January 30, 2023

GLO, MER

February is nearing before the next MSCI rebalancing. Rumors were floating a few weeks ago that GLO and MER will be removed from the index. If true, institutional investors that track the MSCI will have to sell their GLO and MER shares which could lead share prices to drop at significant levels.

There is nothing wrong with the business fundamentals of GLO and MER. GLO still holds a huge market share in the telecommunications sector. On the other hand, MER continues to monopolize the electricity distribution service. Meanwhile, their power arm segment is expected to benefit from the continuing rise of demand for power paired with limited supply.

Their removal from the MSCI index is probably pegged on the stock market sentiment. Despite their stable performance, the share price has been trading sideways for months as well. Hence, MSCI will have to drop them and replace them with stocks that have better share price sentiment.

For dividend investors looking for stocks that give reliable cash flow and some upside on capital appreciation, the MSCI rebalancing could be an opportunity to add more shares at lower prices. MER and GLO dividends have remained stable for the last few years which at the current trading prices gives a dividend yield of 5.5% and 4.6% respectively. The current yields however are not beating the trailing twelve months' inflation rate at 5.8% but could probably do so when the MSCI rebalancing happens. Many analysts have predicted that inflation has peaked and will start on a downward trend moving forward to as low as 4.5% by the end of this year.

MER, DMC, SCC, AP, SGP, CREIT, PREIT, NIKL

Some analysts think that the energy sector will benefit this 2023. This is due to the full reopening of the economy and the power demand will increase. It is within the forecast that each person on average will consume at most 1,000 kWh. That is a 55% increase from the 550 kWh/person in the year 2000. The issue is that demand is increasing at a faster rate than supply. The DoE (Department of Energy) forecasted that there will be 12 yellow alert warnings in Luzon for the rest of the year due to insufficient power reserves in the grid. They specifically mentioned that the yellow alerts will likely happen in March, April, May, June, August, September, October, and November.

Any company that has contracts and holds a significant market share in the energy sector will benefit. Those that are into renewable energy will continue to maximize their sale of energy since they are given priority in the market. However, renewable energy only accounts for less than 15% of the energy mix. The rest will have to be sourced from natural gas and coal-fired power plants. As of today, 60% of our energy mix is from coal and 20% from natural gas. Malampaya, from which we source natural gas is nearing its lifespan in a few years. The government plan is to import natural gas but remains a plan and no definite information to know how much it will contribute to the energy mix. What’s for sure is that coal-fired power plants are not yet going away at least in the short to medium term. Oil prices remain elevated in the market hence power plants that use oil as fuel will pass on the cost. With rising demand but limited supply, power plants will be selling energy at higher rates in the spot market. Meanwhile, electricity distribution and transmission services will have a higher utilization rate.

Not only analysts but some insiders in the energy companies are bullish as well. AP insiders like Sabin and Danel Aboitiz have been continuously buying AP shares since May of 2022. Danel’s buying activity has further increased last December of 2022 and this January of 2023. They have accumulated a total of almost 5 million shares at an average price of 31.83 PHP/sh since May of 2022. On the other hand, SCC insiders Maria Gotianun and Edwina Laperal have been buying shares from last year until this January of 2023. They have long forecasted a year ago that energy prices will remain elevated in the short term.

NIKL is known to be a dominant player in the nickel mining sector. NIKL however have a power arm in which they are ramping up their investments in the power segment due to foreseen profitability. A few weeks ago, NIKL has increased its effective ownership of EPI to 95.8% up from 86.29% a quarter ago. EPI is the renewable energy arm of NIKL. We have to take note that the earnings from their power arm only accounts for 3% of the consolidated revenue and the rest of it still comes from the sale of ore and limestone. However, their power arm segment’s revenue is getting better quarter-on-quarter while the sale of ore and limestone remains sideways. A quarter ago, NIKL sold and exported a lower volume of ore and limestones, the only reason why the revenue remained flattish is due to the high exchange rate in currency.

CREIT and PREIT are into real estate whose guaranteed earnings are mostly from rentals. However, we have to note that CREIT can give an annual special dividend if the tenants can reach energy sales that exceed their quota. On the other hand, PREIT will give dividends from either the rental lease or the energy sales, whichever is higher.

