May 22, 2023

DMC

From the Annual Stockholder Meeting (ASM) a week ago, the management is giving a heads up to investors that the chances of surpassing the revenue from the year 2022 are slim. The forecasted revenue for 2023 could be lower but they did not give a ballpark value by how much lower it can get. DMC insiders however have been buying millions of shares at around 9 PHP/sh after the ASM meeting. This indicates a vote of confidence and optimism that 9 PHP/sh is probably worth the price for whatever value the business will return this 2023. 

The year 2021 and 2022 was when DMC’s earning went soaring. It’s not that they did something special but it’s mostly because of the sudden rise of coal prices. That being said, SCC, their subsidiary that handles the coal mining business, has been contributing at least 50% to 70% of the net income for the past 2 years. Now that coal prices are starting to go down, it could be that SCC will contribute below 50% in net income. For context, the average contribution of SCC in net income during the pre-pandemic level is at 30%.

If we put an assumption that earnings will go back to the pre-pandemic level, then it could be that the dividends will go back to the usual 0.48 PHP/sh and this would give a dividend yield of 5.33% at 9 PHP/sh. However, there is a possibility that dividends could be a bit higher as well. Excluding the coal segment, other business segments such as real estate, water, power, construction, and nickel mining have increased or at least maintained their revenue year-on-year. The management forecasted that growth will most likely be in the power and water segment for this year. Power rates in the Philippines remain elevated due to supply issues and DMC has plans to expand their off-grid energy by constructing Wind and Solar facilities in Masbate and Palawan though no target completion has been set. We also have to take note that SCC has a power segment, hence DMC is banking on its growth as well. On the other hand, Maynilad which is 27% owned by DMC, has started its 5-year rebasing period this 2023. Rebasing refers to the process of adjusting water rates.

GMA7

The revenue of GMA7 continues to bleed as seen from their Q1 2023 financial report. The first quarter net income has dropped to 604 million PHP from a high of 2 billion PHP in the same quarter a year ago. They are still facing the same challenges where revenue from advertisements is slowing down coupled with increasing costs and expenses due to inflation. To be fair, ABS is also facing the same challenges hence their ad revenue has dropped as well. What this probably implies is that the chances of profiting in the advertising business are slim hence the most appropriate approach to protect profit margin is to control cost and expenses. As compared to GMA7, ABS is doing good so far in controlling their cost and expenses due to its smaller size.

During their last Annual Stock Holder meeting, investors were asking how GMA7 will respond to slowing ad revenue. In response to the question, GMA7 mentioned a few initiatives that they are currently working on but if we put it into context, it’s mostly about advertisement pricing strategy, growing their audiences in social media, and expanding their reach through partnerships. 

To attract or at least maintain customers who want to advertise with GMA7, they continue to understand the needs and metrics required by their customers and price them appropriately. The price for advertisement is complicated nowadays since it’s not the usual number of minutes in airtime anymore but also includes the number of views, subscribers, geographic reach, viewer interaction, and so many more. 

Meanwhile, they have been making partnerships in which they can distribute their content such as in Netflix PH, Viu PH, and TFC/iWantTV. Although it is uncertain how much value these partnerships will return to further increase the revenue. For context, the TFC/iWantTV of ABS has 3.5 million subscribers and 568 million views which is way below ABS’ YouTube Channel which has 42.1 million subscribers and 56 billion lifetime views. That said, the TFC/iWantTV is probably not the best deal between GMA7 and ABS but having something is better than having none at all. 

We do not know how well GMA7’s performance will do in the next 3 quarters but if we assume that the performance will be the same as the last 3 quarters a year ago then GMA7 will end up with a 4 billion PHP in annual net income which is a 40% decrease from the annual net income a year ago. That said, investors are also expecting a 40% decrease in dividend income assuming that GMA7 will use the same dividend payout ratio a year ago. If we put that into numbers, the projected dividend payout as of now is at 0.66 PHP/sh but it could go lower if GMA7 continues to underperform.

DDMPR

After two consecutive quarters of declining amount of dividends, DDMPR has declared a higher dividend payout for the 1st quarter of 2023. This does sound like good news but unfortunately, it might not sustain in the next few quarters. The rental income in their financial statement is still on a decline and was only offset by income from forfeitures. We have to take note that around 35% of leases are going to expire this 2023 and tenants canceling their contract earlier than the deadline is not good news. As per their recent disclosure, 15% of leases are now left to expire for the year 2023. The average occupancy rate as of March 2023 is now down to 81% from a high of at least 95% a year ago. This is expected to further decline when the said 15% of leases will not renew their contract. 

