy market. Investors are looking forward to CREIT's special dividends by the end of the year. The special dividends will be coming from the excess energy sales of CREIT’s tenants. The probability of giving out special dividends is high since the energy produced from renewable energy is sold first before others. On the other hand, MGen, MER’s power generation arm partnered with Vera Energy to develop and construct a new solar project in Ilocos which is expected to start its operation in 2023. It will only contribute 68 MW but MGen is targeting 1,500 MW of renewable energy in the next 7 years. Last 2021, MGen deployed a 55 MW solar plant in Bulacan and another 75 MW solar project in Rizal. 

On a side note, Villar is filing an Energy REIT IPO to ride the renewable energy trend. The company is called PremiereREIT and is expected to be offered this November 2022 at a maximum offer price of 2 PHP/sh. There is no prospectus yet but similar to CREIT, the tenants are power plants owned by Villar themselves with a weighted average lease expiry of 9 years.

Even though AP is aiming to achieve 50% renewable energy in its portfolio, it continued to increase its shares in STEAG, a coal-fired power plant in Mindanao. They currently own a portion of STEAG in the past and now they’re increasing ownership to as much as 34%. This is the very same STEAG that was supposed to be bought by SPC a few months ago but was terminated for some undisclosed reason. Due to the dwindling supply of power in the Luzon grid, once NGCP’s Mindanao-Visayas interconnection project is finished, STEAG will be able to export much-needed capacity not only to Mindanao but to the whole nation.

GLO

Those who hold GLO shares until September 16 are entitled to buy additional shares for 1,680 PHP/sh which is lower than the current trading price. Shareholders are only allowed to buy 1 share for every 13.24 shares they currently hold. GLO will be selling around 10 million shares and will be added to the pool of common shares later on. As an effect, there will be a dilution in the earnings per share as well as the dividends per share.  Currently, GLO approximately has 134 million common shares in which they give 27 PHP/sh as dividends. After listing the additional 10 million common shares, the quarterly dividends will be reduced to 25 PHP/sh. It would be beneficial for an existing GLO shareholder to maximize and buy those entitled shares at the given SRO offer price to avoid the effects of dilution, but that is if they have enough capital to buy. Bernard LLamzon, a GLO insider (Executive Vice President), trimmed his position by selling 1,500 shares a few weeks ago. It’s either he’s reducing the risk of being diluted, maybe using the proceeds to buy back shares at SRO price, or probably something else.

AREIT, FILRT, MREIT, RCR, DDMPR, LTG

A decision has been finally made. BPO firms in ecozones are now allowed to continue WFH (work-from-home) arrangements for up to 30 percent without compromising their tax-incentive benefits. The WFH arrangement is extended up to the end of this year. This probably might be a negative sentiment towards FILRT especially since many of the tenants are in a wait-and-see attitude before they expand and take in more offices. FILRT currently has an 88% average occupancy rate while other BPO-heavy REITs maintained at least 90%. AREIT claimed that tenants who are reducing their office space are not going to be a problem since the Philippines is still a top destination for BPOs. Due to the demand for BPOs, they will have to fill in the spaces with new tenants. We’ll have to keep an eye on the next few quarterly reports.

DDMPR has got nothing to do with BPOs but more towards the sentiment on POGOs that might probably affect Office REITs as well in terms of rental rates. Many personalities in the government are suggesting stopping POGO operations in the country since they are linked to crimes and the expected revenue that was supposed to be collected through tax did not materialize. That being said, Leechiu Property Consultants projected that office rental rates in the Bay Area, Makati, Alabang, Cavite, Ortigas Center, and Mandaluyong could drop from 55% to 80% if the government decides to close POGOs. Rental rates have increased due to the entry of POGOs during the pre-pandemic since they pay higher and are seen to be more profitable than other tenants. If Leechiu’s forecasts are true or will materialize, then things might not be looking good since dividends will be greatly affected. This would be bad news for LTG as well since its real estate arm Eton just sealed a deal with one of the biggest POGO in Southeast Asia to lease two floors on one of its buildings in Makati’s Central Business District.

September 5, 2022

NIKL, DMC

A month ago, the government approved the new fiscal regime for the mining sector. A royalty tax of 5% will be slapped on all large-scale mining operations. The implementation of the additional 10% export tax on raw mineral ore would have the biggest impact. That being said, this will probably reduce the net income of both NIKL and DMC. 

