Maybank Securities is positive about the Philippines market following robust results for the FY2022 earnings season and a positive outlook. Of all 30 component stocks of the benchmark Philippines Stock Exchange Index (PSEi), 21 have reported earnings that were ahead, or at least in line with expectations, says Maybank’s head of Philippines research Jacqui De Jesus.
The strong FY2022 results have also prompted Maybank to upgrade its current FY2023 earnings forecasts by an average of 3% for the 18 index stocks it covers, reinforcing its positive view of the market.
De Jesus adds that even with the higher FY2022 earnings base, Maybank expects FY2023’s earnings growth forecasts to be in double-digits at 13% y-o-y, reiterating its 7,800-point year-end target for PSEi. “Note that 2022 is the first full year that the country has fully reopened — further implying that the double-digit earnings growth we’re looking at for this year is coming from real expansion-driven growth.”
Aside from sustained earnings recovery story, valuations are also at historic lows. The PSEi is trading at about 12 times P/E, almost a 40% discount from its 10-year mean of 19 times P/E. This implies that current levels offer strong entry points for overlooked corporates with high-quality and multi-year earnings growth potential, says De Jesus.
After a screening of the most discounted earnings outperformers, Maybank finds 10 overlooked stocks with earnings performance-based rerating potential. The analysts have “buy” calls on nine of them.
Under the recovery play, Maybank has “buy” calls on conglomerates SM Investments Corp and GT Capital, retailer Robinsons Retail Holdings and F&B chain operator Shakey’s Pizza Asia Ventures. Maybank also has “buy” calls on what it describes as “undervalued economic moats”, namely conglomerate Ayala Corp and property developer Ayala Land.
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Other overlooked counters it has identified with “buy” calls are instant noodles maker Monde Nissin Corp, food ingredients manufacturer D&L Industries and telco company Converge ICT Solutions.
The list of stocks Maybank likes includes port management company International Container Terminal Services, integrated resort and casino operator Bloomberry Resorts Corp, property developer SM Prime Holdings, retail banker BDO Unibank, F&B producer Universal Robina Corp, telecommunication services provider Globe Telecom and electric services company Aboitiz Power Corp.
Asean growth leader
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The earnings recovery of these companies is apparent from another indicator. Maybank Investment Banking Group economist Zamros Dzulkafli says the Philippines’ real GDP in 4Q2022 expanded at 7.1% y-o-y, resulting in full-year growth at 7.6% for 2022 as the economy reopened. The country’s GDP is expected to grow at a slower pace of 5.5% and 6.2% in 2023 and 2024, respectively, which means that it will still be one of the fastest-growing economies in Asean.
This year, the Philippines economy is expected to face a balance of headwinds and tailwinds, says Zamros. The headwind risk mainly comes from the global economic slowdown from the continuing Russian and Ukrainian conflict, sticky inflation and elevated interest rates.
The country also continues to be affected by the US and China trade war disrupting the global semiconductor supply chain, aside from the possibility of extreme weather phenomena and longer-term climate change issues, which may disrupt agrifood industry production and supplies, pushing prices up.
There are also several tailwind opportunities, says Zamros. China’s reopening would translate to an increase in Chinese tourist arrivals. In February, the number of tourists from China reached 14,903, the highest since February 2020. In total, tourist arrivals were steady at 464,522 in February despite the shorter month, compared to January at 464,168. Beneficiaries of this include wholesale and retail trade, accommodation and food services, as well as entertainment and recreation services.
The Philippines also boast stable labour market conditions, with the unemployment rate below 5% since October 2022, although the under-employment rate remains double-digit. Based on the data available in February, the country has also seen an encouraging gradual rise in the labour force participation rate (LFPR) at 66.6%.
The LFPR had also improved for females compared to males, Zamros adds. On the back of economic reopening and revival of the tourism industry, Maybank thinks this would be supported by creating more jobs. “The services sector has a 16.7% share of the total employment in the Philippines. Hence, the recovery in the services sector would be vital in supporting the country’s labour market conditions.”
The Philippines could be the main driver of Asean economic growth in the medium- to long-term due to its growing and young population. On average, the Philippines has the highest population growth rate in Asean at 1.6% versus Malaysia’s 1.2% and Vietnam’s 1.1% from 2010 to 2020. The Philippines also has the highest working age population — defined as those between the ages of 15 and 64 — at an average of 1.9%, followed by Indonesia at 1.7% and Malaysia at 1.5%.
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With the highest youth dependency ratio in the region at 51.8 compared to the closest follow-up, Indonesia’s 39.9, the Philippines has a clear opportunity to generate growth in the long term, says Zamros. However, he says that while labour participation has improved, LFPR of the Philippines has been historically low compared to its Asean peers. This could be due to insufficient job creation and high numbers of overseas workers who would remit their salaries to family members at home.
Sector calls
Regarding sectors, Maybank likes conglomerates the most, despite having a “neutral” rating due to vastly varying exposure to improvement in consumption and rise in mobility, says De Jesus. She explains that the growth in the Philippines’ GDP in 2023 is expected to be underpinned by a projected 6.4% y-o-y increase in domestic consumption, which should be sufficient to boost the net asset values of well-positioned conglomerates, says De Jesus.
Maybank has a “positive” rating on the transport sector, recommending trade-related transport companies as the economic reopening should raise trading volumes and translate to higher throughput for ports, particularly origin-destination ones.
Another sector it likes is gaming, on the back of sustained domestic demand-driven mass and slots segments, adds De Jesus. This is especially as historical data has shown that inflation has a minimal impact on gross gaming revenue (GGR), likely due to the income and wealth profile of the players. Maybank expects companies within the sector to continue posting growth of 8% to 10% y-o-y in FY2023, mainly driven by domestic foot traffic and a possible boost from Chinese players following the China reopening.
On the property and REITs sector, De Jesus says there could be a story to rotate to more property developers towards the second half of the year. That said, Maybank believes developers will outperform landlords in 2023, as the increase in construction activity should translate to accelerated revenue recognition.
The last sector it has a “positive” rating about is banking. De Jesus explains that banks have shown healthy liquidity indicators, with liquidity coverage ratios above 100% and below 85% loan-to-deposit ratios.
Looking ahead, the sector should see significant net interest margin expansion after the 350 basis points interest rate hike in 2022, which should be fully reflected in 2H2023, given the timing of the repricing of loans. Maybank expects the margin improvement to be more than sufficient to offset any potential slowdown in lending growth caused by higher interest rates.
