AMDG
In my previous article, I wrote about how oil could bring the Philippine Stock Exchange down to its knees, and the specifics of how several companies I have invested in could be affected.
Oil is so crucial to the global economy (to our very civilization, even) because it’s used in just about everything. Switch on a light, and oil comes to play at least in the following ways: one, there’s a chance the electricity that powers the light bulb is produced by a diesel or bunker fuel generator; two, that light bulb had to be made in a factory, which consumes oil for its equipment; three, the bulb, switch and wiring had to be trucked from the factory to the retail store where you bought it, a process that consumes oil; four, you had to go out and buy the bulb, hence more oil consumed by your commute; five, the rubbery insulation around the copper wire that connects the switch to he bulb is most likely an oil byproduct, as are most plastics that make up switches, light bulb housing, etc; six, your house, in which that light is located, had to be built by people who commute and equipment that had to be mobilized and that consume oil as they operate, all of which use materials that have to be freighted as well. Care to know about the oil needed to produce a spoonful of rice that’s on your plate right now? Or the oil needed to operate your computer or your car? How about the oil needed to fly the entire family to Boracay for a weekend vacation?
Needless to say, we all consume oil. It’s a resource around which our lifestyles revolve even in ways we are not aware of. Could we live without it? Sure we can! Just at a much slower pace, though – we might have to go back to lighting candles instead of switching on light bulbs. But as it is, with lives, business, economies, demands and supplies all living in the fast lane, rising oil prices is a very nasty speed bump. Rising oil makes everything else expensive, thus dampening demand, increasing costs and depressing world economies (with the possible exception of oil superpowers such as the Middle East, Venezuela, Nigeria, Russia and, soon, Canada).
So, what now? In the far, far future, what are the chances we’ll all end up like Mel Gibson in the movie Mad Max, scrounging for gasoline from wrecks of crashed cars and fighting off hordes of scantily-dressed, paltik-wielding gothic warriors just to protect a tanker truck of gasoline? Or those (again!) scantily-clad and paltik-wielding hippies in Waterworld, riding around in an oil tanker looking for dry land?
In my opinion, very little. As I have said before, oil itself isn’t what we buy when we pay for oil; it’s energy. Of course, oil in itself does have its own uses (think petroleum jelly or engine lubrication), but by and large, energy is what we buy when we pay for oil. And as a source of energy, oil is dirty, scarce, expensive and volatile. Think about it: in terms of oil being dirty, American gas guzzling cars contribute about 20% of all of America’s greenhouse gas emissions, and airlines contribute over 15% of all global-warming carbon output worldwide; oil spill such as the Exxon-Valdez more than two decades ago still have adverse effects to the Antarctic environment even to this day; as far as scarcity is concerned, in just a little over a century since oil was discovered as a source of energy, the human race has burned through what experts estimate to be about half of all the oil in the world, and the world isn’t in much of a hurry to make more of the stuff; expensive is self-explanatory; volatility – almost all the big oil players are countries that have a high degree of instability or propensity to use oil abusively as a political power-brokering tool (think Venezuela, Nigeria or Russia – even the Middle East fits this bill in some instances). As such, given that energy is what we pay for when we buy oil, and that oil is further and further becoming a less viable source of said energy, it’s only a matter of time before the wonders of one economic and marketing concept take effect: alternatives.
Alternatives, as the name suggests, is simply other options. Butter too expensive? Use margarine. No marlin? Buy sea bass. Can’t find any disinfectant for the scrape on your knee? Chew some malunggay or boil some guava leaves. Oil’s too expensive and dirty? Well, it’s about time alternative sources rise and meet the challenge, right?
I mean, who wouldn’t want a world run by clean and affordable energy from solar, wind, geothermal or hydrogen-based power sources? With clean energy, we would no longer be at the mercies of Venezuelan dictators or Russian autocrats holding back production, or Nigerian bandits blowing up oil pipelines, or even Wall Street fund managers pouring all their extra cash into oil and driving prices higher. We would also no longer be polluting the environment, and we avert the crisis of scantily-clad, paltik-wielding Goths or hippies fighting for the last ounces of oil on the planet.
