October 17, 2022

GMA7

Felipe Gozon, GMA7’s CEO, admitted in an interview that dividends are much lower for this year. This is due to big advertisers like Nestle, Unilever, and Unilab cutting back television ad time in GMA7. He further noted that these advertisers have started cutting back since the pandemic and that they were not able to feel the negative impact due to the timely election. It was the monopoly of political advertisement that boosted their profit. Advertising is the lifeblood of GMA7 with a 95% share in the total consolidated revenue. That being said, now that election is done, gross revenue will likely start to go on a downtrend for the next few quarters.

The strength of GMA7 at the moment is that they monopolize the broadcasting industry. They cover at least 95% of places in the country with a viewer population of 81 million as of 2022. The issue however is how are they going to use that strength to make more money. The future of advertising is not entirely done through televisions anymore. We are speculating here that the reason why these big advertisers started to cut their ad time with GMA7 is that social media platforms are cheaper and provides better ad metrics. Moreover, more people are getting accustomed to social media since they can control the content that they want to consume which obviously cannot be done on a TV. As of now, what we can tell is that GMA7 is only profitable during elections, after that, they do not have enough moat to maintain their profitability. 

SCC

SCC released a record-breaking annual total dividend of 5 PHP/sh. In addition to the 1.50 PHP/sh dividend they declared last March, they declared another round of special dividends of 3.50 PHP/sh a while ago. Many investors were expecting the special dividends since the Consunjis themselves talked about it during the last stockholder meeting. The 3.50 PHP/sh dividends are more than twice as much as the special dividends declared a year ago. SCC continuously benefits from high coal prices and selling energy in the power market at elevated prices. Since SCC exports much of its coal, they are also benefitting from the strength of the dollar. 

Good as it seems but the Consunjis admitted that there is no guarantee of the sustainability of SCC’s earnings as well as the dividends. The geopolitical war that is happening in Ukraine and Russia is far from over causing economic instability. Commodity prices like coal, oil, and energy become expensive which causes inflation to get worse, the US has to fight inflation by making the dollar stronger, meanwhile, we here in the PH import some of these commodities and have to pay in foreign currency. That said, the future of SCC in the meantime will probably rely on the progress of the war.

DMC

DMC’s order book is getting better as they bag more contracts and joint-venture projects. Order books in simple terms are projects that DMC will have to work on. This gives certainty of income for the company in the next few years until the contract is done. As of June 30, 2022, 43.7 billion worth of combined projects is in the book.

I’ve been tracking DMC’s real estate projects for this year and they are the following:

(1) Bags the first subway project in Quezon and East Avenues, a joint venture with Nishimatsu Construction Japanese company. DMC will do the design, supply, install, construct, test, commission, and train. The project is expected to be completed in 2028.

(2) Partnership with Northern Star Energy Corporation to build the 3rd largest import facility which when completed will be leased to Shell Petroleum. The expected completion date will be in 2024.

(3) Partnership with RLC for the construction of Sonora Garden Residences, a condo in Las Pinas. This is expected to be completed by 2024 as well.

(4) Their newest residential condominium in Mandaluyong is expected to generate at least 12 billion PHP in sales. As of last week, 4.8 billion PHP worth of units has already been sold just barely a month after it was launched.

The real estate arm of DMC looks promising but we still have to note that DMC is a holding company and at least 65% of its total income is from its subsidiary SCC. Only 15% of the revenue are coming from real estate projects. With SCC declaring special dividends just awhile ago, investors expect DMC to give out special dividends as well a day after.

AREIT, FILRT, MREIT, RCR

Leechiu, a real estate property consultant, reported that the IT and BPO firms leased out office spaces vacated by POGOs. Even if work-from-home arrangements are becoming common, BPOs are still seen to remain in demand. Many firms will indeed take lesser space, but these vacated spaces can be filled by new incoming BPO tenants.

This might be good for office REITs since they will be able to maintain a high occupancy rate. The only issue would be at what price are they renting out these office spaces. POGOs are the reason why rental rates are inflated because they pay premium rates. Now that they’re getting fewer, it might not make sense to think that BPO tenants would pay the same inflated rates. That said, this might affect the dividend income and is something to keep an eye on in the next quarterly reports. 

October 3, 2022

SCC, DMC

The government is not keen on passing a carbon tax as this can make electricity more expensive given that electricity in our country is already expensive due to high coal prices. Around 60% of our power source is generated through coal and taxing 60% of energy in this country is a violation of the law because our country has the right to affordable energy.  Currently, data shows that 29% of the country’s energy mix comes from renewables and the Renewable Energy Roadmap aims to increase that by 35% by 2030 and up to 50% by 2040.

Despite SCC looking for ventures in the renewable energy business, the current economic situation shows that their coal business is going to stay for quite some time. SCC Insiders like Maria Gotianun and Edwina Laperal have been buying large volumes of SCC shares since a few days ago. Many analysts speculate that the declaration of special dividends is close. SCC and DMC insiders have a historical record of buying shares a few weeks before a dividend declaration happens.

AREIT, FILRT, MREIT, RCR

The Philippine peso continued to depreciate against the dollar. The IT-BPM industry in the Philippines claims that this is an advantage because foreigners will spend lesser dollars to fund their operations. Other analysts however do not see this as an advantage since almost all currencies are depreciating against the dollar. Countries that are also a hub for BPOs will have the same advantage as well. I guess we’ll have to wait for reports in the next quarters to see whether the decline of the peso is a positive catalyst in the BPO office REIT sector.

