December 26, 2022

SCC, DMC, AP, SPC

Malampaya gas field is scheduled for a shutdown in February for 2-week maintenance. 20% of our energy mix in the Philippines is through gas hence the government will have to source energy from alternative fuels. The government did not explicitly mention where the source will be coming from but obviously from coal-fired power plants. That said, we should expect higher electricity rates for February.

This would be beneficial to coal-fired power plants which should allow them to increase their energy sales but not all energy companies will perform well. For instance, SPC has not been doing well lately ever since typhoon Odette. Their performance continued to decline quarter-on-quarter and it seems like a renewal of power supply contracts remains a challenge for them due to stiff competition. SPC which is known to be a high-yielding dividend stock in the past is now giving dividends from internally generated funds instead of sourcing it from surplus in net income. The last dividend they gave is 50% lower than what they usually give historically. Moreover, SPC used to declare dividends twice a year, however, it’s almost the end of the year and the 2nd tranche of dividends has not been declared yet or might never be declared. 6 months ago, SPC made a statement about adding renewable energy to its portfolio but until now there is no released statement of its progress.

PNX

PNX4 preferred shareholders’ nightmare unexpectedly came.  The dividends have been deferred after the dividend payout schedule has been moved from November 22 to December 19 then From December 19 to an unknown date. PNX4 deferring payment is making history as this has never happened in the history of preferred shares in my years of investing in the PSE. In PNX’s defense, they will not be giving dividends as they will use the cash to ensure the long-term sustainability of the business. That being said, the share price of PNX4 continued to further drop to the 300 PHP/sh range. Ever since Dennis Ang Uy had problems repaying the debt to creditors in the past few months, many investors have already started selling their PNX4 shares. The negative sentiment continued to spiral when PNX decided not to redeem PNX4 this December. At the trading price of 300 PHP/sh, the dividend yield is now at 25% per annum and we have not factored in yet the dividend step-up rate of 8.5% since PNX4 chose not to redeem the shares.

Buying PNX4 shares at 300 PHP/sh gives a “good to be true” dividend yield. Moreover, that would give a gain of 70% if PNX finally redeems the shares at 1000 PHP/sh. The problem is that nobody knows when will PNX continue to pay dividends and when will they be able to have enough cash to redeem PNX4. For context, they have ongoing PNX3B preferred shares which are already past their redemption date and we’re not sure which of these preferred shares are going to be prioritized for dividend payouts and redemption. The only good news left for both of these preferred shares is that they are cumulative. A cumulative preferred share means that the deferred payout for the quarter will be carried on the next dividend payout schedule.

TEL

TEL has been on the spotlight last week due to the 48 billion PHP capital expenditure (CAPEX) overrun debacle. It was supposed to be in the 100 billion PHP range but they finally got it down to 48 billion PHP after further auditing their finances. They have not traced any form of corruption or fraudulent transactions. They do however admit mismanagement in which they overspent their budget on 5G network equipment. This equipment however is still in warehouses not being used or planned to be used in the future. In other words, these assets are just there depreciating in the meantime. Before TEL made the press release of their CAPEX issue, they get to know about it a few months before. However, the budget overrun has been happening since 2019, and investor confidence in TEL management is certainly and negatively affected.

That being said, TEL made a statement that they will be spending lower CAPEX in 2023 and hope for a rebound in 2024. The meaning of their financial statements which many investors rely on for valuation is certainly affected. Investors are usually forward-looking in which they weigh and derive a speculative future price of a stock and position it as early as possible. Would TEL’s financial statements could have been better if there were no budget overruns? Or could’ve been worse? Nobody knows and everybody is free to speculate. Some investors who don’t like highly speculative scenarios rather played safe by deciding to liquidate their shares and are in a wait-and-see mode before they re-purchase again TEL shares at a fair price. S&P made a statement that the budget overrun and the increased risk on governance might affect TEL’s investment rating. Institutional investors who rely on these ratings and have holdings in TEL will act on it by either delisting TEL from their list or lower down the number of shares they hold. There are many local and foreign institutional investors (eg., MSCI, FTSE, and so on) holding TEL and we’ll soon find out when they do their scheduled rebalancing. If it holds, then we should expect TEL’s share price to be volatile.

As for dividend investors, TEL is going to borrow additional money to maintain regular dividends. Sounds good but dividends coming from debt do not bode well in running a healthy business. Giving out dividends is good if it’s from unappropriated retained earnings. TEL is already carrying a pile of debt and requires high CAPEX to remain competent in the market. Typically, giving out dividends to investors should be the least of their concerns and they should focus on increasing the value of the business by using the cash to grow and/or repay debt and any surplus can be given as dividends. For context, the expected dividend payout ratio for TEL is 88% which is already too high and close to the 90% payout ratio of REITs. A 90% payout ratio for REITs is never a concern since it is a different investment asset and REITs are not expected to grow. That said, dividend investors are uncertain about what TEL is trying to do since a high dividend payout ratio is rarely equated to growth. They may be maintaining regular dividends so that the share price will not fall further.

The good news for TEL is that the market share for the broadband and telecommunication sector is only divided between TEL, GLO, DITO, and CNVRG. That said, TEL’s core business and fundamentals may remain strong moving forward and could bounce back in 2024 as they claim.

PGOLD

PGOLD is not a high-yielding dividend stock but they have consistently been giving dividends annually since 2015. One of the reasons why dividend investors avoid this stock is because there is no dividend policy as to how much of the net income is being given as dividends. Things have now changed as per the last board meeting of PGOLD. The board of directors voted to adopt a new cash dividend policy in which they will pay at least 30% of the core net income as dividends to shareholders. It might not be that much of a boost in dividend yield but historically, for the last 5 years, the net income of PGOLD has been increasing year-on-year. With the just announced dividend policy, and if the net income continues to increase in the following years, then we should expect dividend growth. A dividend investor might be getting a lower dividend yield today but it could increase year-on-year.

