March 20, 2023

ANS

ANS is starting to gain traction in share price recently however the trading volume is still low hence it is remaining an illiquid stock. It is unclear what’s pushing the share price upward but during the last 5 years, there has been growth in dividend income. They used to average a regular dividend income of 0.20 PHP/sh before the pandemic. Starting in 2018 and onwards, they’ve increased their dividend to 0.50 PHP/sh but half of it is mostly special dividends. Special dividends are unsustainable hence it is called “special” but even so, ANS has been giving them out regularly. Starting last year and this year, things have changed and 0.50 PHP/sh is now the regular dividend. On top of that, they still give out special dividends. A year ago, they managed to release a total dividend of 1.00 PHP/sh.

It is unclear what’s increasing ANS dividends but we are free to speculate and at least feel whether these increases are sustainable. ANS is a holding company and they are into many kinds of businesses however there is only 1 business that has been consistently and significantly contributing to the overall revenue. Phelps Dodge Philippines (PDP), one of the market leaders in cable and wire manufacturing, is contributing at least 70% of ANS’ annual revenue for the last 5 years or so. However, the net income of ANS has been going up and down year on year with no clear trajectory. This is mostly because other businesses that ANS is holding are sometimes not performing well and pulling down the net income due to significant losses. For the past 5 years, revenue from PDP has remained stable and not increased and investors wonder how is ANS able to increase its dividends.

Looking at ANS’ financials, they had little to no debt for the last 5 years and always had an average of 13 billion PHP worth of cash and short-term investments year on year. For cash alone, they are keeping an average of 2.8 billion PHP year on year. We can safely speculate here that dividends are coming from these cash and short-term investments. From 2018 to 2023, they’ve been shelling out 1.25 billion PHP to 2.5 billion PHP year on year as dividends. 

For sure declaration of dividends will mostly be there since the wires and cable business is very important in the market. In terms of sales, PDP is in the top 4 leading manufacturers. PDP Energy’s clients include telecommunication companies, contractors, building developers, power companies, government corporations, and other industrial companies. At least 75% of PDP products are mostly used for buildings and 14% for power cables.

What’s not sure is if the dividend income will remain stable since unlike other dividend stocks, ANS has no dividend payout policy that dictates how much of the net income is to be given as dividends annually. There is a pattern though, ANS had always been giving dividends in which the yield at the annualized share price has been at par or higher than the annual inflation rate. Will the dividend income go down if inflation goes down even though they have more than enough cash saved? It’s possible since inflation was low in the past and ANS had been keeping an amount multiple times higher than the dividends paid at that time and they chose to pay a lower amount as compared to today. It’s just speculation and that’s what we’ll have to find out next year since inflation is forecasted to go down this year.

GSMI

Since its IPO in 2005, the share price of GSMI has been trading flat until 2018. However, for the last 5 years and in a 5-year time frame, GSMI is the second top-performing stock with at least a 450% increase in share price. I cannot tell what happened in the past as to why GSMI has been trading flat since the copy of disclosures and financial statements during those times are not already available today, however, 2017 is the turning point of the business. That was when somewhere and something changed in the management in which they were able to double their net income year after year. From there on moving forward, they continued to double their net income annually. From a net income of 360 million PHP in 2016 to a high of 4.4 billion PHP in 2022. For most investors, 5 years is more than enough criteria to observe the resilience and profitability of a business since they will go through different economic cycles. Even during the pandemic when lockdown restrictions are imposed, GSMI performed well and their net income end up higher year-on-year. 

GSMI is not known as a dividend stock in the past since they never gave out any cash dividends since their IPO. However, ever since their cash flow improved a few years ago, the management decided to include a dividend payout policy in 2019. The policy states that up to 50% of the net income can be declared as dividends to shareholders. From there on, GSMI has been giving out dividends every quarter which has been growing year-on-year relative to the net income.

This is not a recommendation to buy GSMI since the share price already went up significantly especially since there is an upcoming dividend ex-date. Nobody knows if the share price will remain stable or go down after the dividend ex-date. Though it would probably be best to put GSMI on the watch list since there is value in this business. They’ve been giving out competitive dividends and the yield at current trading prices is higher than the annualized inflation rate. However, GSMI is trading at an all-time high and we do not want to be left holding the bag at high prices so it is never a good idea to buy the stock now just to chase the dividends. What we want is for the price to go down then buy it at a discount or at least buy at a price where there is a margin of safety.