The nickel mining business of DMC contributes only up to 5% of the overall net income so would not be much of an issue. NIKL however will be most affected since it exports 45% of its produced ore which contributes up to 63% to the overall net income. Nickel mining companies could avoid the export tax if they process their ores but of course, this will add additional expense. Either way, net income will be affected and it's just a matter of choosing the lesser evil between taking in the 10% export tax or spending additional money for processing the raw ore before exporting. Anyhow, we'll have to wait and see its effect on the financial statement on the next quarter report.

With regards to NIKL's performance in the nickel market, they sold lower ore volume during the first half of the year, and they were only able to maintain a slight increase in revenue due to higher nickel prices and favorable exchange rates. Market analysts however forecasts that nickel demand will continue to slightly increase or remain the same in the next 12 months assuming that no unexpected event will disrupt the nickel market.

CREIT, FILRT

The FTSE (Financial Times Stock Exchange) PSE (Philippine Stock Exchange) index rebalancing is going to take effect this September 16. Both CREIT and FILRT are added to the FTSE PSE's micro-cap index. We should expect foreign buying of shares to both REITs.

AREIT, FILRT, RCR, MREIT

The 30% limit WFH (work-from-home) arrangement for IT-BPM companies within the ecozones is only until September 12. The decision to extend the arrangement until March 2023 is still pending as they are waiting for inputs from different government agencies.

AREIT's CEO, Carol Mill, in an interview a week ago mentioned that the WFH arrangement is not going to be an issue. The demand for BPOs in the Philippines remains to grow and they can take in more BPO tenants to occupy their buildings.

On the other hand, RCR and MREIT are mum about the issue. They do however maintain a healthy occupancy rate of at least 90%. 

Jones Lang Lasalle (JLL), a property service firm, projected that leasing volumes will further accelerate in the 2nd half of this year in Metro Manila. Deals that have been delayed due to the pandemic will continue. BPOs continue to lead transactions due to the stabilizing of the economy.

FILRT is currently standing at an average occupancy rate of 88% while 10% is still under negotiation. The tenants are taking a wait-and-see attitude before deciding to take more office space. That being said, FILRT is hanging at a balance because it will affect income if the 30% limit WFH limit is extended or becomes permanent. Their buildings however are PEZA accredited, similar to AREIT, it might not probably be an issue to add more BPO tenants.

SCC

Coal is still the cheapest and most practical source of energy at the moment. Even though coal prices are at their all-time, nobody knows if coal and coal-fired power plants will be sustainable. It's not that the world is lacking coal but it is mostly due to its negative contribution to climate change. 

During a virtual press briefing a month ago, SCC disclosed that they are interested in adding renewable energy to their energy business. They went through and looked at different types and kinds of renewable energy, and after a careful review, they decided to go with solar and LNG (liquified natural gas). They are currently in the preliminary stage of the study. 

SCC venturing into renewable energy is probably a defensive move for them since they can't rely only on coal as a business which many government regulations are going against. After all, China, where they sell most of their coal can't be relied on because China is now sourcing their coal from Russia. In other words, SCC finds the coal and coal-fired power plant business probably good in the short to medium term but not in the long term.

A month ago, Maria Cristina Gotianun (Director, President, and Chief Operating Officer), sold all her SCC shares that she accumulated since the 2020 crash. She helped push the SCC share price going up until it finally went back to the PSE index. There is no further disclosure why she sold 2.3 million shares of SCC. Some investors do not see this as an issue because at the end of the day she still has 21 million shares left. An insider selling their shares to the public will increase the stock's public float which is a contributing factor for the stock to remain in the PSE index.

TEL

A month ago, Cignal Cable Corporation (a subsidiary of PLDT) was supposed to purchase 39% shares of Sky Cable Corporation. The Lopezes who own Sky Cable was supposed to use the proceeds to buy shares of TV5 Network. Many speculate that they will revive their ABS-CBN programs via TV5. Due to the negative stance of the government towards ABS-CBN, the deal has been scrutinized. Just a week ago, Cignal Cable and Sky Cable disclosed that they have terminated the deal. They did not disclose further the reason, but speculation is that it is due to political risk and that any company related to the deal (including TEL) will be politically attacked in some way or another. Any company being attacked by the government is bad for business similar to what happened to MWC during President Duterte's term.