As mentioned in my previous blog entry, there seems to be more reason for the market to be bearish near-term than bullish most especially after the news came out that Greece has 98% chances of declaring default in the next 5 years. However, a favorable leading indicator data of the US could provide us a bit of comfort.

With these uncertainties in mind, anybody with exposure in the stock market could only achieve gains by having the ability to pick up stocks with a predictable sideways movement. Perhaps a favorite example for this strategy would be Lepanto (ticker: LC). Shown below is a three-month chart of Lepanto Consolidated Mining Company.

As shown in the graph above, the share price of Lepanto went up to as high as 170% from second week of July until today’s close of 1.35 a share. Of course no one can claim that he had seen this coming. This was driven by the developments pertinent to Lepanto’s deal with South Africa’s Gold Fields.

However, the more interesting part is how the stock managed to reach as high as 1.80 during the last week of August, translating to a gain of 260% assuming you accumulated the stock by the end of June. It became the local stock market’s drug, that caused the people to be “at high”. What even made it amusing was the fact that Lepanto reached 1.80 even if its underlying commodity dropped during the last week of August, as shown by the Gold chart below.

However, as I pointed out, Lepanto seems to be a “trading play” pick these days. Last Thursday, it went down to as low as 1.22, which is 2 cents away from its next support (red line of the first photo). The market participants just did not allow this to happen. While the rest of the mining stocks dropped as a result of the foreign funds’ selloff, Lepanto just had its own behavior, practically anybody could do several day trades. As of today, it closed at 1.35.

Note that this is my first serious attempt to try to come up with a technical analysis of any stock, so make sure that if you rely on my analysis, please realize that this is an amateur technical view of mine.

The stock just seemed to have stayed away from 1.20, so unless there will be a major selloff, I see the stock to keep its trading band with 1.20 as support. Assuming last week’s trading band will hold, the next resistance could be as high as 1.40 (yellow line with circle at the bottom of the first graph). During the briefing of Calapan Ventures, I asked some stock brokerages regarding their trading play on their stock. They all made significant buying of the stock yesterday. So there can still be some trading opportunities anywhere between 1.20 and 1.40.

If by any miracle or connivance, the stock breaks 1.40, perhaps we can still see another return to 1.80. Beyond 1.40, the trend channel is really wide, with a ceiling price of 2.00 a share. Though it might be improbable in the near term given the market condition, it is definitely not impossible.

However, I saw one potential challenge to breaking 1.40: the stock’s weekly RSI. It already dropped from the theoretical weekly RSI oversold levels as shown below.

Nonetheless, this stock really seems to be the best trading band stock in the market today. Other picks of mine include Jollibee and Meralco, although I need to review the situation of Meralco. Today, it went to as high as 270 per share, but it closed at 255 a share following the selloff done by JP Morgan.

To the few followers of my blog, my sincerest apologies for not being able to sustain blogging. I have been busy with work and some other extra-curricular activities.

Last July, I was given a bigger allocation to trade for an equity portfolio. I was excited to trade because being given an allocation connotes trust. Lo and behold, the market betrayed me, thanks to the smurfs! Haha.

At the time that I started trading the increased allocation, the market dropped significantly, as shown by the chart below.

My proprietary portfolio’s simple return stood at -2%.

It’s been difficult trying to improve my marked-t0-market returns, as uncertainties in the fiscal position of Greece and other PIIGS countries remain in danger. What even made it a bit troublesome on my part are the following:

1. Last Tuesday during the joint gathering of various association of investment professionals, BSP Governor Amando Tetangco presented the central bank’s responses to mitigate the adverse impact of the developments in the US and Euro Area. In his presentation, though he made it clear that the Philippines was able to build some isolation amidst global market surprises, he made a statement that the Philippines is still coupled with the US cyclically due to strong financial, investment and trade linkages. I remember that his strongest basis for this is the historical trend of interest rates. Also, he named five channels that have served as buffer for the Philippine economy vis-a-vis external risks: trade, remittances, investments, BPOs, and financial markets. The BSP governor easily identified the following risks to all these channels. He emphasized that the US and Europe represented 30% of Philippine exports and 57% of OFW remittances. He also mentioned that 75% and 7% BPO receipts of the Philippines came from US and Europe, respectively.
2. Asian Development Bank also came up with its revised GDP forecasts, which translated to lower 2011 GDP numbers in most economies that they cover, including the Philippines. While ADB made it clear that the economy will still be steadfast because of positive business sentiment, high manufacturing capacity utilization (above 80%), and solid domestic demand, they made some qualifications on their economic optimism: a) that the government follows through on this plan and on reforms of the past year and that the PPP will kick-in and follow its forecast period, and b) the uncertainty about the global economy raises risks on their forecasts. Personally, I don’t feel the current administration actively addressing the global uncertainties in order to shield our country.