AREIT

Due to the reopening of the economy, malls are starting to be profitable again. That said, AREIT will be infusing mall properties from their sponsor ALI through an asset-for-share swap at 37 PHP/sh. These assets will add 190k square meters of gross leasable space with a 99% occupancy rate and an average lease expiry of 14.5 years. As per the disclosure, the infusion will potentially increase the dividend income by 9% (not to be mistaken as a 9% dividend yield). AREIT continues to deliver its promise to its shareholders to infuse an average of 100k square meters annually until 2025. 

The transaction will happen sometime in April of this year but will have to be approved first by the SEC. A year ago, the last infusion of AREIT happened in April as well but the SEC had only approved it in January this year. That said, there’s no need to rush buying AREIT shares due to how slow the SEC review and approve the said infusion. The dividend income will only increase after SEC’s approval which is why even though AREIT infuses assets annually, there would be times when the dividend income stays flat for a while. For context, MREIT has a pending infusion as well which they submitted to SEC last April and as of today, there’s still no word of it. 

TEL

TEL disclosed a week ago that they are purchasing Sky Cable’s broadband business from ABS for 6.75 billion PHP. Before the revocation of ABS’ franchise, 70% of its revenue are coming from its media and studio entertainment business segment while the rest of the revenue is divided among Sky Cable and others. After the revocation of their franchise, their media and studio entertainment business segment is gone along with some others. As of last year, ABS is left with only 2 business segment which is content production/distribution and Sky Cable. I am not sure where ABS is heading but they did mention that they want to focus on content creation hence they sold Sky Cable to TEL since they need the funding and cash to repay debt.

Within the fixed broadband market segment, TEL holds a nearly 50% market share while the other half is divided among GLO, CNVRG, DITO, and Sky Cable. As of 2020, Sky Cable holds at least 7% of the fixed broadband market which is a significant amount that can be added to TEL. The transaction would further strengthen TEL’s market share coverage. Sky Cable rakes in an average of 9.2 billion PHP annually in revenue as per their financial statement. TEL paying to own Sky Cable for 6.75 billion PHP seems like a good move in relative to the annual revenue it can provide. The only issue is that it is a business that requires high capital expenditure and Sky Cable annually spends at least 7 billion PHP to maintain operations and an additional 1 to 2 billion PHP for general and administrative expenses. That said, Sky Cable has some years in which they end up with a negative income. TEL who is a pioneer in the fixed broadband business could find ways to make Sky Cable profitable by changing internal policies and lower down costs.

March 6, 2023

CREIT, AP

A month ago, the government has extended the suspension of Feed-In Tariff Allowance (FIT-All) for the next 6 months. FIT-All is a monetary amount that is given to renewable energy generators for every unit of electricity they contribute to the grid. It is an incentive to promote the development of renewable energy in the country. The suspension of FIT-All has been going on since last year due to the high inflation rate. The government does not want to burden the population with higher electricity costs. With the inflation rate still rising as of today, we do not expect the FIT-All suspension to be lifted anytime sooner. 

Though it might look bad for renewable energy power generators, losses from the FIT-All could be offset by the rising electricity cost. The good thing about renewable energy generators is that the power they produce is prioritized for purchase before others. They usually have a contract of up to 20 years for a fixed rate payment that is usually higher than what’s in the market.

A few indicators are already showing why electricity prices will continue to increase in the next few years. Malampaya gas field which we source natural gas is expected to deplete in the year 2027. A few weeks ago, Malampaya underwent maintenance. During that time, natural gas only contributed 10% of the energy mix which is down from the usual 20%. Long-term LNG contracts with deliveries before 2026 have been reported to have been sold out hence LNG is going to be an expensive and unreliable fuel source for the Philippines after Malampaya’s depletion. Meanwhile, NGCP is already sending out a warning of a thin power supply this summer due to higher demand caused by the reopening of the economy.

With the above-said discussion, we are not sure how CREIT and AP will be affected since it is difficult to gauge every deal they have made. What’s certain is that 27% of the energy produced by CREIT’s tenants is under FIT programs. With the suspension of FIT-All, we are not certain of its impact on the overall revenue and whether it could still reach the required energy sales quota for them to give out special dividends to CREIT shareholders. AP on the other hand has around 50% renewable energy in its portfolio but only 17% of which benefits from the FIT-All program.  The percentages of FIT-All are small in CREIT and AP’s portfolios hence the suspension might not do much damage to their core income. For context, AP just declared their annual dividend a week ago amounting to 1.87 PHP/sh, a 29% increase from a year ago and the highest so far since 2009. Note that AP has a dividend payout policy of paying up to 50% of their net income and the increase in dividends mean something on their net income for 2022 even if it hasn’t been officially released yet. Though we can imagine the possible further surge in income if the FIT-All has not been suspended, then again, what we can probably learn from here is that high electricity costs and FIT-All have a low chance of being altogether happening at the same time.