December 12, 2022

DMC, SCC, SGP, MER

The power arm of DMC and SCC are preparing for the summer which is usually the time the power demand is high. SCC reported that they’re spending money for the maintenance of their power plants in preparation for the steady demand for electricity next year. DMC on the other hand is spending money to boost further their off-grid energy solution in Masbate due to strong demand. DMC is also looking to add solar energy to its portfolio next year. Currently, DMC power includes diesel, bunker, and thermal energy in its portfolio distributed in Masbate, Palawan, and Oriental Mindoro. DMC’s power arm specializes in off-grid energy where they offer energy to places that are not connected to NGCP’s grid.

Isidro Consunji, chairman of DMC, forecasted that their power arm will do better in 2023 than their performance in 2022. Coal and power will continue to drive the company’s growth. They expect power prices to continue rising next year and will only dampen with the importation of LNG which will start arriving in significant volumes in 2024. Isidro’s assessment is in line with the Department of Energy which also sees that energy prices will increase next year.

This December alone, MER already reported an increase in power prices. Prices of fuel that will run the power plants remain elevated. The Luzon grid has been placed on yellow alert thrice this November-December due to steady demand but dwindling supply. Some plants are on the forced outage and some are running on derated capacities. On the other hand, SMC terminated their supply contract due to losses and they can’t afford to charge the same rate as what is in the contract. They instead chose to sell their power in the electricity spot market in which they will match the higher prices of electricity.

As for SGP and MER, there’s not much to say but whatever happens, they’ll remain in a defensive position in the power market. NGCP, the sole asset of SGP, will continue to get paid to transmit energy while MER distributes energy. Dividends will be steady for sure.

DMC

Outside the power sector, DMC has plans to enter the agriculture sector. They are planning to enter the Palm oil industry. There are no specific details as of yet but as of 2020, the Philippines is the 38th largest exporter and the 11th largest importer of Palm oil in the world. That said, it gives a notion that there is potential for entering the Palm oil industry.

DMC, NIKL

The nickel industry remains sideways. DMC’s mining arm saw its net income decline for the 3rd quarter due to lower demand and average nickel prices. Unfortunately, it is the same situation for NIKL, and they only ended with a 2% increase in revenue. What’s keeping DMC and NIKL’s nickel mining business steady is the foreign exchange rate from which they are benefitting since they get paid in foreign currency. I wrote about NIKL’s earnings 2 quarters ago and it’s still the same situation today. Now that the peso is getting stronger this month, it will be interesting to see their performance in the 4th quarter. The peso’s strength this December is not a guarantee that it could sustain. Many analysts speculate it is due to the Christmas season and that many OFWs are remitting their earnings to the Philippines. Moreover, more rate hikes from the Fed are expected in the following year which could further weaken the peso.

Nevertheless, nickel prices are forecasted to remain elevated until next year. DMC and NIKL would just have to find ways to sell more of their nickel.

PREIT, VREIT, DDMPR

PREIT is going to be listed on the 15th of December. As most already know by now, PREIT has been offered at a 25% discount. At the IPO price of 1.50 PHP/sh, this gives a dividend yield of 9.56% within the assumption of a 100% payout ratio. In addition to the attractive dividend yield, PREIT is trading below its NAV of 2.26 PHP/sh. 

Fundamentally good as it sounds, the negative sentiment towards Villar remains to be seen since most of the companies he offered to the public are trading below their IPO and there is not much support for share price appreciation. This time around, there is a possibility that Villar’s REITs might move differently. Many analysts do not see much growth in Villar’s REITs because they are not the leader in the Mall and Power industry. Moreover, sentiment remains negative even though the company promises growth through infusions. For context, many companies did not remain committed to their promises as per the prospectus during their IPO.

Similar to DDMPR, what would probably sustain VREIT and PREIT’s share price is their dividend yield. It is mostly pegged to the movement of inflation and interest rate. PREIT, VREIT, and DDMPR share prices would probably end up in dividend yields that match the interest rates of fixed-income assets. For context, unlike other Villar non-REIT companies, VREIT share price is not on a free-fall but stayed at a price that is close to the interest rates of bonds and similar assets.  That said, PREIT, VREIT, and DDMPR are for dividend investors not looking for growth. Among the three, PREIT would probably be the most stable since it will have a 100% occupancy rate for the next 9 years. 60% of VREIT’s tenants are Villar companies hence that gives some sort of stability in the occupancy rate. DDMPR would be interesting to watch since around 40% of tenant leases will expire in the year 2023 and nobody knows what would happen after that.

AREIT, MREIT, RCR

Cushman and Wakefield, a real estate service firm, forecasted that office space demand is expected to pick up next year in Manila. As of the year 2022, there is a supply of approximately 600k square meters available but will be reduced to 300k square meters in the year 2023 due to the demand for office space. Some real estate developers may not reach their completion until 2023 due to the pandemic. Meanwhile, other real estate developers have postponed projects indefinitely. That said, Cushman and Wakefield forecasted supply to go down gradually to up to as low as 100k square meters in 2026. With tight supply and steady demand, office space rental rates are expected to go up. Due to the forecasted gradual decline of supply in office space, Cushman and Wakefield expect a year-on-year growth of rental rate by approximately 2.6% annually until 2026. Cushman and Wakefield reported that it will be the IT-BPM sector flocking into the country in 2023 to take up the available office spaces.