But, you say, that’s not going to happen overnight! That might not even be viable considering we use so much oil that alternatives (even dirty ones like coal) could not possibly fill the void if you take oil out of the equation.
We have two rebuttals there: time frame and viability. In terms of the latter, this I have to say: never underestimate the power of technology and conservative consumption. Take France and Germany, for example. Germany, along with much of Europe, made a lot of noise when Russia, the main source of oil and natural gas for Europe, announced increases in the prices of oil and natural gas. But the French? They complained, but certainly not as much. This was because France has probably the most well-developed nuclear energy industry in the world, one that supplies for 75% of all their energy needs (by contrast, nuclear energy in America comprises only for 20% of total electric production). This lessened their dependence on Russian oil and natural gas for energy used for heating or running their homes and businesses. How about Iceland? Has anyone ever heard the placid people of Reykjavik complain about oil at over $134 a barrel? Hardly, I assume, because most their energy needs are provided for by hydroelectric and geothermal plants. Even right now, cars that run on less or no oil at all (everything from hybrids to compressed air to hydrogen-powered vehicles) are just years away from the mainstream production pipeline. Airplanes? That will probably take a while. It’s not like you can retrofit a jumbo jet with a nuclear reactor the way the U.S. navy did with their submarines, but who knows? That said, I do believe that we could live in a civilization and economy not dependent on oil (but probably in the relatively distant future, though).
As for the time frame, that might be a bit trickier. Experts say that oil may reach as high as $200 a barrel and may never come back down from there. With that, I mostly agree. But there’s also a small part of me that says that demand and supply pressures will take its toll. For one, the price of oil now is partly artificial, i.e., brought about by excess liquidity in the financial markets looking for a safe hedge against the flailing dollar and the sagging U.S. economy. Secondly, with oil prices this high, you suddenly have projects previously considered unfeasible becoming financially viable. Take for example the smaller fields being drilled or explored, or the sudden interest in local oil stocks the likes of OV or PERC, both of which are small-time drillers/explorers. There’s also the sand pits of Canada – a proven reserve of at least 173 billion barrels that was once too considered too expensive to extract that is now receiving billions of dollars worth of investments from giants such as Shell, ConocoPhillips and Exxon (to put that in perspective, Saudi Arabia’s proven reserves, the largest in the world, is 250 billion barrels). Thirdly, with oil this expensive, you also have the inevitable dampening in demand for it (though that probably won't apply to rapidly growing economies like China or India). In line with this, SUV sales in the U.S. have fallen 50% this year alone, and GM’s Rick Wagoner recently announced his company was halting the production of big cars for good and sticking to compacts, a process that will close down four major oil-consuming plants. Business and homes have learned the value of conservation, partly because of high oil prices and partly for the sake of the environment. Bicycle sales are surging, and investments into more effective and less energy-consuming forms of mass transit are booming as well (think China’s maglev trains). Money is also fast flowing into alternative energy R&D - billions of dollars paid to make solar cells cheaper and more efficient, wind turbines quieter and less resistant, etc.
(Notice that these demand-side effects of high oil are by and large irreversible: even if oil prices fall back to earth, there’s little chance the gas-guzzling SUV will make a comeback, or newly-minted green business will turn around and start polluting again just because they could once more afford to do so. Also, solar panels, wind turbines, offshore wave turbines and others are now providing for a growing chunk of energy needs, and the chances are nil that they will be decomissioned even when oil becomes cheap again, if ever that does happen.)