GLO, TEL

GLO reported that it is investigating the use of LEO (Low Earth Orbit) satellite technology as an option to expand its services to far-flung areas. They partnered with Lynk Global and conducted a field trial a week a few weeks ago. Lynk Global is a company based in the US whose services provide broadband communication around the world using a network of LEO satellites. They’ve been around since 2018 and their mission is to provide affordable communication in remote or underserved areas. Lynk Global will provide the technology while GLO will handle the distribution. Meanwhile, TEL also disclosed last November that they have been testing space-based Internet and have going around checking out satellite providers whether it is economically viable in our country. There are no new updates as of to date.

The technology looks promising but the question is if it is profitable within the Philippine context. What we do know is that they are costly. Starlink alone charges $100 a month plus an upfront cost of $500 for the equipment. The reliability is also questionable since LEO satellites are known to not perform well in bad weather conditions and signals are vulnerable to interference. Most importantly, as per the Philippine Statistics Authority, only 15% of the population does not have access to the internet and it is unclear how many of them are in remote areas.

LEO satellite is not a new technology since it has been launched in the 1960s but was only made commercially available in the early 2000s. Never in the past that both GLO and TEL have opted to at least offer this option to expand their coverage. GLO and TEL are reactive companies, at least in the telecommunication sector. In that sense, they only innovate if there is a need. They do not proactively improve their service not unless they are threatened by new market players. They concentrated the expansion of their towers mostly in profitable areas then suddenly shelled out money for expansion when DITO was introduced as a new market player. They ramped up the inclusion of 5G technology when they realized that DITO is going to offer it to their customers where 5G has been existing for quite some time already. TEL ramped up the spending of its infrastructure by building more cable landing stations to increase Internet speed in the country but they only did so when CNVRG entered the market. Now that Starlink entered the market, both TEL and GLO are now again trying to catch up to secure their future.

With only 15% of the population that does not have access to the Internet, it seems like entering the LEO satellite market is not enticing. However, the sentiment of the population towards Starlink is positive and many are interested to try it out. Life has always been cheaper in the province and many want to work remotely. Starlink’s entry could change the playing field. Both GLO and TEL are only performing tests but are not committed to offering such services yet and they are in a wait-and-see mode as to how Starlink will do in the market. If the impact is positive, well at least GLO and TEL are ready to compete. As for Starlink, they are the ones taking the risks for now but that’s okay because Elon Musk has always been known as a risk taker most especially in tech. Besides SpaceX (where Starlink operates), Elon Musk is widely known for companies he co/founded that are making impact to people's lives such as Tesla (Renewable Energy and Electric Vehicles), PayPal, and OpenAI (creator of ChatGPT). 

AREIT

AREIT declared a quarterly dividend of 0.52 PHP/sh, a 6% increase from a quarter ago. Without a doubt, AREIT is still the top-performing REIT as most early investors are enjoying both share price appreciation coupled with increasing dividend income. There are still no signs of AREIT slowing down as it still aims to infuse an average of 100k square meters of gross leasable space annually until 2025. Assets will mostly come from ALI in which they still have around 800k square meters of gross leasable space that can be infused into AREIT. 

Last December of 2021, I posted a discussion that AREIT and ALLHC (a subsidiary of ALI) will somehow intertwine in the future. Around that time, AREIT disclosed that they are not going to limit themselves as a pure office rental REIT. Their strategy is to include other asset classes such as logistics and industrial properties to diversify investor risk. The reason why they haven’t done so is that there was no certainty on the profitability of malls, logistics, and warehouses due to the lockdowns brought by the pandemic. Now that the economy is re-opening, ALLHC, the logistics arm of ALI, is now back to its profitability. Revenues from warehouse leasing, cold stage, and commercial leasing are up by 44%, 144%, and 28% year-on-year respectively. That being said, the infusion of these assets is on the horizon. Even SM is now planning to revive its offer of its very own Mall REIT this year due to positive sentiment towards the reopening of the company.