It could be that 2023 is not DDMPR’s year. Injap Sia, the chairman of DDMPR, is leaving investors with a statement: “Real estate cycles are constant alternating trends of lessees’ market during economic crisis periods and lessors’ market during boom times. The type of office tenants also changes over decades. Given the cyclical nature of this, what will preserve the solid value of shareholders of DDMPR over the long-term is their perpetual ownership of the prime titles land and quality buildings within the complex”. If we put what Injap said in another context, it means that they’re done and can’t do anything further to add more value to shareholders hence leaving everything to “hope” that things would get better in the future.

Looking ahead, DDMPR’s occupancy rate will get worse if there will be no new tenants since 25% of leases will expire in 2024. Hopefully, the Ascott-DD Meridian park will be completed by then to improve the overall portfolio. Investors however temper their expectations because the recently completed DD Tower that is subject to infusion is still hardly looking for tenants until now. 

There could be merit in buying DDMPR shares at forecasted lower share prices. Lockdowns and restrictions have already been removed hence tourism is coming back. That said, the Ascott DD Meridian might improve DDMPR’s portfolio since it is a luxury serviced apartment unit that is fitting for tourists. On the other hand, the inflation rate is now on a downtrend and the BSP has paused hiking the interest rate which is expected to decline in 2024. If inflation continues to go down, then DDMPR might spend less to maintain and operate the assets hence increasing profit margins. Meanwhile, REIT share prices usually appreciate when interest rate declines that is because investors favor the dividend yield from REITs which is higher than the interest rate they get from interest-yielding instruments such as bonds. Moreover, the economy will start to prosper when interest rates decline since many businesses can open and apply for competitive financing from institutions like banks. Hopefully, by then, DDMPR will have this kind of tenant and increase its occupancy rate. These however are all speculative that investors will have to take into account.

May 8, 2023

PLC

The 2022 4th quarter report of PLC was disappointing because they were only able to achieve a 4 million PHP in net income whereas they usually average at least 300 million PHP in net income quarterly. This was unexpected since historically the 4th quarter of the year is when people spend the most. That said, their annual 2022 performance remained flat year-on-year with a net income of 1.16 billion PHP. With an 80% dividend payout ratio policy, their 2022 annual net income alone was not enough to sustain the dividend income from a year earlier. Nevertheless, they were able to do so with the help of the remaining cash that they have saved way back before the pandemic. For context, to sustain the dividend of 0.50 PHP/sh, PLC needs to earn at least 1.5 billion PHP in net income. PLC was holding at least 3.7 billion PHP in cash before the pandemic and had been using it to sustain the high dividend payout ratio until 2022. Now that we’re in 2023, PLC is left with 750 million PHP in cash.

They recently released their 2023 1st quarter report a few weeks ago and PLC is starting strong this year. Their net income is up by at least 100% as compared to the same quarter of 2022. This was a result of increased revenue in the gaming share and equipment lease rental coupled with a decrease in cost and expenses. For the 1st quarter of 2023 alone, they were able to earn at least 500 million PHP which gives a strong positive sentiment that they might potentially reach at least 1.5 billion PHP by the end of the year. For dividend investors, PLC’s 2023 performance is highly critical since cash is dwindling and not enough to sustain the dividends. PLC is expected to recover this year since lockdown and restrictions are removed and the country is open again to tourism. 

In other news, PLC considers joining the bidding process if the government pushes through with its plan to privatize PAGCOR-operated casinos. The probability of winning is high since PLC is backed by the SM group. However, the value that it will bring to the table is uncertain and would probably affect PLC’s defensive stance as a business. Currently, PLC is passively earning from gaming share revenue and equipment lease rental with minimal operational and capital expenditure hence they can give out 80% of the net income as dividends. Analysts say that operating a casino is costly in terms of upgrading the venues and integrating new technology. 

TEL, GLO

In an Inquirer BizBuzz article a few weeks ago, it was estimated that on average, each user spends 1,320 PHP per SIM annually (or 110 PHP a month). Out of the estimated 169 million SIMs, only 62 million are registered as of April 2023. A significant loss of subscribers will take away a big chunk of revenue from the telco companies and that includes taxes that the government can obtain. That said, the deadline for SIM registration has been extended for another 120 days.

GLO is the most affected in the worst-case scenarios if the SIM registration has not been extended. GLO holds at least 52% out of the 160 million subscribers in the market. Moreover, at least 60% of GLO’s revenue is coming from its mobile segment. As of April, only 26 million GLO subscribers have been registered out of the 88 million subscribers they hold. This will bring an estimated annual revenue of 35 billion PHP in the mobile segment which is way too far from the 108 billion PHP revenue of the same segment a year ago. The other 40% of GLO’s revenue is coming from the fixed line segment in which they were able to achieve 67 billion PHP a year ago. Assuming that GLO can maintain the revenue from the fixed-line segment in the year 2023, and after adding the projected 35 billion PHP projected annual revenue from the mobile segment, then GLO will end up with 102 billion PHP in the year 2023. This is a 40% decrease in consolidated revenue from the 175 billion PHP revenue from a year ago.