The last time oil prices spiked as suddenly as this was during the Iran-Iraq war of the 1980’s. With supplies from two major oil-producing countries disrupted, oil soared and the high prices prompted a wave of investments into oil exploration and drilling ventures. After the war, a glut followed: oil from Iran and Iraq streamed again along with all the other new oil fields, and the price of oil slumped. See any similarities? Rising oil prices, investors rushing to oil and further inflating prices, new investments meant to increase oil production, easing demand (well, excluding China and India, among others), the rise of alternatives, the fact that biggest oil field found this decade was in Canada – a stable country that’s just across the border of the world’s largest consumer of oil that also happens to be its close ally. Am I hinting at a bust? No, a bust would be too strong a word considering that, (one) at the end of the day, oil will still run out in a matter of decades (according to estimates of some experts – see last months’ National Geographic) and (two), China, India and other growing economies will most likely continue to increase their oil consumption despite high prices. But, if not a bust, I do expect a strong correction in the price of oil. When and how much, I can’t say – although I do hope it will come soon and in a significant amount because my portfolio’s just about dying.
This is why I haven’t sold out of the PSE yet. Even though BSP expects double digit inflation later this year due to expensive oil, I believe it will only be a matter of time until hot money oozes out of oil to find emerging market stocks grossly undervalued. Throw in the fundie bandwagon mentality along with the correction in oil that I’m hoping for, and maybe we could see the PSEI hitting the long-elusive 4,000-point mark.
Of course, my crystal ball could be cracked too, and the PSEI descends into non-existence. I lose money and those who followed my cockamamie theories lose money too. By that time, my only hope is that readers of this blog don’t throw me to the hordes of scantily-clad, paltik-wielding hippies that would be roaming the planet to be eaten alive, or worse, to be dressed the way they are. Damn you, Mel Gibson and Kevin Costner!!!
Tuesday, June 17, 2008
Thursday, June 12, 2008
Oil at $200?
AMDG
When Goldman Sachs first predicted oil would reach $100 a barrel before the decade was out, they were laughed at. This was back in 2005, when oil was selling at a paltry $40-$50 per barrel (source: Philequity corner, Philippine Star, May 12, 2008). But now, not only has oil hit the $100 mark, it has surpassed it by almost 40% even way before the year 2010. What’s scarier is this: the latest Goldman Sachs study showed possibly oil reaching $200 per barrel before 2010, double what they had originally forecasted. That frightening figure is no longer drawing laughs of incredulity this time around, although I wish it were so I could laugh nervously along. Nope, this time around the $200 per barrel figure is actually within the estimates of many other respected fund managers, investment banks and industry analysts.
So what’s a small time stock exchange investor like me to do? Sell? Transfer to less inflation-sensitive ventures like drugs or gun-running? Try setting aside a percentage of my portfolio to a “poker fund” or “blackjack investments”? I’d actually try tong-its (people say I’m good at it), but instead of cash, tong-its winners only get bottles of long-neck Tanduay rum – good luck sending my kids to college with that.
It is an understatement to say that oil hitting $200 per barrel won’t bode well for the global economy. That said, l could expect my holdings to go south as well.
In my past entries about AGI, I expressed confidence in this stock despite the subprime crisis and the depreciating Peso, but admitted its considerable vulnerability to high inflation due to its largely consumer client base. With rising oil prices being the grandmother of all inflationary pressures today, my fear of AGI’s susceptibility is once more keeping me up at night.
Another problem of mine regarding rising oil prices and rising inflation would be my real estate stocks, namely: SMDC and, again, AGI (AGI owns 46% of MEG. MEG, in turn, contributes 39% and 65% of AGI’s total revenue and net income, respectively. MEG is also the is fastest growing revenue source for AGI). Rising oil prices is a double whammy if you’re in real estate: your production cost goes up significantly (bulldozers, trucks, cranes, cement mixers and what not don’t run on magic or nuclear fuel; everything used for construction – steel bars, cement, aggregates, nails – goes up too because of more expensive freight) while the capacity of your potential markets to buy goes down significantly as well. Not to mention high oil and inflation depresses the Stock Exchange, the other Achilles’ Heel of SMDC.