Funny that after the BSP Governor gave his speech, yields of the Philippine treasuries went up significantly for two days.

At the start of the year, everyone was looking at the Philippine Stock Exchange index reaching 5,000 by the end of 2011. With these developments, I do not know anymore. Lucky we even reach 4,400.

Looking at the charts below, in a situation of economic uncertainty, the major indices tend to be mirrored by the PSEi.

No one really knows what will happen with the fiscal situation of Greece, but in my opinion, it is really just a matter of policymakers devising the best sugarcoating of the situation.

However, looking at the US in isolation, assuming you view the glass half-full and you trust how the leading indicator is computed, perhaps there can be an improvement. Shown below is a parallel chart of the YOY change in the US leading indicators and the US GDP YOY (credit goes to my colleague).

If we assume that the leading indicators are accurate “advanced diagnostics” of the US economy, perhaps the US GDP situation will improve. However, the leading indicators for the month of August have not been published. Heck, even most of the components of the leading indicators at this point are outdated at least for more than a month. Also, it is hard to believe if the Dow Jones is significantly influenced by the leading indicators. My colleague and I have not a way of translating the daily index level of Dow into a meaningful comparable data relative to the Leading indicators. Lastly, even if the US economy improves just a little bit, we still have to review the economic situation in the Euro Zone.

My 2 cents: the securities markets will still remain uncertain. It seems that we need clearer signs at this point. For my proprietary equity portfolio, it seems that I only have no choice but to limit my exposure on stocks that have trading bands or trading upside, but I have to blend it with low beta stocks. I’ll try to work on some stock picks in the coming days.

If you’ve managed to take positions from the market’s drop during the last week of May, then you would have enjoyed generously high returns by now. In fact, if you listed all of the index stocks in a dart board, and if you just threw five or six darts to the board and tapped the stocks where the darts landed, you would probably earn a return that could at least be at par with the index. Year-to-date earnings of the index as I write this stood at roughly 4.2%. Of course I did at least almost twice as the index, haha.

In my very short exposure in the equity capital markets, and in my one year experience of being a part manager of my employer’s proprietary portfolio, one thing that I’ve learned is to always buy stocks on sale provided that you are a value investor. I managed to do this especially during the months of March and May on the following stocks: Atlas, Philex, San Miguel (I’ve been saying that since they had a secondary offering at PHP110 per share), Aboitiz Power, PNB (yup, I kept on buying at PHP59-60 and selling at PHP62-63), RFM, SMDC, JFC (similar to PNB, I kept on coming in at PHP85-86 and selling at PHP89-91), and RCBC. Of course I had a lot of misses and early selling decisions, including Security Bank and Aboitiz Equity Ventures. My most fantastic experience was/is with San Miguel and Atlas. For the case of San Miguel, I bought during the secondary offering, and sold at PHP119, and came in again at PHP126.30. Today, SMC closed at PHP130, haha. For Atlas, I managed to came in lucky at PHP16.94. For my personal trades, I sold at PHP19.

For the case of mining stocks, I have two additional simple rules:

• if you believe the mining company has a story (i.e. it has more existing mines than exploratory sites), and if you believe in the prospects of the commodity they are mining, go for it! Nevermind the periodic drops, just average your costs down.
• though there is really no perfect correlation, it is typical for the market to view commodities as a hedge in case the other investment instruments drop. If the underlying commodity goes up, more often than not, the stock of the company that mines the underlying commodity also goes up.

It’s official. The offer price of SMC was set at PHP110 per share + 0.331 for the relevant fees. That’s equivalent to a steep 28% drop in the value of the shares since the trading was halted (last close at PHP153). Of course you should be more sorry if you decided to buy and hold to your SMC shares when it was still trading at above PHP170. The pricing was finalized yesterday, although it was announced last week that the issue (or to put it more correctly: share sale size) was reduced to USD850 Million. In my three years of work experience as a gopher and highly-paid encoder slash faxer and messenger (pun intended), this share sale manifested the greatest intentional equity value decay I’ve ever seen. Unless we will include Cebu Air, Inc., which dropped by 36% since its IPO last year. However, the decay in value for the case of Cebu Air is much different in my honest opinion. At least for the case of Cebu Pacific, you know that the proceeds have “reinvestment objectives”, unlike SMC where bulk is just to pay Top Frontier. The only problem with Cebu Air is that they have so much high self-worth that they thought their equity should be valued at 19-20x PE (haha!).

