Stock Market Weekly: Investors expect BSP to keep interest rates steady
Will the central bank keep its rates steady? The market thinks so.
WHAT HAPPENED LAST WEEK
Last week, the Philippine Stock Exchange index (PSEi) ended nearly unchanged at 6,508.34 (+1.19 points or +0.02%). The local bourse started the shortened trading week on a positive note amid bargain hunting, but immediately corrected mid-week as the FTSE rebalancing and lower May foreign direct investment (FDI) net inflow weighed down the market. The benchmark index pared losses for the rest of the week as investors digested key data including the lower US inflation rate for May 2023 at 4% (Apr 2023: 4.9%), policy tightening pause from the US Fed, and the higher-than-expected April overseas Filipino (OF) cash remittances (actual: 3.8% year-on-year; consensus estimate: 3.6%).
WHAT TO EXPECT THIS WEEK
We expect the market to trade sideways with a slight upward bias as investors expect the Bangko Sentral ng Pilipinas (BSP) to keep interest rates steady at 6.25%. Meanwhile, local fuel prices are expected to roll back by as much as PHP 0.15/liter for diesel and PHP 0.40/liter for gasoline. On the international front, the market may take its cue from major data releases including the US housing starts, initial jobless claims, existing home sales, and US S&P global manufacturing Purchasing Managers’ Index (PMI).
ANALYSIS AND TRADNG PLAN
The market traded within a tight range, with the bears managing to take control for the third straight week. The 200-day moving average (MA) (~6,545) acted as the immediate resistance level with the market failing to break above the said level. We believe that only once the PSEi breaks above 100-day MA/6,740/6,800 will the market reverse its short-term downtrend.
Gradually accumulate once the PSEi trades back above 6,800.
STOCK CALLS FOR THE WEEK
Manila Electric Co. (MER)
Manila Electric Co. (MER) announced that electricity rates will increase by over 4% month-on-month (m-o-m) to PHP 11.9/kilowatt-hour(kWh) in June 2023 from PHP 11.49 in May 2023 driven by the completion of the distribution-related refund equivalent to PHP 0.87/kWh. However, the increase in prices was tempered by the 6% m-o-m decline in generation charge amid improved average plant dispatch and lower coal prices. Nevertheless, MER expressed optimism on the company’s strong performance for the rest of 2023 as its power generation segment is poised to contribute significantly to its bottom line.
With the onset of El Niño, we think that MER is positioned to benefit from the anticipated increase in electricity prices and demand as consumers require more cooling amid the dry spell and warmer weather. During the 2019 El Niño, the average WESM prices registered at PHP 4.9/kWh, 41% higher compared to WESM prices 12 months prior which recorded an average of PHP 3.5/kWh. As for price action, MER is currently trading on an uptrend since its year-to-date low last January 31, 2023, with the counter above long-term moving averages (100-day and 200-day).
Universal Robina Corp. (URC) — BUY ON BREAKOUT
Universal Robina Corp. (URC) reported a flattish attributable net income of PHP 3.41 billion in the 1st quarter of 2023 from PHP 3.47 billion in the 1st quarter of 2022, in line with our estimates, while its earnings before interest and taxes (EBIT) margins grew by 15% y-o-y with the margins at 4.7% (+60 basis points y-o-y). Amid the positives, we raised our earnings forecast by 5.8%/4.8% for full year 2023/2024. Since 2018, improvements in distribution scale and cost rationalization have provided dividends for the group – with operating expenditures (opex) now only at 16.01% of sales in full year 2022 vs 19.5% in full year 2017. In addition, it has cushioned the impact of inflation on costs (especially fixed opex).
We see these gains to be sticky for URC. For the remainder of the year, we expect gross margins to recover as commodity prices ease, price increases likely to remain sticky, and the Philippine peso stabilizes. As for price action, URC is currently trading on a downtrend since May 2023, with the stock trading below key moving averages (20- day, 50-day, and 100 -day). We expect the stock to continue trading sideways with a downward bias unless URC breaks above the resistance level of PHP 150.00.
Accumulating once URC breaks above PHP 150.00 is advisable. Set stop limit orders below PHP 138.00 and take profits at around PHP 172.50/PHP 174.00. For long-term investors, our target price for URC is PHP 160.00 (+14.3% from the last closing price)
Century Pacific Food, Inc. (CNPF) — BUY ON BREAKOUT
Century Pacific Food, Inc.’s (CNPF) share price dropped by as much as 16% in May 2023 after Century Pacific Group, Inc. approved the sale of 114 million common shares in CNPF through an overnight placement. The shares were sold at a transaction price of PHP 24.60 each for a total consideration of PHP 2.8 billion. CNPF expects that its public float will increase from 31% to 34%, which it believes will improve its trading liquidity and allow for greater investor participation in the stock.
As for our outlook for CNPF, we project a meaningful recovery in CNPF’s margins driven by a healthy correction in skipjack tuna prices (c.15% of COGS). Our view is premised on: (1) a long overdue correction in tuna prices – which has peaked every four to five years since 2006, with the last one in Oct 2017; and (2) we have observed that lower tuna prices coincide with periods of El Niño. This is likely a function of better catch as skipjack tuna tends to follow warmer waters as studies have shown. We believe CNPF would benefit from this by loading up on low-cost inventory, thus allowing for elevated margins during our forecast period. Hence, we have shifted our valuation base to next year to capture the impact of El Niño on tuna prices.
Accumulating once CNPF breaks above PHP 25.20 is advisable. Set cut loss below PHP 23.20. Take profit at around PHP 30.3/PHP 31.0. For long-term investors, our fundamental target price for CNPF is PHP 29.00 (+17% upside from latest close).
KEY DATA RELEASES
1. US Housing Starts for May 2023 on Tuesday, June 20, 2023 (consensus estimates: 1,400k; prior: 1,401k);
2. BSP interest rate decision on Thursday, June 22, 2023 (consensus estimates: no change in rates);
3. US Initial Jobless Claims as of June 17, 2023, on Thursday, June 22, 2023 (prior: 262k);
4. US Existing Home Sales for May 2023 on Thursday, June 22, 2023 (consensus estimates: 4.25 million; April: 4.28 million); and
5. US S&P Global Manufacturing PMI for June 2023 on Friday, June 23, 2023 (consensus estimates: 48.5; prior: 48.4).