COAT is one of those stocks which is not totally affected by rising oil prices. Of course, their production costs would likely go up (I’m sure they’ll have to haul stuff around in trucks or something). Unlike real estate, though, rising oil prices will make the products of COAT more attractive to buyers, especially their oleochemical-derived biodiesel. Add to rising oil prices the emerging awareness against air pollution and global warming, and COAT’s biodiesel becomes more likeable on a less consumerist and more civic and environmental level. One need only to look at green companies in the U.S. or China whose stocks have doubled or tripled in the past two years, and the potential of COAT becomes evident.
However, COAT – in my humble opinion – seems to be a company that’s too conservative for its own good. Current ratio is above 9, and debt comprises a minuscule 7.4% of equity. While this state of financial health is amazing for conservatives (I really liked it too the first time I saw it), I believe COAT may not be doing enough to prepare for the future and take advantage of the opportunity at its doorstep. Case in point: capex for COAT for the first quarter of 2008? P20M – microscopic for a company with P3.1B in equity, almost P3.4B in total assets, P480M in net income last year and possibly the largest market share in an industry set to double (at the very least) in size come February of 2009 when the mandatory biofuel blend for diesel as per the Biofuels Act becomes 2%.
Another stock that I’ve been looking at lately that might not be as vulnerable to rising oil prices is AP. With 78% of AP’s revenues coming from power distribution, and with its power plants drawing electricity from coal, geothermal and hydropower, the impact of rising oil prices is minimized (although rising oil prices will make the construction of future plants more expensive). Moreover, with AP’s thrust to draw more electricity from clean, renewable and, most importantly, affordable sources, their product might become a more attractive alternative to oil. (Since oil is a substance whose end byproduct is energy, this is what it essentially is, i.e., energy is what you pay for when you buy oil. As such, AP’s product – energy drawn from coal, hydro or geothermal sources – has the capacity to compete directly with oil. This will not happen overnight, of course, but think long term: electric cars being fueled by electricity from hydroelectric or geothermal power plants. Who knows? Maybe wind farms and solar power plants may even add to that mix.)
However, I feel the time to buy AP may have come and gone. In the third quarter of last year, AP reached a low of P3.90, just a little more than P0.20 shy of its 2007 yearend book value. Now, at P5.50-P5.60, I feel AP may be too expensive for the meantime.
When Goldman Sachs first predicted oil would reach $100 a barrel before the decade was out, they were laughed at. This was back in 2005, when oil was selling at a paltry $40-$50 per barrel (source: Philequity corner, Philippine Star, May 12, 2008). But now, not only has oil hit the $100 mark, it has surpassed it by almost 40% even way before the year 2010. What’s scarier is this: the latest Goldman Sachs study showed possibly oil reaching $200 per barrel before 2010, double what they had originally forecasted. That frightening figure is no longer drawing laughs of incredulity this time around, although I wish it were so I could laugh nervously along. Nope, this time around the $200 per barrel figure is actually within the estimates of many other respected fund managers, investment banks and industry analysts.
So what’s a small time stock exchange investor like me to do? Sell? Transfer to less inflation-sensitive ventures like drugs or gun-running? Try setting aside a percentage of my portfolio to a “poker fund” or “blackjack investments”? I’d actually try tong-its (people say I’m good at it), but instead of cash, tong-its winners only get bottles of long-neck Tanduay rum – good luck sending my kids to college with that.
It is an understatement to say that oil hitting $200 per barrel won’t bode well for the global economy. That said, l could expect my holdings to go south as well.
In my past entries about AGI, I expressed confidence in this stock despite the subprime crisis and the depreciating Peso, but admitted its considerable vulnerability to high inflation due to its largely consumer client base. With rising oil prices being the grandmother of all inflationary pressures today, my fear of AGI’s susceptibility is once more keeping me up at night.
Another problem of mine regarding rising oil prices and rising inflation would be my real estate stocks, namely: SMDC and, again, AGI (AGI owns 46% of MEG. MEG, in turn, contributes 39% and 65% of AGI’s total revenue and net income, respectively. MEG is also the is fastest growing revenue source for AGI). Rising oil prices is a double whammy if you’re in real estate: your production cost goes up significantly (bulldozers, trucks, cranes, cement mixers and what not don’t run on magic or nuclear fuel; everything used for construction – steel bars, cement, aggregates, nails – goes up too because of more expensive freight) while the capacity of your potential markets to buy goes down significantly as well. Not to mention high oil and inflation depresses the Stock Exchange, the other Achilles’ Heel of SMDC.