But for the case of San Miguel, here are my two cents given this new development:

• As early as January,  San Miguel made some pronouncements that they will float around PHP200 Billion. It appeared very ridiculous at the beginning (both in terms of valuations and offer size, but with the way San Miguel are doing things, it felt nothing was impossible at that time.
• Then come first to second week of April, San Miguel adjusted their issue size to USD 1.5-USD1.2 Billion PHP65 to PHP85 Billion. They made the shares valuation contingent on the bids of the investors via the joint lead arrangers. Like I said, they tried to do it the Boy Edeza way. It was a combination of Top Frontier share sale and treasury share sale coupled with exchangeable bonds.
• Last week, San Miguel once again adjusted their issue size to USD 850 Million, equivalent to PHP36 Billion. It is still bigger than the IPO size of Cebu Air, but it is obvious that there are really no hardcore reinvestment needs for SMC. From PHP200 Billion down to PHP36 Billion? It is simply a share sale gain that Top Frontier or the Ramon Ang block want to do. If my memory is correct, the Ramon Ang block made its way to acquire the shares owned by the government and exchanged them into preferred shares (which are now apparently owned legitimately by Danding Cojuangco). At that time, the final acquisition value was PHP75. So  Top Frontier’s shares that will be sold in the secondary market (which is still relatively small compared to the total shares the group owns),  will still gain by 46.67%. Even if the offer price dropped to PHP110, they would be very indifferent.
• Though I still don’t know what the actual split is between the secondary shares and the treasury shares, the new offer price of PHP110 would translate to a trailing PE of 18x to 20x. The peer valuations are as follows:

•  Though it is still relatively overvalued vis-a-vis the market and a few of  its conglomerate peers, it has perhaps gone down beyond its retracement (i.e. various support) levels. Also, it seems to be cheaper compared to the likes of MPI and are almost of the same value relative to Ayala and and SM Investments Corp.

I actually do not know if this is a follow-on offering. It is one of those unconventional equity public offerings. Anyway, San Miguel Corporation (yes, the parent company, not the brewery), plans to raise USD1.5-2 Billion. The salient terms of the offer are as follows:

Yup, there is no range of share prices. It will be determined based on the bids during the commitment date. Thus, the number of shares will be determined once the price has been set. Indeed, San Miguel tried to change the dynamics of their fund raising. This mechanism is probably influenced by SMC’s Treasurer Sergio Edeza, given his very extensive experience as National Treasurer.

It is really hard to come up with a valuation of San Miguel because it is a conglomerate with a wide array of subsidiaries, more than half of which are in industries that are way different from their core. It is already a given. I’ll try to find some quick and dirty simulations as more information becomes available. But here are my two cents worth at this point:

1. San Miguel will try its best to haggle for a high share price. They obviously think that their shares are still undervalued given current share prices of PHP170-172. Perhaps part of the psychological game is their earlier press release of an offer price of PHP200-250 per share, even if the offer size seemed ridiculous.
2. However, despite San Miguel being a giant conglomerate (sales allegedly represent 3% of the country’s Gross Domestic Product), I still think that the foreign underwriters will price it at a discount from market. After all, no matter what the price will be, Top Frontier (aka Ramon Ang) will still gain from the share sale because they accumulated shares from various common shareholders (including the government) at PHP75 per share.
3. But whatever the offer price may be, since around 80-95% (yes, the range is that big and uncertain) will be offered abroad, it is likely that it will be taken up by funds and sophisticated investors who need huge block of shares of SMC for their respective portfolios. These funds/investors need exposure to emerging markets like the Philippines. If you are after an exposure on Philippine equities, how can you not have San Miguel? It is definitely not easy getting such huge block from the secondary market, which brings me to point number 4…
4. If you are a retail or indifferent investor, just buy in the secondary market. If you think the offer price will be just aligned with the current market price or higher, then you better buy now.  If for whatever reason (fingers crossed) the offer price becomes lower than market, then you still better buy in the secondary market since eventually, SMC’s share price will revert close if not the same to the offer price.

Is San Miguel a good company? Personally, I think so. But is the stock good? Hmmm… I think it is pricy. but it might be worth accumulating now for trading gains purposes. Try not to listen to me though, as I am not a really good stock trader.

For those who are having difficulties in understanding Megawide’s business proposition: think of how lego works. In lego, the parts of let’s say, a “lego building” or “lego house” are being built by “lego blocks”. For Megawide’s case, they create in advance the parts of the condominium building, as if these are “pre-made” lego blocks.

Historically, the company posted terrific earnings. However, this should be viewed with a grain of salt. If I understand it correctly, booking of revenues for construction companies like Megawide are based on a “percentage of completion” method. Change it to completed contract method, and the numbers won’t be as rich as they are.

However, assuming accounting convention will cause a long-debate amongst analysts, let’s just view it in terms of the price. For the nine months ended September 30, 2011, the company posted posted PHP246 million net income. For the whole year of 2009, the company posted PHP71 Million, with PHP57 Million accumulated fo the nine months ended September 30, 2010. Using these numbers, we can deduce that for the last twelve months ending September 30, 2010, Megawide had around PHP260 Million 12-month income.

Megawide currently has 565 million shares outstanding, and the company intends to offer 292 million shares. This will translate to a total of 856 million shares outstanding come post-IPO. Thus, the company’s earnings per share can be computed as follows:

• Pre-dilution: EPS of 0.4618
• Post-dilution: EPS of 0.3034

Thus, the Price-Earnings Ratio of Megawide on a “trailing” basis will be as follows:

• Pre-dilution: PE of around 17x
• Post-dilution: PE of around 25x

Obviously, regardless on whether we look at the trailing PE ratio on a pre or post-dilution basis, the PE is still high. Thus, Megawide is expensive in terms of “Trailing PE”. Same goes for the company’s trailing Price to Book ratio.

The trailing PE of the other comparable stocks are as follows:

• EEI – around 7x PE
• DMCI – around 12x PE
• SMDC – around12x PE

Also, the Philippine Stock Exchange Index has around 12-13x trailing PE.

You might wonder: “why not use forward-looking PE? why not estimate a PE for 2011? Some analysts say that the 2011 PE of MWIDE should be anywhere between 10-12x.

Here are my arguments against that:

• Personally, I believe such earnings are too optimistic. However, granting that these earnings are attainable, then shouldn’t I just project the 2011 earnings of SMDC, DMC, and EEI, as well as the other listed companies in the PSE? They too might give me a 10x PE, or even lower.
• Also, isn’t it obvious that EEI, SMDC and DMC  stocks are still cheaper even by mere reliance on their trailing PEs, compared to the analysts’ forward looking PE computation of Megawide?

Also, Henry Sy or the SM group will come in and buy around 65% of the 292 million shares. Doing the arithmetic, this will mean that Henry Sy or the SM Group will own 20% of Megawide, while the company’s Chairman and President will own a combined 45-50% share of the company.  Funny that the Sy Group will come in at IPO price. Which makes you wonder, why will the Sy Group willingly buy at such high PEs or acquisition costs?

Well, this deal might be expensive in terms of acquisition cost. But no one really knows the “synergy value” that Megawide will bring in to the Sy Group. In finance, synergy value pertains to the prospective cash flow contribution that will be brought in to the Sy Group as a result of the acquisition i.e. prospective cost reductions and revenue enhancements, especially in favor of SMDC.  So the Sy Group couldn’t care less if PHP7.84 is the extreme price for them to get Megawide. They simply have to!

Lastly, what about their plans of going beyond condominiums and their intention of participating in PPPs of the Aquino administration? Such an information is worthless at this point. But we should not forget that Henry Sy is the brain behind this, so we should all be watchful. Who knows? Henry Sy might just suddenly become a construction genius.

My 2 cents worth:

• Don’t buy Megawide at IPO. It is pricy. Buy it only if  you see that the synergy between Megawide and the “Sy company” is really high, and that this synergy can be felt soon. (If you have a quantitative value of this synergy in mind, please send me a message, haha).
• Buy the SM company that will act as the buyer of Megawide, especially if such SM company is undervalued.

Should you really insist on buying Megawide, please leave your contact details by posting a comment. My employer has a stock brokerage that has a small allocation for this offering. Deadline, however, is on February 8.

Based on February 1, 2011 5-year Benchmarks, the indicative dividend rate per annum will fall anywhere between 7.7% to 8.2%. However, the dividends will be given per quarter, subject to Board Declaration.

Also, SMPFC has the option to redeem the shares. In the previous preferred share offerings (i.e. Petron, Ayala, and FPH), the call option can only be exercised on the fifth year or any succeeding quarters after the fifth year, except in the event of a change in taxation of the dividends to be paid by the issuer. The same options apply to SMPFC. However, SMPFC has more “optional redemption” provisions, which are as follows:
1) redemption on the third year from listing – which can be satisfied by Board approval and amendments of articles of incorporation
2) redemption at any time before the fifth year from listing – which can be triggered by any of the following events: accounting event (or if an accounting convention suddenly says that preferred shares are no longer classified as equity), a tax event (as mentioned previously), or a change in control event (i.e. change in controlling participation in SMPFC). It should be noted that the change in control event has special additional provisions: that SMPFC may redeem the preferred shares at any time after the change of control, but failure to do so in 180 days will require them to increase the dividend rate by 4%.

So all of a sudden, what a “would have been simple” offering became a bit complex. Is that really bad?

Personally, not really. However, any investor interested on this issue should already “price in” the possibility that SMPFC will redeem the preferred shares because of possible change in control scenarios. In short, the reinvestment risk could be experienced by the investor before year 5. However, it’s not really that bad because the investor can still gain high simple returns.

Let’s say for example, Juan Dela Cruz has PHP50,000 invested in SMPFC during its initial offering. If things will be going smoothly, Juan will get PHP962.50 dividends per quarter, or PHP3,850 per year (assuming dividend rate was pegged at 7.7% per annum). If SMPFC decides to redeem the shares on the fifth year, then Juan Dela Cruz will have a simple return of 38.5% for the five-year period, equivalent to PHP19,250 worth of dividends, plus the PHP50,000 will be returned to Juan on year 5. The reinvestment risk for Juan if SMPFC redeems the shares on year 5 (and not earlier) is if at the course of the five years, interest rates go up.

However, what if SMPFC decides to either amend its articles of incorporation or if a change in control happens on the third year from listing? In my understanding, it means that Juan can only receive dividends up to year 3, equivalent to a simple 3-year return of PHP11,550 worth of dividends, plus the PHP50,000 will be returned to Juan on year 3. Juan’s reinvestment risk would be valued at PHP7,700 (i.e. Juan would have received PHP7,700 in the last two years, but this is no longer assured because the shares were redeemed two years earlier). The reinvestment risk of Juan will be greater if on year 3, interest rates dropped.

Given the seemingly continuous consolidation in the stock market (as of this writing), then perhaps SMPFC would not be so bad. You just have to consider the reinvestment and event risks involved. For now, let’s hope that the yield will be attractive come pricing day.

As for the company’s financials, I just have some concerns on the sustainability of their reduced OPEX levels as a percentage of revenues. Also, it is hard to measure if the Vietnam acquisition would be really add value to SMPFC. However, it is not far-fetched that SMPFC will be Ramon Ang’s foray into “other ventures”.

For those interested to invest, please leave your email address and contact details after your comments.

First of all, allow me to show you the salient features of the Preferred Shares:

Salient terms of the SMCPM

As you can see, the “par value” of SMCPM is at PHP75. Assuming that it will on October 15, 2012, the call price will still be PHP75 per share.

However, what amazes me is the fact that on its first listing day, the price per share of SMCPM closed at PHP112.50. It even went up the following day, but it eventually dropped to PHP93.00 as of yesterday.

Historical Price Chart: SMCPM

What is the point that I’m trying to make? Well, how the market is pricing it is difficult to comprehend. The difficulty is coming from the computation of “dividend yield/YTC” assuming it will be called on October 15, 2012.

In finance, the convention in solving for present value problems (or for this case, yield to call or YTC), requires the computation to use a “price per hundred” convention, or whatever equivalent. For example, in solving for the YTC of Petron Preferreds, which is currently trading at PHP106.50 with a par value/listing price of PHP100.00 and a dividend rate of 9.53%, you will get a YTC of roughly 7.68% using the Present Value Formula.

Thus, in solving for SMCPM’s YTC, the following adjustments need to be made:
PHP75 divided by 0.75 = PHP100 (this will become SMCPM’s translated par value/listed price)
PHP93 divided by 0.75 = PHP124 (this will become SMCPM’s translated current price)

According to the salient terms of SMCPM, the dividend rate stood at 8%.

Thus, performing a YTC computation for SMCPM using the terms provided plus the adjustments in the par value and current price, will yield to a negative value!

Guess what, even Bloomberg has this disclaimer in solving the yield-to-call of SMCPM:

Bloomberg Disclaimer: SMCPM

I might have been missing something that’s terribly basic, so if such is the case, please feel free to let me know.

Some notable celebrities included in the and their respective ranks and tax dues are the following:
3) Revillame, Wilfredo Buendia – 
PHP57,248,831.34
12) Gozon, Felipe Lapuz – PHP22,197,208.29
17) Duavit, Gilberto Jr Roy – PHP19,774,370.29
18) Pangilinan, Sharon Cuneta – PHP19,546,807.70
20) Pangilinan, Manuel Velez – PHP19,284,666.67
39) Yap, Kristina Bernadette Aquino – PHP12,786,797.52
50) Pascual, Piolo Jose Nonato – PHP11,509,860.48
62) Gracia, Marian Rivera – PHP10,115,118.10
74) Enriquez, Miguel Castro – PHP9,313,517.00
86) Cruz, John Lloyd Espidol – PHP8,599,032.56
97) Santos, Judy Anne Lumagui – PHP8,210,404.89
102) Jimenez, Menardo Jr Gozon – PHP8,062,757.68
113) Pacquiao, Emmanuel Dapidran – PHP7,410,221.44
121) Vidanes, Norbert Gabriel – PHP7,071,204.40
153) Rosales, Jericho Vibar – PHP6,407,519.00
174) Ressa, Maria Angelita Aycardo – PHP5,905,472.27
175) Babao, Julius Caesar Concepcion – PHP5,883,852.13
196) Recto, Vilma Santos – PHP5,612,655.61
242) Lopez, Eugenio III Lao – PHP5,151,108.60
261) Geronimo, Sarah Asher Tua – PHP4,893,319.04
302) Chiu, Kimberly Sue Yap – PHP4,605,017.71
369) Santiago, Claudine Margaret Barretto – PHP4,172,818.00
386) Rivera, Jose Ariel Jimenez – PHP4,071,201.83
401) Vidanes, Ma. Socorro Valenzuela – PHP3,992,264.00
451) Abrogar, Anna Teresa Gozon – PHP3,748,669.14

On the other hand, some notable businessmen and other prominent individuals are the following:
6) Ang, Ramon See – PHP26,438,338.99
7) Lopez, Oscar Moreno – PHP25,703,558.26
14) Montinolo, Aurelio III Reyes – PHP20,142,459.85
19) Lopez, Manuel Moreno – PHP19,325,238.19
24) Campos, Joselito Jr Dee – PHP16,984,927.32
25) Ongpin, Roberto V. – PHP16,545,143.57
27) Ortiz, Justo Aboitiz – PHP15,423,172.98
28) Lhuillier, Michel Jones – PHP15,103,500.10
46) Razon, Enrique Jr. Klar – PHP12,006,714.67
47) Valdepenas, Victor Bunuan – PHP11,993,853.066
55) Ty, Arthur Vy – PHP11,175,324.51
59) Tantoco, Richard Baltasar – PHP10,369,292.71
64) Yang, George Tan – PHP9,960,755.41
68) Panganiban, Artemio Villasenor – PHP9,566,028.65
91) Nazareno, Napoleon Logarta – PHP8,455,222.06
100) Caktiong, Tony Tan – PHP8,079,528.34
116) Zamora, Manuel Bayan – PHP7,266,758.64
135) King Angelo – PHP6,756,248.00
209) Luchango, Guillermo D- PHP5,503,925.23
247) Benitez, Alfredo Abelardo Bantug – PHP5,030,997.36
251) Ty, George Siao Kian – PHP5,017,969.43
347) Tambunting, Jesus P -PHP4,303,366.96
413) Consunji, Isidro Almeda – PHP3,912,349.07

There are other notable surnames in the list, so it is hard to include them all in this summary. But some prominent surnames that had several individuals include the Tans, Lopezes, Sys, Del Rosarios, and Aboitizes. I guess they belong to the clan of their respective conglomerates.

This ranking was published at the BIR FTP site. In case this link doesn’t work, you can go to the file site index of BIR and look for the file “top_500_indiv_2009.pdf”.

Some observations:
1) The 2009 Top Individual Taxpayers list show a very contrasting result from Forbes’ 40 Richest magazines in terms of ranking. (Link of Forbes ranking here).
2) Willie Revillame has a bigger tax due vs TV honchos Gabby Lopez, Felipe Gozon and Manny Pangilinan.
3) It is also the TV personalities that have the biggest tax due. Imagine Sharon Cuneta paying bigger taxes than Roberto Ongpin, Piolo Pascual paying bigger taxes than Arthur Ty of Metrobank, Marian Rivera paying bigger taxes than former Chief Justice Panganiban, and John Lloyd Cruz and Judy Ann Santos paying bigger taxes than Tony Tan Caktiong of Jollibee. It is really funny seeing the likes of Alfredo Benitez, Lorenzo Tan, Aurelio Montinola, Isidro Consunji, etc. having smaller tax dues than celebrities. It seems that it’s only Mr. Henry Sy and Oscar Lopez who had a “more realistic” tax assessment, but it is still unbelievable that Willie Revillame paid bigger taxes than these two.
4) What actually made this list funny is that the employees of Gabby Lopez both in the news and entertainment division of ABS-CBN paid even bigger taxes than Gabby Lopez himself. Gabby Lopez must have a really competent tax lawyer.
5) If I remember correctly, Manny Pacquiao was the number one taxpayer in 2008. All of a sudden, he dropped to rank 113. There must have been some serious accounting “considerations” that led to the drop in his tax due rank.
6) Some prominent celebrities (i.e. Angel Locsin, Richard Gutierrez, Korina Sanchez, Mel Tiangco, Charo Santos) were not included. Either they didn’t make it to the 500th rank, or they had really good tax lawyers/assessors. In fact, Cocktales.ph once said (in reference to another tax list) that Mel Tiangco was the highest paid journalist, and yet, she is not in the top taxpayers list of 2009.
7) A lot of top business honchos are also missing. Either there tax dues are “segregated” to their relatives, or they also have really good tax lawyers. It is also like that they have large tax savings due to their nonprofit organizations or foundations. Of course my favorite politician slash businessman Manny Villar is not in the list (unless I missed his name).

Indeed, life is unfair.

There are at least two companies who will undergo initial public offering before 2010 ends: Nickel Asia Corporation and IP Converge Data Center, Inc. I’d like to share my short take on the IP Converge IPO first since it’s the Company that I was able to study in greater detail. Based on the offering circular posted at the PSE, IP Converge will be listing 181,866,669 common shares to the public at a maximum price of PHP8.80 per share. However, the President of IP Converge’s lead underwriter said that they are looking at a maximum price of PHP7 per share instead of PHP8.80 per share. For details, you can view the PSE Circular here.

Out of the 181 million shares to be listed, roughly 25% will be offered in a primary offering. There will be no offering of secondary shares. Proceeds will be used to fund their Data Center expansion in Fort Bonifacio and Cebu.

IP Converge is an IT Company engaged in offering Data Center facilities to clients who require colocation and disaster recovery services. Basically, clients rent for “data center spaces”, which could be coupled or bundled with connectivity and maintenance services. It’s like renting a condo unit, except that instead of a person, it is data who is renting for the space. IP Converge rents data center space inclusive of other amenities such as bandwidth connection and maintenance services (i.e. professional monitoring, troubleshooting, etc.).

IP Converge is also a reseller of several applications and software vendors such as Google, Salesforce.com, and Microsoft. However, Data Center and bandwidth services provided more than 60% of IP Converge’s revenues.

The problem with the business of model of IP Converge is that its direct cost of services and operating expenses are volatile. They do not necessarily move with revenues for some reason.

Anyway, to put into valuations the offer price of IP Converge, I used the following financial information:

Net Income for Year 2009 = PHP35,132,471.00
Net Income for 1H2010 = PHP20,948,831.00
Net Income for 1H2009 = PHP20,977,704.00
(Source:Company Filings with SEC)

Therefore, trailing net income (for four quarters ended June 30, 2010) should be computed as follows:
Year 2009 Net Income minus 1H2009 Net income = 2H2009 Net income amounting to PHP14,154,767.
Adding the 2H2009 net income to the 1H2010 net income would translate to a Trailing 12M ended June 2010 net income of PHP35,103,958.

If we will compute the trailing PE of IP Converge, it would translate to some whopping Price Earnings multiples. Allow me to show two computations:

a) PE Ratio assuming only issued and outstanding shares will be included:

= Price of PHP7.00 / PHP0.2575 EPS
= PE Ratio of 27.18x

The EPS of PHP0.2575 is computed by dividing the trailing 12 months net income to the issued and outstanding shares of IP Converge, excluding the primary shares to be offered.

b) PE ratio assuming primary shares will be added to the issued and outstanding shares:

= PHP Price of PHP7.00 / PHP0.1930 EPS
= PE Ratio of 36.27x

I still don’t understand why some underwriters compute for offer price that are at a significant premium from the “Trailing market PE”. While I agree that trailing valuation multiples do not capture the earnings potential of a stock for the upcoming period or forecast period, it is also the trailing valuation multiples that allow investors with less access to financial information and with inabilities to compute for the company’s value.

The lead underwriter, however, gave some guidance and summarized forecasts during the investors’ briefing. Their projected net income of IP Converge for 2010 is more than 100% of 2009′s full year net income, which would translate to a 2010 forward looking PE of 16x.

Blogger’s note: once I’m able to gather more information, I will compute for IP Converge’s enterprise value.

The question is: is the 2010 projected net income achievable? It’s hard to say “yes” or “no”. However, let’s look at the historical earnings of IP Converge:
1) In 2007, IP Converge registered a net income of PHP85,559,239, albeit, at that time, the company have not had any interest-bearing debt.
2) In 2008 – IP Converge’s net income dropped to PHP1,352,050. As I pointed out, the company’s direct costs and operating expenses vary each year, and it also varies depending on the type of service contract. I do know the specific answer to that, but since the information is proprietary, I’ll rather not divulge the details. Another factor that caused the drop is the impairment loss that the company recognized because one of their clients closed shop. To be fair though, they have a lot of clients, and yet, only one folded up so far.
3) The earnings of 1H2010 was almost at the same level as that of 1H2009. Having a more than 100% net income growth from 2009 to 2010 would require having a large amount of service contract revenues or some serious cost cutting. However, they also provided a 2010 revenue forecast amounting to PHP549 million, which translates to a measly 6% revenue growth. How can their net income grow more than 100% if their revenues will only grow by 6%

Also, is the net income growth achievable in the remaining 6 months? Maybe yes, maybe no. But according to IP Converge, their RCBC Data Center is 80% taken up and operating at 90% capacity. They are raising funds for their Data center facility in Fort Bonifacio and Cebu. I doubt that the surge net income will come from there. However, there might be revenues from bandwidth and professional services that I or we are not aware of.

And by the way, it seems that IP Converge’s 2010 projections do not include the effect of peso appreciation.

Also, IP Converge is banking on their “Intra-Asia Cable System”. IP converge bought from a Singaporean company a large bandwidth capacity. This was a major Capital Expenditure on the part of company, which is to be amortized for like 15 years. However, until now, they have not found a client or clients who could use such large capacity. However, during the company briefing, it was mentioned in passing at IP Converge’s powerpoint material that they will be able to utilize this capacity by 2011.

Thus, the value proposition will come from two main sources:
1) revenues and net income from existing data centers, which would hopefully come from more clients
2) the utilization/IP Converge’s ability to find buyers or lessees of the Intra Asia Cable System

What are the risks on the sources of IP Converge’s Value? I can think of two things:
1) that despite the growth in revenues, net income will not grow aggressively as expected even if there will be increase in Data Center facilities
2) that the capacity of the Intra Asia Cable System will not be utilized/sold or leased. This event could lead to selling such asset at a much lower value relative to its acquisition cost. This could seriously affect IP Converge’s stockholders equity.

So what is my recommendation or view?
The best answer on whether to buy this stock or not will depend on your entrepreneurial view. Personally, there are more risks than investment merits. However, the risks are mainly event risks. What if all of a sudden, there will be a large demand for bandwidth, and the capacity suddenly becomes demandable? The problem with the IT industry is that it is vulnerable to cycles and changes in technology trends. However, there have been several instances in the past when certain technologies suddenly become popular and highly regarded. Thus, these event risks are “make or break” events for IP Converge.

If you decide to buy this stock, it’s like you are investing to this company as a venture capitalist.

If I still have time, I will take a closer look at IP Converge’s parent company, IPVG. Perhaps these event risks can further be answered if IPVG and its subsidiaries have been successful in their respective IT endeavors. I do know, however, that IPVG has consistently had Deficit on its Retained Earnings. IP consistently had net losses.