As for TEL, it holds the 2nd largest subscriber share in the market. Out of the 68 million subscribers, only 31 million have registered as of April. 50% of TEL’s revenue is from its mobile segment and the other 50% is from the fixed line segment. With only 31 million subscribers, the projected annual revenue in their mobile segment is 41 billion PHP which is down from the 103 billion PHP revenue of the same segment a year ago. Assuming that TEL can maintain their fixed line segment revenue of 102 billion PHP a year ago, and after adding the projected 41 billion PHP projected annual revenue from the mobile segment, then TEL will end up with 143 billion PHP in the year 2023. This is a 30% decrease from the 205 billion PHP consolidated revenue from a year ago.

With the above-said discussion, TEL and GLO investors are trying to weigh in on the fair value of share prices. It’s a mixed-bag sentiment since some are banking on the positive growth of subscribers in the long term, some would argue that the sale from the tower would offset the losses, some think that GLO and TEL have enough credit lines to support operations, and so on. Other investors who feel that it is already getting too speculative have already sold their shares and would probably buy back shares if there is already stability. Even though investor sentiments are scattered, one thing they have in common is they know that TEL and GLO are here to stay as a business. It’s a matter of buying a wonderful company at a fair price than a fair company at a wonderful price (a quote credited to Warren Buffet).

SCC

SCC’s net income for the 1st quarter of 2023 dropped by as much as 40% compared to the same period a year ago. The decline in revenue is mostly attributed to lower shipment and selling prices of coal. The management anticipated this to happen based on their forecast a year ago. Newcastle coal futures, the benchmark for coal prices, are now trading around $180/ton from a high of $450/ton a year ago. Nevertheless, the drop in coal prices is still expensive as compared to historical prices.

This 2023, SCC is planning to sell at least 15 million metric tons of coal and they have already sold 3.5 million of them in the 1st quarter. As per a recent disclosure, SCC’s coal is being sold at an average price of 4,427 PHP/metric ton. If we put an assumption that they will be able to sell 15 million metric tons of coal and that the price of coal remains stable, this should bring in at least 65 billion PHP in revenue for this year which is lower than the 75 billion PHP they achieved a year ago but higher than the 40 billion PHP in the year 2021.

Looking back, it was in the year 2021 that SCC started giving out special dividends due to higher coal prices, and was further amplified in the following year due to the Ukraine-Russia war. If their plans for their coal segment materialize this year then another round of special dividends could be on the table. To further support the argument concerning the possibility of special dividends, we can look at SCC’s cash balance. SCC had at least 25 billion PHP in cash as of the 1st quarter of 2023 but they have already given out 15 billion PHP as regular dividends recently. With only 10 billion PHP cash left, a few more billion to earn for the rest of the quarter and by then SCC can sustain the regular and special dividends they declared in 2021. For context, SCC shelled out at least 12 billion PHP to shareholders as dividends (regular + special) in the year 2021 and at least 21 billion PHP in the year 2022.

Things would be great if they will be able to sell at least 15 million metric tons of coal at 4,427 PHP/metric ton, however, this remains speculative which is a risk that investors need to take into account. Note that 50% of SCC’s coal is for export back in 2021 and 90% of these exported coals are sold to China. Things have changed recently since China is now sourcing almost all of its coal from Russia. In a recent disclosure, SCC is now exporting 30% of its coal and the rest is going to be used in the country. It seems like they haven’t found a foreign counter part that would match the revenue that comes from China.

In another story, the power segment of SCC continues to thrive as revenue for the 1st quarter of 2023 has increased by as much as 60% compared to the same quarter a year ago.  At least 40% of the consolidated revenue is now coming from the power segment. Power demand remains high and the need for coal-fired power plants is necessary to keep power stable. A year ago, SCC forecasted that their power segment will be profitable this 2023 but it will be a challenge in 2024 which is when significant volumes of LNG will arrive in the country that would dampen power rates. Looking back at November 2022, the management conducted preliminary stages of venturing into solar and LNG. Recently, SCC disclosed that they already have an existing property in Batangas as a potential location for their proposed LNG facility. However, they will only enter the LNG when the business opportunity presents itself. The management is concerned with the LNG’s business viability in the country since it was recently reported last March that long-term LNG contracts with deliveries before 2026 have been reported to have been sold out.