COAT is one of those stocks which is not totally affected by rising oil prices. Of course, their production costs would likely go up (I’m sure they’ll have to haul stuff around in trucks or something). Unlike real estate, though, rising oil prices will make the products of COAT more attractive to buyers, especially their oleochemical-derived biodiesel. Add to rising oil prices the emerging awareness against air pollution and global warming, and COAT’s biodiesel becomes more likeable on a less consumerist and more civic and environmental level. One need only to look at green companies in the U.S. or China whose stocks have doubled or tripled in the past two years, and the potential of COAT becomes evident.
However, COAT – in my humble opinion – seems to be a company that’s too conservative for its own good. Current ratio is above 9, and debt comprises a minuscule 7.4% of equity. While this state of financial health is amazing for conservatives (I really liked it too the first time I saw it), I believe COAT may not be doing enough to prepare for the future and take advantage of the opportunity at its doorstep. Case in point: capex for COAT for the first quarter of 2008? P20M – microscopic for a company with P3.1B in equity, almost P3.4B in total assets, P480M in net income last year and possibly the largest market share in an industry set to double (at the very least) in size come February of 2009 when the mandatory biofuel blend for diesel as per the Biofuels Act becomes 2%.
Another stock that I’ve been looking at lately that might not be as vulnerable to rising oil prices is AP. With 78% of AP’s revenues coming from power distribution, and with its power plants drawing electricity from coal, geothermal and hydropower, the impact of rising oil prices is minimized (although rising oil prices will make the construction of future plants more expensive). Moreover, with AP’s thrust to draw more electricity from clean, renewable and, most importantly, affordable sources, their product might become a more attractive alternative to oil. (Since oil is a substance whose end byproduct is energy, this is what it essentially is, i.e., energy is what you pay for when you buy oil. As such, AP’s product – energy drawn from coal, hydro or geothermal sources – has the capacity to compete directly with oil. This will not happen overnight, of course, but think long term: electric cars being fueled by electricity from hydroelectric or geothermal power plants. Who knows? Maybe wind farms and solar power plants may even add to that mix.)
However, I feel the time to buy AP may have come and gone. In the third quarter of last year, AP reached a low of P3.90, just a little more than P0.20 shy of its 2007 yearend book value. Now, at P5.50-P5.60, I feel AP may be too expensive for the meantime.
Wednesday, June 4, 2008
Inflation at 9.6%, according to my broker
AMDG
Inflation numbers came out today: 9.6%! That’s almost as heavy as my newborn son (9.2 pounds – delivered normally. Kudos to the Missis). Another similarity between inflation and my son: both are going to be taking money out of my wallet. One difference: unless my son grows up to be a thief, inflation takes away money from EVERYBODY’S wallets. Rich or poor, young or old, man or woman. It’s like a shotgun: indiscriminate and just blows away anything that’s in front of it.
It’s bad enough that inflation’s going to pick at my wallet, it’s also going to crush demand and bring up production costs, in effect killing business, dragging down the PSE and slowly bleeding my already-anemic portfolio.
Markets already went down heavily two days ago and traded cautiously on the negative side yesterday ahead of the inflation numbers coming out. That’s not much of a wonder considering people have been talking about inflation to be at double digits since last week. I haven’t checked the PSE yet, but I wouldn’t be surprised if we see another 1++% dip in the index today.
How long will the market malady last because of the latest inflation numbers? I can’t say. I think the more important question is, How long will this high level of inflation go on? As long as inflation remains as high as it is, there’s very little chance the PSE can find the momentum it needs to break the 3,000-point mark, much less reach 4,000 points.
