FRIDAY, 29 MAY 2015

Out of the Radar Screen (for now)

COLing the Shots is a monthly publication by COL which provides insights on investment
opportunities based on global and local developments that could affect the market. COLing the Shots
aims to provide timely and relevant information and analysis as well as a model portfolio for
successful investing.

Key Highlights

The market is down by 2.7% from its end April level driven by numerous factors including the
disappointing first quarter earnings season and the worse than expected first quarter GDP
numbers. Aside from the said factors, technical indicators point to a threat that interest rates
would continue to climb in the near term.

Despite all the bad news, I would like to reiterate our view that we should stay bullish over the
long term and take advantage of the ongoing correction to increase our exposure in the stock
market. Although the recently concluded earnings season was quite disappointing, median
earnings growth remained healthy at 12.5%. Moreover, earnings were not weak across the
board. As such, we should just be selective and focus on companies that were sold off despite
delivering in line or better than expected earnings results.

The below expected first quarter GDP growth numbers were not entirely negative. Consumer
spending and capital formation remained strong during the first quarter. Manufacturing also
continued to grow and so did the services sector.

We also do not believe that a steep rise in interest rates can be sustained given the numerous
challenges facing the global economy at present.

We are removing GTCAP and DNL from our COLing the Shots stock picks list. We believe
that we should take the opportunity to lock in gains as the valuations of both stocks are no
longer attractive. Meanwhile, we are adding FLI and URC to our list of stock picks.

We like FLI given its successful entry into the mid-rise and high rise residential buildings
space catering to the mid-income market and its growing rental income portfolio. In fact, rental
revenues are projected to grow rapidly by a CAGR of 19.3% from 2014 to 2020 as FLI plans
to almost triple its gross leaseable area in five years. Valuations are also attractive, with FLI
trading at only 8.7X 2015E P/E and 46.5% below its NAV. We recommend accumulating FLI
at prices below Php1.94/sh.

URC has successfully grown its branded consumer foods business both locally and
internationally allowing profits to increase by a CAGR of 22.4% during the past five years.
However, the stock has been sold down by 14.1% from its end April level despite the company
reporting in line first quarter earnings results. In our opinion, the ongoing sell-off is an
opportunity to buy the stock at a cheaper valuation as nothing is fundamentally wrong with the
company. We advise investors to accumulate URC at prices below Php184.00/sh.

Head of Research
April Lynn Tan, CFA

Analysts
George Ching
Richard Laeda, CFA
Charles William Ang, CFA
Jed Frederick Pilarca
Garie Ouano
Meredith Hazel Cua
Angelo Lecaros
Michelle Yu

The straw that broke the camels back

Since I last came out with my COLing the Shots report, the PSEi rose briefly, causing a lot of investors
(including myself) to wonder whether or not a correction would materialize.
As of this writing, the market is down by 2.7% from its end April level to 7,505.03. The sell-off was
driven by numerous factors including the disappointing first quarter earnings season and the worse
than expected first quarter GDP numbers.
The first quarter 2015 earnings performance of listed companies was generally disappointing. Out
of the 58 companies that we monitor, 23 or 39.7% reported below expected profits, up from 35.3%
in 2014. Meanwhile, only 11 companies or 19.0% reported better than expected profits, down from
31.4% in 2014.
As far as the different sectors are concerned, the major disappointment came from the consumer and
gaming sectors as most companies missed estimates.
Exhibit 1: 1Q15 Earnings Summary (vs. COL Forecast)

Above

Inline

Below

MBT

BDO

CHIB

RCB

BPI

PNB

SECB

EW

UBP

CEB

ABS

AT

ICT

GMA7

EEI

PX

MWC

IMI

FPH

NIKL

AEV

JGS

SCC

AGI

GLO

AC

COSCO

EDC

GTCAP

DMC

FGEN

MPI

CIC

SM

DNL

PIP

EMP

SSI

JFC

URC

PGOLD

CNPF

RFM

RWM

RRHI

TEL

BEL

AP

BLOOM

ALI

MCP

FLI

MER

RLC

CPG

VLL

MEG

SMPH
Total
Percentage

11

24

23

19.00%

41.40%

39.70%

Meanwhile, just this week, the government announced that first quarter GDP grew 5.2%, slower than
consensus growth forecast of 6.6%. The major disappointment came from public construction which
fell by 24.6% during the first quarter after growing by 5.1% during 4Q14. Consequently, government
spending increased by only 4.8% during the first quarter of 2015, down from 9.8% during the fourth
quarter of 2014.
FRIDAY, 29 MAY 2015

