Wednesday, September 21, 2022

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TODAY’S TOPICS
IN FOCUS MPI has been in a tight range over the past 18 months and is likely to remain
_____________
there in the next few months. Keep exposure low but a large dip should be
taken as an opportunity to buy or accumulate.
MPI We assert that inflation is likely to peak soon and that a potential 50 bps rate
P3.64, -2.15% hike tomorrow may be a bit too much.
We partly agree with the PSE CEO that local equities have been
underperforming because of the weak peso. Odds are that the PSEi will
continue to underperform against its peers.
If US policymakers' policy statement is in line with traders' hawkish views,
then a relief rally for US equities is likely and local stocks may follow suit
Heavy fines and increased regulation may be in order for SGP, but it seems
highly unlikely that SGP will be completely stripped of its control over NGCP
or that the latter's franchise is revoked.

: MPI

MPI has been in a tight range over the past 18 months. Over this period, the stock
has closed 88% of all trading days between Php3.50 and Php4.00, a range of just
50 centavos or ~14%. If we move the upper bound to Php4.10, the range would still
be quite narrow at ~17%, and the percentage would go to 98%. It is the only member
of the PSEi that has been as range bound as this over the same period. Even San
Miguel, which is hardly traded and has no analyst coverage on Bloomberg, has been
more volatile.

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Up or down? In technical analysis, a very long and tight consolidation, such as the
IN FOCUS one we have pointed out with MPI, is often followed by a very large move. The
_____________ ments for both. For
the bear case, it must be pointed out that management has already already spent
Php8.2B to repurchase 2.15 billion shares since October of last year and yet the
MPI stock price has actually fallen since the start of the buyback program. What will
P3.64, -2.15%

MER MPI appears to be immune to good news. For example, H1 results were solid and
P301.0, -0.73%
core profit was ahead of consensus but it gave the price no spark. Meralco, its
biggest holding by far, rallied 43% from August 2021 to March 2022. This added

reacted. Our third concern is that foreign interest appears to have waned with the
number of shares held under PCD Nominee (non-Filipino) falling by about 1.5 billion

rate will be reduced significantly, possibly by January. The impact on the bottom
line of MPI is going to be substantial.

Bull case. We already laid out our bullish case in early August but the key points that
bear repeating or expounding on are the following. Metro Pacific, with a market cap
of Php106B, is already trading at a discount to the value of its stake in MER
(Php161B). The former, therefore, is a cheaper way to get exposure to the latter, with
the other businesses thrown in for free. And speaking of cheap, its current forward
P/E of 7x is the lowest in at least 10 years (except for the March 2020 trough) and
is among the least among holding firms. MPI also has one of the biggest gaps
between its share price and consensus price target (currently near 60%) among
index members
domestic vehicular traffic is already above pre-pandemic levels and with four
projects set for completion until the end of next year, its bottom line is set for rapid
growth through 2024. And if MPTC goes public next year, this value can be
unlocked for MPI shareholders.

What it all means. We believe the stock will continue to trade sideways over the
next few months. Downside will be protected by its low valuation and the remaining
Php1.8B
limited by the bearish factors mentioned above. MPI may finally make a major move
some time in 2023. The scenario we have in mind is that its share price will dip below

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Php3.50 if we are
IN FOCUS this breakdown is likely to be short-lived as we expect management to re-up the
_____________
So we reiterate our recommendation to keep exposure low for the time being but a
large dip should be taken as an opportunity to buy or accumulate.
MPI
P3.64, -2.15%

SIGNIFICANT DIGITS
MER
P301.0, -0.73%
7.1%: Last Monday, we asserted that Philippine inflation will peak in Q4 even if MoM
inflation remains at +0.4%, which was the rate in August. The table below shows
Inflation
why we think so. The columns represent the projected CPI for each month until June
23 under different MoM inflation scenarios. Our view is that +0.4% per month is the
maximum given that actual MoM inflation has already slowed from 0.9% in June to
0.8% in July and 0.4% in August. With fuel prices continuing to fall, the impact of

will peak at 7.1% in October and will be under 6.0% by April. Then obviously, CPI
shall decelerate faster as we move to the left of the columns. Of course MoM
inflation is highly unlikely to plateau or stay at any level; it will fluctuate. This
exercise, however, is meant to show that near term inflation is likely to peak soon
and that a potential 50 basis point hike tomorrow may be a bit too much.

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RANDOM THOUGHTS
IN FOCUS
_____________ 1. PSE CEO, Mr. Ramon Monzon, said in an interview with Bloomberg TV that local
equities have been underperforming because of forex volatility (we take this to
mean the peso has been weak). Indeed, if we look at quarterly data from 1988,
PSEi we find that there is a moderate degree of negative correlation (-0.43) between
6,448.00, +0.17% the two variables. That is, when the P:$ exchange rate goes up (depreciation) in
one quarter, the PSE index will tend to go down. This makes sense because a
Exchange Rate sharp depreciation can drive inflation higher and may make foreign investors
think twice about putting money here. Forex, of course is not the only factor.
US Interest This is why the inverse correlation is only moderate. As we mentioned in January,
Rates the index was undergoing a structural de-rating and is currently at our fair value
of 14x forward earnings. The pace of economic and corporate earnings recovery
US Monetary from the pandemic have also been below par. Nevertheless, given our view that
Policy the peso will continue to depreciate, then odds are the PSEi will continue to
underperform against its peers.
SGP
P12.32, -6.81% 2. The yield on 10-year US treasuries touched 3.6% last night, breaking through its
June peak and climbing to its highest since 2011. The US 2-year treasury yield,
on the other hand, is at a 15-year high. Traders, therefore, appear to be bracing
for a very hawkish Fed which will announce its latest policy decision tomorrow
morning (Manila time). As we said previously, Chairman Powell is more

believe there will a dovish surprise. Nevertheless, it is hard to imagine that the
Fed will be even more hawkish than already anticipated or priced in by the
markets. If the policy statement that accompanies the expected 75 basis point

and local stocks may follow suit tomorrow.

3.
have active coverage on the stock. Neither have we closely followed
-day drop of more than 9%. However,
it seems highly unlikely that SGP will be completely stripped of its control over

the government reneges on another major contract with private investors.

Heavy fines and increased regulation may be in order but nothing more drastic.

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Unit 2904-AEast Tower, Philippine www.mytrade.com.ph asc.research@abacus-sec.com.ph 8667-8900 (63.2) 634-5206

Stock Exchange Centre, Exchange
Road, Ortigas Center, Pasig city 1600

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