I have recently considered selling some of my holdings to transfer to other stocks, or just to hold on to the cash until prices bottom out. The problem of course is that trying to outsmart the market on a short-term basis is very tricky. It takes a lot of skill and time devoted to studying. Unfortunately, with a nine-to-six grind and two kids to take care of when I get home, I do not have the luxury of time that I could spend studying charts and market trends on a daily basis (I still haven’t even finished reading some of the annual reports of the companies in my watchlist). So for me, it’s just average down when I have the money and watch my portfolio bleed when I don’t while I listen to my son cry and my daughter sing ABC and Happy Birthday at the top of her voice while running around our bedroom. All of that while hoping that the decisions I made based on sober research when I first bought the companies I’m into now were accurate. Yes, yes, my life is glamor galore.
My consolation: in sixteen years, my son would be in freshman college while my daughter will be in her junior year. By then, I could possibly retire from my nine-to-six (at a tender age of forty-four) and my portfolio would be so big (hopefully!!!) that I could consider myself filthy rich. Then I’ll spend my time taking photographs, planting trees or propagating coral reefs, riding my mountain bike (that I still have to buy), scuba diving, working for NGO’s with environmental or grassroots livelihood causes, traveling and resting.
Hey, if you’re dreaming, you might as well dream big, right? Ok, now I have to stop typing and get back to work.
Peace out!
Inflation numbers came out today: 9.6%! That’s almost as heavy as my newborn son (9.2 pounds – delivered normally. Kudos to the Missis). Another similarity between inflation and my son: both are going to be taking money out of my wallet. One difference: unless my son grows up to be a thief, inflation takes away money from EVERYBODY’S wallets. Rich or poor, young or old, man or woman. It’s like a shotgun: indiscriminate and just blows away anything that’s in front of it.
It’s bad enough that inflation’s going to pick at my wallet, it’s also going to crush demand and bring up production costs, in effect killing business, dragging down the PSE and slowly bleeding my already-anemic portfolio.
Markets already went down heavily two days ago and traded cautiously on the negative side yesterday ahead of the inflation numbers coming out. That’s not much of a wonder considering people have been talking about inflation to be at double digits since last week. I haven’t checked the PSE yet, but I wouldn’t be surprised if we see another 1++% dip in the index today.
How long will the market malady last because of the latest inflation numbers? I can’t say. I think the more important question is, How long will this high level of inflation go on? As long as inflation remains as high as it is, there’s very little chance the PSE can find the momentum it needs to break the 3,000-point mark, much less reach 4,000 points.
I have recently considered selling some of my holdings to transfer to other stocks, or just to hold on to the cash until prices bottom out. The problem of course is that trying to outsmart the market on a short-term basis is very tricky. It takes a lot of skill and time devoted to studying. Unfortunately, with a nine-to-six grind and two kids to take care of when I get home, I do not have the luxury of time that I could spend studying charts and market trends on a daily basis (I still haven’t even finished reading some of the annual reports of the companies in my watchlist). So for me, it’s just average down when I have the money and watch my portfolio bleed when I don’t while I listen to my son cry and my daughter sing ABC and Happy Birthday at the top of her voice while running around our bedroom. All of that while hoping that the decisions I made based on sober research when I first bought the companies I’m into now were accurate. Yes, yes, my life is glamor galore.
My consolation: in sixteen years, my son would be in freshman college while my daughter will be in her junior year. By then, I could possibly retire from my nine-to-six (at a tender age of forty-four) and my portfolio would be so big (hopefully!!!) that I could consider myself filthy rich. Then I’ll spend my time taking photographs, planting trees or propagating coral reefs, riding my mountain bike (that I still have to buy), scuba diving, working for NGO’s with environmental or grassroots livelihood causes, traveling and resting.
Hey, if you’re dreaming, you might as well dream big, right? Ok, now I have to stop typing and get back to work.
Peace out!
Keep SMDC in your watchlist?
AMDG
The first time I bought SMDC was in June of 2006, thanks to a word of advise from my friend chiefstocks. My average purchase price then was P1.59 and I sold it eleven months later at almost P5. Needless to say, it was the brightest star in my portfolio at the time.