COLING THE SHOTS

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Aside from the said factors, I would like to share with you what COLs chairman Mr. Edward Lee told
me earlier this month when I asked him whether or not we made a mistake by being cautious.
Although the PSEi rebounded a few weeks earlier, Mr. Lee said he believed that we should remain
cautious because of the increase in the 10-year bond rates. He also said that technical indicators
point to a threat that interest rates would rise more sharply in the near term.
Note that the U.S. 10-year bond rate is currently at 2.1%, up from a low of 1.65% early this 2015.
The Philippine 10-year bond rate is also higher at 4.3% from a low of 3.1% early this year. In the
past, bond rates typically go down when equity markets drop as investors shift from stocks to bond in
search of safe havens. Circumstances today are quite unusual as bond rates are rising despite the
lackluster performance of the stock market.
Exhibit 2: US 10-Year Bond Rates

3.0

2.5

2.0

1.5

1.0

Exhibit 3: Philippines 10-Year Bond Rates

5.0
4.5
4.0
3.5
3.0
2.5
2.0

FRIDAY, 29 MAY 2015

COLING THE SHOTS

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If both stocks and bonds are being sold down, where are funds flowing to? Personally, I cant find
a convincing argument as to why interest rates can go up significantly. In our COLing the Shots
report two months ago, we already shared our view that even if the Fed does raise interest rates
this June, the increase is not expected to be significant as implied by the changing assessment of
the appropriate pace of policy firming by Fed meeting participants and the numerous threats facing
the global economy. Nevertheless, given the threat that interest rates would continue to rise in the
short term, there is room to be more cautious in stock investing. After all, higher rates make bonds
more attractive relative to stocks. Higher rates also negatively affect the valuations of stocks as the
required rate of return increases.
Despite all the bad news, I would like to reiterate our view that we should stay bullish over the long
term and take advantage of the ongoing correction to increase our exposure in the stock market at
more attractive levels.
Although the recently concluded earnings season was quite disappointing, median earnings growth
remained healthy at 12.5% during the first quarter. Moreover, earnings were not weak across the
board. As such, there is no need to avoid stocks altogether. We should just be selective and focus
on companies that were sold off despite delivering in line or better than expected earnings results.
Moreover, despite the below expected first quarter GDP growth numbers, the results were not
entirely negative. Consumer spending and capital formation remained strong during the first quarter.
Consumer spending was up by 5.4%, in line with its historical average growth. Capital formation
climbed 11.8% brought about by the significant increase in private sector construction (+14.2%) and
the 14.3% jump in investments in durable equipment. Manufacturing also continued to grow as it
was up by 5.9% during the first quarter. Services were likewise strong, rising by 5.6% during the
same period.
The strong growth in capital formation should bode well for economic growth over the long term as it
signifies an increase in productive capacity while the continuous improvement in the manufacturing
and services sector should help create more jobs locally.
Finally, as discussed earlier, I do not believe that a steep rise in interest rates can be sustained. As
a result, any stock market sell-off resulting from an interest rate hike scare should be viewed as an
opportunity to buy stocks.

Removing GTCAP and DNL from our COLing the Shots Stock Picks
This month, we are removing GTCAP and DNL from our COLing the Shots stock picks list.
Note that despite the markets correction, GTCAPs share price still continued to increase this May,
rising by 8.8% since we last came out with our COLing the Shots report. The increase was brought
about by several factors including its strong first quarter earnings results and the stocks inclusion in
the MSCI index. However, we believe that GTCAP is already fairly valued as it is trading almost at
par with our FV estimate of Php1,470. Since we first recommended GTCAP this January, the stock
is up by 22.6%. As such, we recommend locking in gains and to just wait for pullbacks to buy back
the stock.

FRIDAY, 29 MAY 2015

COLING THE SHOTS

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We are also removing DNL from our stock picks list. Although we still like DNL fundamentally,
valuations are no longer attractive (in fact, the stock has been trading above our fair value estimate
for quite some time now). With the market undergoing a significant correction, we believe that it
would be a good time to lock in gains as the stocks elevated price makes it vulnerable to a sharp
sell-off. Since we first recommended DNL in February 2013, the stock has appreciated by 217.3%.
As far as our remaining stock picks are concerned, there are no new developments prompting us to
change our positive view. In fact, out of the five remaining stocks in our COLing the Shots list, three
reported better than expected first quarter earnings results, namely MBT, CEB and FGEN. AC and
SMPH reported in-line earnings results.
FGEN was battered significantly last month (down 7.5% for the month to date period) despite
announcing better than expected earnings results. Investors seem to be too fixated with FGENs poor
earnings growth outlook for this year (down 4%). However, they fail to take into consideration that
profits would grow by 30% next year. Consequently, we believe that the steep sell-off is unwarranted.
At FGENs current price of Php26.00, capital appreciation potential is significant at 38.5%.