AREIT, MREIT

After more than 6 months of waiting, SEC has finally approved the property-for-share swap with ALI. In exchange, AREIT will infuse Cebu-based office buildings into the portfolio which should increase the dividend income. Last August 2022, AREIT’s investment strategy is to infuse an average of 100k square meters annually and may acquire mall assets depending on economic conditions. ALI has around 800k square meters of gross leasable space for offices that can be infused into AREIT in the next few years. For this year, investors are waiting what assets are going to be infused. 

MREIT has a pending asset infusion as well which they filed as early as April last year. As of today, it is still pending but at least we’re seeing movements since AREIT’s property-for-share swap has already been processed. MREIT failed to deliver the 2022 1.00 PHP/sh dividend target due to the delay in infusion.

Investors are now pricing in “SEC” as part of risk management. Even though how prompt a company is on wanting to deliver value to their shareholder, the SEC control the time of approval. The SEC, AREIT, nor MREIT have not given any explanation for the delay. That said, when there is a planned infusion of assets, investors need not rush and buy shares early.

SPC

KEPCO, a South Korean energy company and a partner of SPC in operating coal-fired power plants in Cebu for the past few years is now divesting its stake in the partnership and its ownership in SPC. The sale is expected to happen this year and bidders are currently doing their due diligence. Interestingly, SPC also has an interest in acquiring KEPCO’s shares. KEPCO in their defense said that they will focus their investment in renewable energy and that they were given the regulatory approval to venture into the renewable space.

As far as many are concerned, KEPCO is not like ACEN which ditched traditional energy and ventured into the renewable energy space regardless of whether it is profitable or not in the short term. In other words, KEPCO is not known to be aggressive in renewable energy and they just follow where the money currently is.  That being said, we can only speculate that the reason why KEPCO is breaking away from SPC is not that they want to entirely venture into renewable energy but rather due to SPC not being profitable. Since typhoon Odette a year ago, SPC has not been performing well and its profitability is on a decline. As a result, dividends have declined by more than 50% year-on-year. The challenge for SPC at the moment is in the renewal of power supply contracts due to stiff competition. Hence, KEPCO is now changing its stance to go all-in on renewable energy since it is easier to get power supply agreements.

For context, SPC had plans and also received regulatory approval to venture into the renewable space a year ago. If both KEPCO and SPC have plans to venture into renewable energy, why would KEPCO choose to divest from SPC and why not help each other instead? Nobody knows but most probably due to disagreements on plans and prospects moving forward.

GMA7

GMA7 is partnering with Wavemaker 360 Health, a venture fund based in the US focused on the health-tech sector. Wavemaker 360 was launched in 2018 and funds startups in the healthcare industry. They have at least funded 50 companies distributed in the US, Europe, Canada, and Asia. Wavemaker 360 Health’s portfolio exceeds a 2.5 billion USD valuation. What makes Wavemaker 360 Health different from other venture capital firms is that they connect these startups to a network of healthcare organizations, industry executives, and physicians. The partnership with GMA7 will allow Wavemaker 360 Health to fund startups in the PH and help them expand outside the PH, while simultaneously helping US-based healthcare companies to expand in Southeast Asia. 

Integration of technology in the healthcare sector is becoming prominent in the country. This was due to the impact of COVID-19. GLO is ramping up its efforts to consolidate its healthcare apps that are mostly found in GCash. GLO envisioned that their KonsultaMD will be valued as the next unicorn in the country. To give context as to why competition in the healthcare sector is heating up, research shows that the CAGR (compounded annual growth rate) of Health Tech Market in the PH is approximately 29% from 2020 to 2025. From 2019 to 2020, there was a 160% increase in demand for online consultation, a 75% Internet penetration rate, and a 12% increase in the healthcare budget. There are only at most 30 prominent players sharing the health tech market whose services are distributed in Online Consultation, E-Pharmacy, and Healthcare IT solutions. That being said, we can understand why Wavemaker 360 Health is wanting to enter the PH Healthcare market.

Though it is nice and promising to look at, we do not have any detailed information as to how GMA7 is going to capitalize on the partnership. We can probably tell for now that at least GMA7 has more room for growth but we cannot speculate a ballpark value on the return on investment. I guess we’ll have to keep an eye on the quarterly financial reports.

CREIT, DDMPR, FILRT, MREIT, RCR, SGP, DMC

The PSE has announced the following updates on the index rebalancing:

• DMC has been removed from the Midcap index and has been transferred to the PSEi index. We should expect fund inflow towards DMC or maybe not. It has been long projected that DMC is going to enter the PSEi and many investors have already priced this in before the announcement. 
• FILRT, MREIT, and RCR have been added to the Property and Midcap index.
• SGP has been added to the Midcap index.
• DDMPR has been removed from the DivY and Midcap index.
• FILRT has been removed from the DivY index.
• CREIT has been added to the DivY index.