After the downturn in the PSE caused by the U.S. subprime meltdown, I got into SMDC again, buying it at what I thought then was a discounted price of P3.95. We know now how wrong I was then, and I’ve been averaging down ever since. What was then the jet engine letting my portfolio soar in the sky is now the anchor that’s weighing my portfolio down and dragging it through the mud. Experience may be the best teacher, but she sure charges a heck of a tuition fee too!
Now, SMDC is trading at P2.20. At this price, you’re more than P0.20 below book value per share (a discount of almost 10%). Also, based on 2007 earnings, you would be just a little over six times earnings per share. Talk about a cheap price to pay for a company that made P1.2 billion in 2007 – a 13% return on equity. Add to that factors like the fact that it’s backed by the Sy family, that it has first dibs on all (yes, ALL!) of SM-related properties like BDO-EPCI and CHIB ROPOA, lots beside SM malls (as a matter of policy, SM buys areas larger than the malls they build on it) and that its real estate project sales growth figures are at triple digits and it would seem irresistible.
Just looking at the 2007 figures would make SMDC the Miss Universe finalist of the PSE. Dig a little bit deeper though, and you would see that of the P1.2 billion it made last year, over P600 million was made during the first quarter on the back of stellar mark-to-market gains. After the stock market collapse, SMDC made less and less every quarter (although the figure it ended up with still made it look terrific, thanks in no small part to its real estate operations). With around 47% of the company today still composed of equity holdings, it was no wonder SMDC was among the worst-hit when stocks nosedived: it made a meager P14 million for the first quarter of 2008, absorbing unrealized mark-to-market losses of over P320M. With the bottom line just 2 % of what it made the same period of last year, P14M is just a “Hey look ma! I’m still alive!” earnings report.
Imagine it: if SMDC were to keep on making just P14M for the next three quarters, that would be a total net income of P56M for the whole of 2008, giving us an almost non-existent ROE of 0.60%. That’s if SMDC continues to make profit at all; with the PSEI continuing to languish below 3,000, the prospect of that might be out of reach.
Of course, there’s always the specter of rising inflation hovering above even the sunniest predictions as far as SMDC – being an inflation-vulnerable combination of a real estate and equities investments company– is concerned. I wouldn’t be surprised to see SMDC fall below the P2.00 level should inflation go even higher than it already is and should the BSP decide to raise rates to stave it off.
But there is a silver lining: SMDC’s real estate operations. As mentioned earlier, sales growth figures are at triple digits, and SMDC’s pipeline of new projects looks tremendously busy (Lindenwood, Berkeley, Mezza and Grass Residences are all currently under construction). Even though SMDC is a relatively small player in a field dominated by giants like ALI and MEG, its near-unrestricted access to SM Group real estate more than ensures its survival in such a competitive industry (cases in point: the Mezza Residences across SM City Sta. Mesa and the Grass Residences near SM North EDSA). Its working capital (come on, who has more money than Henry Sy here in RP?) also ensures that, as a real estate company, it could afford to wait should sales stall due to rising inflation or other crises (continuing that line of thinking though, the question now becomes “If Henry Sy could afford to wait, he being filthy rich and all, could I afford to do the same?”).
Then, there’s also the long-term outlook of Philippine stocks. Personally, I see the light at the end of the PSE tunnel coming early next year, if not late this year (very bright and sunny, I know). At that point, you will have SMDC’s equity holdings, assuming SMDC doesn’t sell them before then, coming back to life and contributing once more to the company’s bottom line.
Now, here’s a daydream: the PSE comeback occurring in tandem with SMDC’s exponential real estate operations growth. It’s not that far-fetched, in my humble opinion, and may come sooner than expected. So is SMDC a good buy at P2.20? The risks involved are high, but I would hesitantly say yes.
P.S. My wife gave girth on the 26th of May, 2008. It’s a boy!
