FRI 5 JUN 2020

Top Stories:
URC: URC to acquire Roxas Holdings’ sugar mill and bio-ethanol plant
AP: Therma mobile power barges to disconnect from grid
HOME: 1Q20 net income up 30.4% despite temporary store closure

Other News:
Economy: House approves Php1.3Tril stimulus bill on 3rd reading
Economy: No grace period for loans falling due in June

COVID-19 update:
Infected Count Death Toll Total Recovered
Philippines 20,382 (+634) 984 (+10) 4,258 (+95)
USA 1,923,717 (+22,746) 110,171 (+1,103) 707,752 (+23,007)
Worldwide 6,688,909 (+134,849) 392,123 (+5,866) 3,228,646 (+83,885)

Market Summary:
The local stock market continued to surged, breaching the 6,500 level, as net foreign buying returned to the market amidst optimism over
the recovery of the economy.

The PSEi rallied 271.84 points or 4.35% to end 6,517.49. The rally was broad-based with gainers outnumbering decliners, 23 to 5. The
top movers were SM (+5.50%), BDO (+6.45%), AC (+5.63%), ALI (+4.17%), and BPI (+6.94%). On the other hand, the only decliners
were TEL (-0.81%), SECB (-0.98%), AP (-0.67%), FGEN (-0.97%), and RRHI (-0.14%),

Value turnover jumped to Php11.5Bil from Php8.3Bil in the previous session. Meanwhile, foreigners turned net buyers, accumulating
Php1.4Bil worth of shares.

In the US, major stocks indices (DJIA +0.05%; S&P 500 -0.34%; NASDAQ -0.69%) mostly corrected following the strong rally over the
past few days.
Top Stories:
URC: URC to acquire Roxas Holdings’ sugar mill and bio-ethanol plant

URC to acquire Roxas Holdings’ sugar mill and bio-ethanol plant.

URC announced that it has come to an agreement with Roxas Holdings, Inc (RHI). and its wholly-owned subsidiaries, Central Azucarera
de la Carlota, Inc. and Roxol Bioenergy Corporation, for the acquisition of the sugar mill, bio-ethanol plant, and shares held by the Roxas
Group in Najalin Agri-Ventures. Under the terms of the proposed sale, URC will acquire the buildings, machineries, equipment, and
parcels of land where the plants and buildings are located that are necessary to operate RHI Group’s sugar milling plant located in La
Carlota City, Negros Occidental. The purchase price will be determined at the closing of the proposed sale transaction and shall be based
on the fair market value of the assets. The proposed sale is subject to the usual regulatory approvals including the PCC’s go signal.
(Source: URC)

The acquisition of the sugar milling and bio-ethanol distillery is expected to create synergies in the sugar industry in the region and is also
expected to boost URC’s capability in providing good milling services to sugarcane planters. Apart from enhancing its own operations,
this would also help increase the productivity of the farmers and help the local communities in La Carlota. As of end 2019, URC’s sugar
operations account for ~7% of total sales and ~19% of EBIT.

Maintain HOLD rating.

We currently have a HOLD rating on URC with a FV estimate of Php127/sh. We like URC for its positive medium-to-long term growth
prospects. We remain confident in the company’s ability to revitalize its business and return to previous levels of profitability. However,
the stock is no longer cheap given that it is already trading at 25X 2020E P/E compared to the average P/E of its peers at 20X. There is
also no more upside to our FV estimate on URC.

AP: Therma mobile power barges to disconnect from grid

Therma mobile power barges to disconnect from grid. AP disclosed that it will put Therma Mobile’s 242MW bunker-C barges on
reserve shutdown due to the lack of power supply agreement (PSA) with Meralco. Therma Mobile’s 1 year PSA with Meralco ended in
April 2020.

This is expected given the power barges were used to provide ancillary power supply for Meralco particularly during the peak demand
months. However, overall demand has fallen due to the impact on Covid-19. Therma Mobile’s power barges account for ~ 6% of AP’s
capacity and ~ 4% of estimated earnings.

Maintaining HOLD rating. We have a HOLD rating on AP with a FV estimate of Php31.09/sh. Despite having the highest growth
profile in the sector due to the expansion of its power generation capacity, we believe near term earnings outlook has deteriorated due
to the impact of Covid-19 and oversupply concerns in the industry. Based on AP’s current market price of Php29.8/sh, upside to our
FV estimate is at 4%.

HOME: 1Q20 net income up 30.4% despite temporary store closure

1Q20 net income up 30.4% y/y to Php270.2Mil. HOME’s 1Q20 net profits rose 30.4% y/y to Php270.2Mil. The growth in earnings is a
result of higher revenues generated despite the slower same store sales growth (SSSG) compared to the same period last year. 1Q20
revenues increased by 41.4% y/y to Php3.4Bil as the 22 new stores that opened in 4Q19 contributed to higher revenues. Meanwhile, the
company’s gross profit margin expanded by 160bps to 30.6% from the 29.0% booked in 1Q19 due to the higher contribution of in-house
brands as a percentage of total sales.

