SM Prime and Jollibee shares are good buys, thanks to active consumer spending

The Chinese fear the Year of the Sheep so much that many pregnant women in China begged their doctors to induce delivery so they could give birth before the start of the new year. The year 2003 is considered an unlucky year because like the animal, the year is expected to be slow with little hope of prosperity.

The Philippine stock market is not expected to be any different, as overlapping concerns of an imminent war in Iraq, the runaway budget deficit and the volatile political situation put a dampener on investors’ spirits.

Foreign and local investors willing to infuse money in Philippine stocks have been on a constant decline since the Asian currency crisis hit the Philippines in 1997. Last year the Philippines emerged as one of the region’s worst performers - the Philippine composite index fell 13% in peso terms and 15% in US dollar terms. This, despite significant activity at the corporate front, according to a strategy report on the Philippines written by one of the top foreign brokers in the country.

The foreign broker said there could still be surprises on the economic and corporate front to warrant some optimism but the market is expected to remain cautious because of politics. With the next presidential election coming, the market is eagerly watching the political maneuverings that are taking place.

Further weighing down the market are concerns over the country’s fiscal position. Another analyst noted that the ratio between the public debt to Gross Domestic Product has been the second highest in Asia, next only to Indonesia, and it continues to rise.

“High public debt is a concern for several reasons. First, servicing high debt tends to account for a large share of government spending, drawing limited government funds away from productive economic activities,” the analyst said.

It is estimated that the debt service burden now stands at 43% of the budget appropriation. Quite wor-ryingly, this is now close to levels last seen in 1992,” the report said.

With government still looking for a quick fix to the deficit problem, the broker expects the local market to remain in the doldrums.

Even local brokers share the pessimistic view on the local market. BPI Securities research chief Spencer Yap said investors are still cautious. “We do not expect significant appreciation for the stock market given the moderate expectations for both the economy and corporate earnings,” he said.

“Investors, particularly foreign funds, are likely to wait for firm proof of economic and corporate earnings recovery before committing to the market. Key economic indicators to watch out for will remain to be the government’s revenue performance and the overall budget deficit.

Like in other crisis situations, there remain some bright spots in the horizon.

Philippine Long Distance and Telephone Co.
A foreign broker said the Philippine Long Distance Telephone Co. (PLDT), the country’s biggest telecommunications company, has good prospects. It has committed to pare expenses to maintain profitability margins and bring down capital expenditures to more manageable levels.

Ownership disputes have also been largely resolved following the Gokongwei group’s decision to back out of its takeover bid.
Concerns remain, however, over its debt burden and the declining fixed-line business – traditionally the main revenue base of the telecommunications firm.

SM PrimeHoldings
The decline in the Philippines’ savings rate has been partly blamed on the popularity of malls. This phenomenon, however, literally pays dividends for SM Prime, the holding company of the SM Group of Companies.

A broker said SM Prime offers opportunities because the low- to middle- income classes continue to spend despite economic and political threats. They are driven mainly by increased remittances from overseas Filipino workers. He noted that the issues on the ongoing budget deficit saga and the risk of more terrorist attacks on its consumers are fairly muted as far as SM Prime is concerned.

“Its three-year profit is driven mainly by a ten percent increase in gross floor space as well as fairly resilient same-store sales of about four to five percent. Current share price weakness offers a good buying opportunity,” the report said.

Jollibee Foods Corporation
The same stable consumer sentiment that has driven revenues of SM Prime has driven share prices of Jollibee Foods Corporation. The broker described Jollibee as one of the best plays in the consumer sector due to its high penetration in the low-ticket discretionary segment and aggressive long-term strategy to expand overseas, primarily in China and in the United States.

“Same-store sales will probably grow by another five to ten percent in fiscal year 2003, driven largely by pre-election spending and hopefully, better weather. The company’s strong expansion plans of 80 to 100 stores will exceed the 75 stores opened in 2002. It plans to double the number of stores in the next 10 years,” the report said.

Ayala Corporation
Ayala Corporation, the holding company of the Ayala Group of Companies, is also a good buy amid political and economic uncertainties. This is primarily because of the strong financial standing of its major subsidiaries, particularly Globe Telecom, Bank of the Philippine Islands and Ayala Land Inc.

A broker said BPI has the highest capital adequacy ratio and best asset quality while ALI is the premier real estate developer in the country. Globe also has good prospects for growth.

“We are optimistic on the prospect of special dividends from BPI and ALI, particularly if these two companies post gains from asset sales. We think BPI’s high capital adequacy ratio suggests room for capital management and ALI’s strong financial standing bodes well for continued special dividends,” the broker said.

Manila Water has also staged a dramatic 184 percent year-on-year growth in revenues, which is expected to continue once the government grants its rate hike petition. Ayala Corporation’s share prices, however, have not been able to grow as fast as expected because it is highly vulnerable to the macroeconomic environment.
“Ayala Corporation’s strategic thrust remains in the Philippines as management believes the company’s competitive advantage lies in its business building expertise within the country. However, growth is further restricted by the fact that the company already has interests in the most promising industries in the country,” the report said.