The first time I bought SMDC was in June of 2006, thanks to a word of advise from my friend chiefstocks. My average purchase price then was P1.59 and I sold it eleven months later at almost P5. Needless to say, it was the brightest star in my portfolio at the time.
After the downturn in the PSE caused by the U.S. subprime meltdown, I got into SMDC again, buying it at what I thought then was a discounted price of P3.95. We know now how wrong I was then, and I’ve been averaging down ever since. What was then the jet engine letting my portfolio soar in the sky is now the anchor that’s weighing my portfolio down and dragging it through the mud. Experience may be the best teacher, but she sure charges a heck of a tuition fee too!
Now, SMDC is trading at P2.20. At this price, you’re more than P0.20 below book value per share (a discount of almost 10%). Also, based on 2007 earnings, you would be just a little over six times earnings per share. Talk about a cheap price to pay for a company that made P1.2 billion in 2007 – a 13% return on equity. Add to that factors like the fact that it’s backed by the Sy family, that it has first dibs on all (yes, ALL!) of SM-related properties like BDO-EPCI and CHIB ROPOA, lots beside SM malls (as a matter of policy, SM buys areas larger than the malls they build on it) and that its real estate project sales growth figures are at triple digits and it would seem irresistible.
Just looking at the 2007 figures would make SMDC the Miss Universe finalist of the PSE. Dig a little bit deeper though, and you would see that of the P1.2 billion it made last year, over P600 million was made during the first quarter on the back of stellar mark-to-market gains. After the stock market collapse, SMDC made less and less every quarter (although the figure it ended up with still made it look terrific, thanks in no small part to its real estate operations). With around 47% of the company today still composed of equity holdings, it was no wonder SMDC was among the worst-hit when stocks nosedived: it made a meager P14 million for the first quarter of 2008, absorbing unrealized mark-to-market losses of over P320M. With the bottom line just 2 % of what it made the same period of last year, P14M is just a “Hey look ma! I’m still alive!” earnings report.
Imagine it: if SMDC were to keep on making just P14M for the next three quarters, that would be a total net income of P56M for the whole of 2008, giving us an almost non-existent ROE of 0.60%. That’s if SMDC continues to make profit at all; with the PSEI continuing to languish below 3,000, the prospect of that might be out of reach.
Of course, there’s always the specter of rising inflation hovering above even the sunniest predictions as far as SMDC – being an inflation-vulnerable combination of a real estate and equities investments company– is concerned. I wouldn’t be surprised to see SMDC fall below the P2.00 level should inflation go even higher than it already is and should the BSP decide to raise rates to stave it off.
But there is a silver lining: SMDC’s real estate operations. As mentioned earlier, sales growth figures are at triple digits, and SMDC’s pipeline of new projects looks tremendously busy (Lindenwood, Berkeley, Mezza and Grass Residences are all currently under construction). Even though SMDC is a relatively small player in a field dominated by giants like ALI and MEG, its near-unrestricted access to SM Group real estate more than ensures its survival in such a competitive industry (cases in point: the Mezza Residences across SM City Sta. Mesa and the Grass Residences near SM North EDSA). Its working capital (come on, who has more money than Henry Sy here in RP?) also ensures that, as a real estate company, it could afford to wait should sales stall due to rising inflation or other crises (continuing that line of thinking though, the question now becomes “If Henry Sy could afford to wait, he being filthy rich and all, could I afford to do the same?”).
Then, there’s also the long-term outlook of Philippine stocks. Personally, I see the light at the end of the PSE tunnel coming early next year, if not late this year (very bright and sunny, I know). At that point, you will have SMDC’s equity holdings, assuming SMDC doesn’t sell them before then, coming back to life and contributing once more to the company’s bottom line.
Now, here’s a daydream: the PSE comeback occurring in tandem with SMDC’s exponential real estate operations growth. It’s not that far-fetched, in my humble opinion, and may come sooner than expected. So is SMDC a good buy at P2.20? The risks involved are high, but I would hesitantly say yes.
P.S. My wife gave girth on the 26th of May, 2008. It’s a boy!
Subscribe to:
Posts (Atom)