Preparing mentally to buy bargains

Last month, we adjusted our buy below price by 10% to reflect our increasing level of cautiousness.
With the market down by another 5.2% since the last time we came out with our COLing the Shots
report, several stocks have corrected to levels that are starting to look attractive. Among the said
stocks, we have six favorites CEB, FGEN, FLI, SMPH, URC and MBT. Four are already part of our
COLing the Shots stock picks list. We will now discuss why we like FLI and URC and will add them
to our stock picks list.
The business model of FLI or Filinvest Land today is vastly different from its business model in the
past where it focused on horizontal developments in the provinces and had minimal rental income
that could insulate it from market downturns. However, during the past few years, it has successfully
entered the mid-rise and high rise residential buildings space catering to the mid-income market.
More importantly, it has successfully grown its leasing business such that rental income now accounts
for around 28% of earnings. Rental revenues are also projected to grow rapidly by a CAGR of 19.3%
from 2014 to 2020 as FLI plans to almost triple its gross leaseable area in five years (from 2014
to 2019). The favorable growth prospects of both its residential sales and leasing businesses will
allow net income to increase by a CAGR of 13.3% in the next three years based on our estimates.
Valuations are also attractive, with FLI trading at only 8.7X 2015E P/E and 46.5% below its NAV. At
Php1.85/sh, capital appreciation potential is significant at 30.8%. We recommend accumulating FLI
at prices below Php1.94/sh.
URC has successfully grown its branded consumer foods business both locally and internationally
such that profits have increased by a CAGR of 22.4% during the past five years. While we have
always liked URC fundamentally, we have never included it in our COLing the Shots stock picks
list because of valuations. However, just this May, the stock has been sold down by 14.1% from its
end April level. This was despite the company reporting first quarter earnings that were in line with
expectations. In fact, operating profits were better than expected. Net income was only dragged
down by higher finance costs and net losses from newly formed joint ventures. In our opinion, the
ongoing sell-off is an opportunity to buy the stock at a cheaper valuation as nothing is fundamentally
wrong with the company. For the next two years, we still forecast profits to grow by 12% annually. We
advise investors to accumulate URC at prices below Php184.00/sh.

FRIDAY, 29 MAY 2015

COLING THE SHOTS

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Lastly, I would like to reiterate what we said in last months report. Although the ongoing correction is
an excellent opportunity to buy stocks at more attractive valuations, nobody knows where the bottom
will be or when the correction will finish. Therefore, peso cost averaging is preferred over lump sum
investing, especially when prices hit attractive levels.
Exhibit 4: COLing the Shots Stock Picks

Price

15 FV

AC

780

877

8/5/2013

600

30.00%

701.6

MBT

90

109

1/23/2014

79.8

12.80%

87.2

SMPH

18.78

23.6

1/23/2014

14.48

29.70%

18.88

FGEN

26

36

1/20/2014

26

0.00%

28.8

CEB

87.85

156

1/20/2014

86.5

1.60%

124.8

FLI

1.85

2.42

5/28/2014

1.85

0.00%

1.94

URC

187

230

184

FRIDAY, 29 MAY 2015

Buy Date Buy Price Current Return Buy Below Price

COLING THE SHOTS

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Investment Rating Definitions

BUY

HOLD

SELL

Stocks that have a BUY rating have attractive

fundamentals and valuations, based on
our analysis. We expect the share price
to outperform the market in the next six to
twelve months.

Stocks that have a HOLD rating have either

1.) attractive fundamentals but expensive
valuations; 2.) attractive valuations but
near term earnings outlook might be poor
or vulnerable to numerous risks. Given the
said factors, the share price of the stock may
perform merely inline or underperform the
market in the next six to twelve months.

We dislike both the valuations and

fundamentals of stocks with a SELL rating.
We expect the share price to underperform in
the next six to twelve months.

Important Disclaimers
Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount
invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are
subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a
security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of
securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report.

2401-B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, 1605 Philippines
Tel: +632 636-5411

FRIDAY, 29 MAY 2015

Fax: +632 635-4632

COLING THE SHOTS

Website: http://www.colfinancial.com

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