The sentiments towards office REITs are still negative: (1) PEZA accredited BPOs will use lesser office space due to they’re allowed 30% of their employees to work from home and avail of tax incentives, (2) BPOs registered under BOI (Board of Investments) are allowed to have 100% of their employees to work from home with intact tax incentives, and (3) Some BPO firms prefer to give up tax incentives in exchange for WFH arrangements. With lesser office space being utilized, office REIT dividends will surely be affected, and have to find a way to fill up vacant spaces. 

Office rental rates are forecasted to drop by a huge margin when POGOs are banned. POGOs are one of those reasons why real estate properties and leasing rates have been increasing since they pay premium rates. Some government official however rejects the idea of banning POGO because it would do more harm than good. Closing down all POGOs including legal ones just because of the bad deeds of other illegal POGOs does not make any sense. Not only we will lose money from legal POGOs but also incentivize underground POGOs. There are no official decisions yet on what to do with POGOs but something to keep an eye on since office REIT dividend income is heavily pegged to rental rates.

AREIT, DDMPR, CREIT, FILRT, MREIT, RCR, VREIT

All the REITs have reached the oversold level. REIT share prices continue to decline and it seems like they will remain sideways or further down with minimal chances of appreciating. As long as the US Fed is hiking interest rates, then the BSP will likely follow. When that does happen, REIT prices will fall down and mostly stay at a price that gives a dividend yield that closely matches the interest rate of fixed-income securities. The price drop will vary from one REIT to another because some investors will hold or reduce their shares relative to the risk and quality of the REIT they’re holding.

The US Fed claimed that it will only stop hiking interest rates until the US inflation rate goes down to 2%. The US inflation rate is currently at 8.3% and analysts projected that inflation is going to trend around 2% in 2023. Within the assumption that no unfortunate event happens (e.g., COVID, Ukraine-Russia war), then we expect continuous rate hikes both in the US and our country. 

PREIT

PremiereREIT released a preliminary draft of its IPO prospectus. They will be issuing shares at an IPO price of 2.00 PHP/sh trading below the Net Asset Value (NAV) of 2.62 PHP/sh. The final pricing is on October 21, the offer date is from October 26 to November 7, and the listing date is on November 17. All these dates however are tentative.

The projected dividend yield at 2.00 PHP/sh is 6.9% for the year 2022 and 7.2% for the following year. After the final pricing, a 5% discount on the offer price will give a dividend yield of 7.3% for the year 2022 and 7.5% for the following year. For a 10% discount on the offer price, the dividend yield will be 7.7% for the year 2022 and 8.0% for the following year. These are all within the assumption that they’ll be paying out 100% of the distributable income.

PREIT’s assets include the land, buildings, and machinery to be leased by tenants in the power industry. The tenants are SIPCOR and CAMPCOR which are also owned by the Villars and the same time the sponsors of PREIT. The occupancy rate is 100% with an average lease expiry of 9 years. The lease rental rates will either come from whichever is higher between the fixed rental or variable lease. The variable lease refers to the tenant’s annual revenue.

IPO proceeds will be used by the PREIT’s sponsors to acquire and develop real estate properties to be leased to PAVI Green, the renewable energy arm of the Villars. The acquired properties may eventually be infused into PREIT.

PNX

PNX was reported to have its bank accounts locked due to a complaint from Absolut Distillers (a subsidiary of LTG). According to the report, PNX failed to settle its 157 million PHP debt despite numerous demands. PNX on the other hand heard of the news circulating on social media but has not yet received the official copy of the complaint.

Investors of PNX preferred shares (PNX4 and PNX3B) are not happy. If assuming that PNX defaults on its creditors and if no debt restructuring or mediation happens, then most likely the company will have to be liquidated. The creditors are paid first and whatever amount is left is given to preferred shareholders. Most of the time nothing is left for preferred and common shareholders which is most likely the case because of their unhealthy financials. As of June, they have a total debt of 48 billion PHP with only 7 billion cash on hand and liability of 74 billion PHP. 

PNX3B was supposed to be redeemed a year ago but it hasn’t so the dividend to be paid to the shareholders has increased. On the other hand, PNX4’s redemption date is in November and they need to shell out 7 billion PHP. Things are not looking good since a debt of 157 million PHP which is just a chunk of the 48 billion PHP debt can’t be paid.

No new press releases have been disclosed yet as of this writing concerning the debt except that PNX is assuring their investors that they have not ceased operation and are handling the matter. Nobody knows what’s going to happen with PNX or if something will save from it. Last 2020, Dennis Ang Uy attempted to sell PNX after successfully selling 2GO to SM (because they can’t make it profitable). Unfortunately, nobody wanted to buy PNX at that time. Then last July 2021, Dennis made maneuvers on their debts that are about to mature. Probably due to a lack of cash, they instead offered creditors to roll over the debt in exchange for a higher interest rate. Now that it's 2022, more red flags are popping out and many of the preferred shareholders have liquidated their positions at a loss. PNX4 is now trading at 700 PHP/sh which is below the IPO price of 1000 PHP/sh. Preferred shares do not usually trade below the IPO price if the fundamentals of the company are healthy.