Exhibit 1: Results Summary

in Php Mil 1Q19 1Q20 % Change

Net Sales 2,381 3,366 41.4

Gross Profit 691 1,032 49.4
Gross Margin (%) 29.0 30.6
Operating Income 288 363 26.0
Operating Margin (%) 12.1 10.8
Net Income 207 270 30.4
Net Margin (%) 8.7 8.0
source: HOME

Lower SSSG booked as stores closed during the ECQ. During 1Q20, HOME recorded an SSSG of 24.3% for their existing 23 stores.
Although still impressive, this is lower than the 32.5% recorded during the same period last year. The slower SSSG was a result of the
closure of Luzon stores starting March 17 when the enhanced community quarantine (ECQ) was implemented. Note that 40 out of
HOME’s 45 branches are located in Luzon and account for approximately 84.3% of total revenues.
Meanwhile, HOME’s GPM during the period improved by 160 bps to 30.6% as the company managed to increase the revenue contribution
of in-house brands from 5.7% during FY19 to 6.3% in 1Q20. This brought GPM for the period up by 49.4% y/y to Php1.0Bil.

Operating expenses jumped by 66.1% y/y. The company’s operating expenses increased by 66.1% y/y to Php668.5Mil from
Php402.4Mil due to higher depreciation and amortization, outside services, and communication and utilities. Depreciation and
amortization rose by 61.8% y/y as the company continued its aggressive store expansion. Meanwhile, outside services and
communication and utilities increased by 93.0% and 118.8% y/y, respectively.

During the 1Q20 analyst’s briefing, management mentioned that they implemented measures to cut down around 20-25% q/q of their
total operating expenses during the quarantine period. As such, we expect the decline in operating expenses to offset the expected
weakness in revenues moving forward as HOME continues the ramp up of its store operations following its re-opening.

Softer guidance for remainder of 2020 as expected. During ECQ, management mentioned that they put up pop-up stores inside Villar-
owned supermarkets. This allowed HOME to still book modest revenues from customers purchasing HOME’s essential items inside
supermarkets, which were allowed to open during ECQ. According to management, sales generated through the pop-up stores are
estimated to be around 15-20% of pre-quarantine sales.

After the government eased quarantine restrictions and allowed hardware stores to operate under the modified enhanced community
quarantine (MECQ) starting May 17, all HOME stores resumed its operations. Nevertheless, we still expect a slowdown in 2Q20 profits
q/q as the company’s planned cost-cutting activities will likely not be enough to offset the substantial decline in revenues during the
quarantine period.

Initially, the company planned on having around 70 HOME stores by the end of 2020. However, management mentioned that they will be
prioritizing the efficiency and productivity of the 22 new stores that opened in 4Q19. Although the 25 planned new store openings have
already been identified and are under various stages in store construction, management announced that they will have to review the
timing of their store openings for the remaining of 2020.

Valuations. There is no consensus rating on HOME. At its current price of Php5.67/sh, HOME is trading at 14.5x 2019 P/E.

Other News:
Economy: House approves Php1.3Tril stimulus bill on 3rd reading

The House of Representatives has approved on third and final reading a Php1.3Tril stimulus package called the ARISE (Accelerated
Recovery and Investments Stimulus for the Economy) bill. Under the bill, Php708Bil and Php80Bil will be allocated in 2020 and 2021
respectively, for mass testing, loans for MSMEs, and wage subsidies among others. Moreover, a Php650Bil budget for the Build Build
Build Program will be spread over three years starting 2021 covering infrastructure projects supporting universal health care, education,
and food security. According to Albay Representative Jose Maria Clemente Salceda, the package is expected to protect and assist up
to 15.7Mil workers, create 3Mil short-term jobs, and help up to 5.57Mil MSMEs, both formal and non-formal. Mr. Salceda also noted that
GDP may grow slightly by 0.2% from the current expected decline of -2.8% in 2020 if implementation is rapid within the year. (Source:
Businessworld)

Economy: No grace period for loans falling due in June

According to the Securities and Exchange Commission (SEC), financing and lending companies will no longer be required to offer a
grace period for loans falling due in June as lockdown measures eased around the country. The SEC cited the central bank memo that
requires the mandatory grace period to be applied only in areas under ECQ or MECQ. Note that since June 1, Metro Manila, Central
Luzon, Cagayan Valley, Calabarzon, Central Visayas, Pangasinan, Zamboanga City, and Davao City are now under GCQ, while the
rest of the country is under MGCQ.

Change in Shareholdings: