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Analysis and Recommendation
Governor Felipe Medalla disclosed that the Central Bank planned to crack down on the foreign debt levels of large corporates, as he cited potential overexposure to external risks. The worry is that if projects funded by overseas loans perform weaker-
than-expected, this could compromise local conglomerates. Two prominent names which Medalla flagged were San Miguel Corp. (SMC) and Ayala Corp. (AC).
As mentioned by S&P, more and more PH firms have been availing of debt given its cheaper cost to equity, although pressures pertaining to high global interest rates and the peso’s depreciation versus the USD could make debt servicing more difficult.
With all the talk about debt, we decided to take a look at the performances of the top 30 most highly-leveraged firms in terms of debt-to-equity. After all, while it is true that piling on too much leverage would compromise a corporation’s stability, proper utilization of debt could also lead to higher returns vis a vis an equity-dominated capital structure.
For this, we kept it simple and focused mainly on Return on Invested Capital (ROIC) and positive Free Cashflow to Equity (FCFE). The reasoning for this is that we wanted to check which names were really able to squeeze out adequate returns from their capital, while also generating enough cash that would allow them to both service debt and still benefit shareholders. We considered an ROIC level of 6.05% as the threshold (median level of the PCOMP index). Upon screening, we saw that as a whole, highly leveraged firms disappointed as median ROIC for these companies came in at only 3.70%, which indicated that a majority of highly-levered companies were not utilizing their debt efficiently.
Nevertheless, we noted that there were still stellar performers, with these companies being International Container Terminal Services Inc. (ICT), Bloomberry Resorts Corp. (BLOOM), and Aboitiz Power Corp. (AP).
The Razon stocks (ICT and BLOOM) displayed double digit ROIC which soundly beat our benchmark, while at the same time generating adequate cashflow. For BLOOM, we would recommend a BUY as domestic demand for mass gaming should benefit GGR given the segment’s high hold rates.
With regard to ICT, we see this as a long-term opportunity (around 1 year holding period), good for ACCUMULATION as global trade is currently experiencing headwinds.
Meanwhile for AP, ROIC was the lowest amongst the four at only 6.6%. Nevertheless, we note that FCFE was the highest, and this translated to a dividend yield of 5.12%. Furthermore, the growing demand for power along with upside to prices stemming from the looming shortage of Malampaya further strengthens the strong narrative for this stock.
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