As of today, there is no known institution that tracks the Midcap index therefore the rebalancing might not have a significant effect on Midcap stock share prices. 

In August 2022, The DivY index is among the eligible product of the mutual fund known as PERA (Personal Equity and Retirement Account). Currently, there are 4 certified administrators of PERA and they are LandBank, Metrobank, PNB, and BPI. After going through their PERA products, it seems like none of them yet are offering a fund that tracks the DivY index. Although it is probably worth noting and checking from time to time since they will have a significant impact on DivY stocks' share price during the next index rebalancing.

January 16, 2023

MWIDE

MWIDE has plans to redeem MWP4A preferred shares before May 27. MWP4A shares have been trading below the IPO price last week. At the trading price of 97 PHP/sh, there’s an upside of 3% if redeemed at 100 PHP/sh. MWP4A preferred shares has been issued in the year 2020 with a dividend yield of 4.75% and are to be redeemed 2.5 years later. If not redeemed, there will be a dividend step-up rate that will match the 5-year BVAL as determined by the Bankers Association of the Philippines or the BSP. Otherwise, if the dividend step-up rate cannot be determined, it will be in the floor rate of 8% as per the IPO prospectus released 2 years ago.

To redeem the MWP4A shares and avoid the dividend step-up rate, MWIDE plans to offer a new series of preferred shares which would probably have the ticker symbol of MWP5. If the proceeds from MWP5 are not enough to cover MWP4A, MWIDE will use internally generated cash and other funding (most likely debt). The initial details of MWP5 are not out yet but it is expected to be offered this month of March and will be redeemed 3 years later. Currently, the interest rate benchmark for a 3-year tenor is around 6%. Since preferred shares are riskier than bonds, the dividends are usually higher than the benchmark. With that being said, there is a good chance that the dividend yield of MWP5 will be around 6% to 7%.

The dividend yield might be competitive but we have to understand the risks. Preferred shares as we already know are riskier than bonds. In theory, preferred shares are a form of debt but on paper they are equity. The company is obliged to pay for its debt but not obliged to pay dividends and most especially if its income is dwindling. Their profit margins are still in negative territory ever since the pandemic. Their debt is currently high and around 60% of the assets are financed by creditors. As per their financial statements, in the long term, around 40% of the assets are financed by creditors. Again, take note that preferred shareholders are not “creditors”. In that sense, when it is time to distribute retained earnings to stakeholders, most of it will go to creditors as per the debt repayment plan, whatever is left goes to preferred shareholders, and the rest goes to common shareholders if any.

On a positive note, the economy is already reopening and MWIDE’s projects are starting to pick up, and hopefully, the profitability goes back to the pre-pandemic levels. They are currently liquid enough to pay for any of their short-term obligations hence there is a high chance that there will be enough cash from the retained earnings that can be distributed as dividends to preferred and common shareholders. Unlike PNX preferred shares, MWIDE is known to be one of those companies that regularly issue preferred shares but never had a history of deferred dividend payouts. 

MREIT

MREIT released their 4th quarter dividend earlier than expected which is lower than last quarter’s dividend. It seems like the annualized dividend of  1 PHP/sh has not been achieved for the year 2022 due to the delayed infusion of the asset. To be fair, MREIT filed the infusion of the asset as early as April, and has been pending review by SEC until today. MREIT however expects the infusion of property to happen in the first quarter of this year.

MREIT’s 3-year strategy plan has not changed much. They to aim continuously reach 500,000 square meters of leasable space by the end of 2024. When the delayed infusion of the asset from SEC materializes, MREIT would have already achieved 325,000 square meters of leasable space. That said, we should expect around 175,000 square meters worth of leasable space to be infused until 2024. MREIT has also changed its strategy such that it will not concentrate solely on office space but diversify on other rental properties under industrial, logistics, and warehousing.

FILRT

FILRT made a press release that they have fully paid their debt which matured on January 7 of this year. This looks good because that’s one big liability that has to be crossed out of the list and in theory, at least more of the earnings will be distributed as dividends to shareholders than repaying debt. The problem right now is they did not disclose how they paid the such debt. Two quarters ago their financial statement is not looking good because of the debt. They are not liquid enough to pay for such debt and were thinking of issuing a new bond or taking out a new loan to refinance the debt. There was no new disclosure of FILRT’s bonds so we can only speculate that they took out a new loan. We’ll have to find out in the next quarterly report how much the financial statement has improved.

