Philippines’ Ayala Corp. poised for take off

Philippines’ Ayala Corp. poised for take off
Mon Jan 09,2006
Manila Bulletin
http://www.mb.com.ph/BSNS2006010953478.html#

MANILA (Dow Jones) — Ayala Corp. trimmed debt and nurtured its various operating units to achieve double-digit earnings growth last year, while preparing for a new expansion opportunity this year.

But the shares of one of the Philippines’ most diversified conglomerates performed poorly in 2005, leading analysts to anticipate a rebound this year.

Ayala holds controlling or majority interests in various companies, including property developer Ayala Land Inc., Bank of the Philippine Islands, Globe Telecom Inc., Manila Water Corp., and semiconductor maker Integrated Microelectronics Inc.

It recently formed a wholly-owned unit, Michigan Power Inc., to pursue investments in the power sector — a new investment area for Ayala.

Most of Ayala’s holdings performed well in 2005: The conglomerate posted net profit of P5.12 billion in the nine months ended Sept. 30, up 48 percent from P3.47 billion in the year earlier period. Even after excluding one-off gains of P1.73 billion in the just-ended period, and smaller one-off gains a year earlier, Ayala’s net profit still rose 10 percent on year.

The odd man out was Globe Telecom, which posted a 28 percent drop in net profit over the same period. The mobile phone company attributed the steep fall to higher marketing and network-related expenses to win more subscribers, and a bigger tax burden due to the lapse of a corporate-tax holiday.

"Except for Globe, Ayala’s various units are firing on all cylinders," said Astro del Castillo, a fund manager and managing director at First Grade Holdings.

In fact, analysts say Globe’s lackluster performance was a major factor behind Ayala’s sluggish share price, as investors rotated out of Ayala shares and into the individual shares of its better-performing units to limit their exposure to Globe.

"We believe Ayala deserves a better rating given better expectations from its core affiliate businesses looking forward," said Erwin Balita, an analyst at AB Capital Securities.

Balita added that Ayala trades at a 27 percent discount to its net asset value of P439 based on the current market value of its major interests in Ayala Land, BPI, Manila Water and Globe Telecom.

Ayala shares closed 2005 at P315, down 3.1 percent from their P325 close in 2004 and way off the 15 percent gain of the Philippine stock market. The shares closed Wednesday at P322.50, up 1.6 percent, but still 11 percent below analysts’ median price target.

Analysts are still reviewing their forecasts for Ayala in 2006, but CLSA’s research head for the Philippines Alfred Dy said the conglomerate’s earnings "could easily grow by 10 percent" in 2006, thanks to strong contributions from Ayala Land, BPI and Manila Water.

For 2005, analysts expect Ayala to post net profit of P6.26 billion, based on the average forecast of seven brokerages polled by Thomson Financial. Ayala usually reports full-year results in mid-February of the following year.

"But the focus is more on the improving balance sheet and potential for acquisitions," added Dy, who expects Ayala to further trim debt and reduce foreign exchange risk by increasing the share of peso-denominated debt as a percentage of total debt.

He noted that Manila Water is now in talks to acquire Maynilad Water Services Inc., the other utility that provides water and sewer services in the Philippine capital, while the government’s privatization of the power generation assets of National Power Corp. offers an investment window for newly-formed Michigan Power.

"One of the biggest assets of Ayala may be (Treasurer and Chief Financial Officer) Delfin Lazaro," Dy said. "A former energy secretary, Lazaro knows the power generation business."

Another plus for Ayala is the expected initial public offering of shares in Integrated Microelectronics, possibly in Singapore, as early as 2007.

Last month, Integrated Microelectronics completed the acquisition of Singapore-based Speedy-Tech Electronics Ltd. (S54.SG), which brings access to the Chinese market and a diversified customer base.

Integrated Microelectronics said it is considering more acquisitions in the next couple of years, but they will be smaller than the 6 million purchase of Speedy-Tech, which will allow it to achieve its goal of hitting US0 million in revenue by 2008.

Ayala has been doing well on the liabilities side, too. Total group debt stood a little over .05 billion at the end of September, down from around .18 billion at the end of 2004. The group reduced its reliance on foreign-currency denominated debt with the issuance of P3 billion in fixed-rate notes in August and a seven-year P4.2 billion fixed-rate loan in September.

This year, even Globe is expected to fare better. Analysts point to the nascent recovery seen in the justended third quarter, when the telecom unit recorded a 26 percent rise in pretax profit to P3.28 billion. Despite the bigger tax bite, net profit rose 2.7 percent on year to P2.23 billion.

AB Capital’s Balita likens buying Ayala now, at its heavy discount to NAV, to acquiring Ayala Land and BPI, with Globe, Manila Water and the other listed assets of the conglomerate thrown in for free.