FILRT’s 3-year strategy has not changed as well. They continue to pursue the agreement that they signed with FLI. There are a total of 8 buildings in the pipeline that are identified to be infused into FILRT’s portfolio sometime between 2023 to 2025. These buildings are found in Clark, Pampanga, Makati, and Pasay. Unlike other office REITs that have already plans on diversifying different kinds of rental properties, FILRT still caters mostly to office spaces.

CREIT

CREIT is planning to issue bonds this 2023. The proceeds from the bonds will be used to acquire a solar rooftop system and parcels of land in Batangas. The solar rooftop system will be leased out for 20 years to an affiliate solar power operator. On the other hand, the acquired-to-be land in Batangas will be leased out to solar power developers and operators for 25 years. That being said, a near 100% occupancy rate and a weighted average lease expiry of CREIT of around 20 years remain to be strong. CREIT is probably a good bet for consistent and defensive long-term dividend investing.

A year ago, CREIT disclosed around 8 projects in the pipeline that will be included in the portfolio that is still under development. These projects are mostly land, solar farm, and river hydro and distributed in places like Zambales, Batangas, Pangasinan, Laguna, Bulacan, and Isabela. These projects are expected to be completed this 2023. That being said, there is still possible growth for CREIT starting this year and onwards.

RCR

As of now, there is nothing new with RCR’s recently disclosed 3-year strategy plan. They are still intent to grow their portfolio by infusing at least 1 to 2 assets per year. Last March 2022, they were able to infuse 2 assets from RLC their parent company. Many investors are waiting for new disclosures on what assets are going to be infused this year. Two years ago around October 2021 and after their post-IPO, RCR claimed that they will be infusing around 442,000 square meters of leasable space into their portfolio. That being said, after the 2 assets that were infused a year ago, there are approximately 392,000 square meters of leasable space left to infuse from hereon. RCR however mentioned that there’s no definite timeline and infusion will be subject to market conditions.

DDMPR, PREIT, VREIT

The 3-year strategy plan of the said 3 REITs are not convincing long-term investors that are looking for growth. They only disclosed a 3-year strategy plan for formality and requirements sake. The content of their disclosure is all generic such that they’re all claiming to be on the lookout for opportunities in the market. In reality, there are no immediate plans for the next 3 years. 

To be fair, the no-growth of PREIT and VREIT have already been conditioned and priced in by the investors because it has always been in the DNA of Villar management. With no infusions in sight, many analysts are forecasting DDMPR’s dividend income to decrease since at least 35% of the lease will expire this year. For context, at least 60% of the office spaces are rented by Gaming-Related BPOs and POGOs. The probability of renewing the lease contract is low because of the continued negative sentiment toward POGO. DDMPR made no disclosures on how are the contracts doing. They did however disclose that they are diversifying their tenant mixes such as banking, insurance, financial services, government agencies, technology, media, and services. That disclosure alone can be taken as an indicator that the renewal of contracts is shaky.

Another factor that is concerning investors about DDMPR is their disclosure that they may also consider divesting mature and non-core properties. Technically speaking, this is just a way to make the company look good on paper. For instance, assuming that 60% of office space will remain vacant, the occupancy rate is going to be too high to look at and investors are not going to be interested in purchasing shares. Hence, disposing of that 60% of the portfolio will increase the overall occupancy rate on paper. Doing so, however, will decrease the NAV (net asset value) per share which is usually a common metric by many REIT investors to know if they’re purchasing shares at a fair price. With that being said, DDMPR is currently seen as undervalued since it is trading below the 2.30 NAV/sh. However, would DDMPR remain undervalued after they dispose of assets from their portfolio? Nobody knows but investors who have been buying DDMPR shares before any asset disposal are affected.

Looking back at DDMPR’s previous disclosures, they were supposed to infuse Double Dragon Tower and Ascott DD Meridian Park after completion. The tower has already been completed but only a small amount of income is being added to the income statement. DDMPR however made no official statement about the infusion of the tower and probably because it is not yet that profitable. The Ascott DD Meridian Park on the other hand which was supposed to be completed in the year 2020 is still under construction. However, some sources say that it is already close to completion and is going open this 2023. But then again, there are no official disclosures from DDMPR concerning any infusion.