Stock Market Weekly: Relief rally seen amid possible deal on US debt ceiling

WHAT HAPPENED LAST WEEK

The Philippine Stock Exchange index (PSEi) closed lower by 2.02% (-134.35 points) week-on-week to 6,530.20 as market sentiment remained cautious due to prolonged discussions on the US debt ceiling.

Adding to investor concerns, Fitch Ratings put the United States’ debt on negative watch last Thursday, highlighting the lack of progress in debt limit discussions. On the domestic front, investors digested the April 2023 Balance of Payments (BoP) report, which revealed a swing from a surplus of USD 1.267 billion in March 2023 to a deficit of USD 148 million. However, the January-April BoP still showed a surplus of USD 3.31 billion compared to a surplus of USD 79 million during the same period last year.

The top index performer was San Miguel Corporation (SMC) (+2.2%), while index laggards were Converge (CNVRG) (-6.2%), LTG Group (LTG) (-6.0%), and PLDT (TEL) (-5.7%). The index breadth was negative with 1 gainer versus 27 losers. The average daily turnover value was PHP 4.0 billion. Foreigners were net buyers by PHP 2.4 billion.

WHAT TO EXPECT THIS WEEK

We anticipate the market to rebound following the agreement in principle made between the White House and House Republicans to raise the US debt ceiling, thereby averting a default and mitigating the risk of a global economic crisis.

Key details of the deal include a two-year debt limit increase and a two-year appropriations agreement that maintains non-defense spending at approximately current levels. Additionally, we expect increased trading activity mid-week as the MSCI semi-annual rebalancing changes take effect as of the close of May 31, 2023 (Wednesday).

PSEi TECHNICAL ANALYSIS AND TRADNG PLAN

Resistance: 6,800

Support: 6,600 / 6,400

After failing to break above the 100-day moving average (MA) (~6,689), the PSEi pulled back and is now hovering below its 200-day MA (~6,542) as well. The market must break back above the 200-day MA to prevent the bears from further taking over. We believe that only once the PSEi breaks above 100-day MA/6,740/6,800, will a reversal of the market’s short-term downtrend occur.

Gradually accumulate once the PSEi trades back above 6,800.

STOCK CALLS FOR THE WEEK

BDO Unibank, Inc. (BDO) — BUY ON PULLBACKS

Currently, BDO is trading within the PHP 135.00 – PHP 145.00 range. With BDO trading near the lower end of the range, it is optimal to accumulate at or near PHP 135.00 for a better risk-to-reward trade.

BDO posted a 1st quarter 2023 net income of PHP 16.5 billion (+41% y-oy) – in line with consensus but ahead of our estimates. We have revised our forecasts to reflect the strong performance in full year 2022, and so far in the 1st quarter of 2023. Benefitting from higher net interest margin (NIM), strong expansion in fee-based services, and continued normalization of credit costs on stable non-performing loans, or NPLs, we now forecast BDO can deliver 13.7%/13.7% return on equity (ROE) in full year 2023 and 2024 – closer to management’s mid-teens target ROE.

However, we believe these positives are already in the price. As for price action, BDO is one of the few index names trading above its key moving averages (50-day, 100- day, and 200-day). After three successive rallies, BDO seems to be consolidating anew above its recent breakout point, suggesting that another rally could occur. Accumulating once BDO pulls back to PHP 135.00 is advisable. Set stop limit orders below PHP 125.00 and take profit at around

PHP 155.5.

Bank of the Philippine Islands (BPI) — BUY ON BREAKOUT

BPI reported 1st quarter 2023 net income of PHP 12.1 billion (+52% y-o-y) – in line with consensus and ahead of our estimates, attributable to average asset base expansion, margin growth, and lower provisions.

We raised our target price for BPI to PHP 123.00. We have factored in the strong showing in BPI’s earnings from recent quarters, driven largely by the positive transmission of policy rates on net interest margins, double-digit loan growth (led by credit cards), robust fee income, stable cost-to-income ratio, and lower provisions.

As a result, we now expect the bank’s return on equity to reach 13.9% this year – close to the high of 14% in full-year 2016. As for the merger of BPI and Robinsons Bank, we see merits to the pending merger of the two banks, in view of BPI’s growing assets, deposits, and client base, with RBank having delivered above-industry loans and deposits CAGR in the last five years.

We also see synergies between BPI and Gokongwei group’s (through Robinsons Retail) products and services platforms – strengthening both companies’ positioning across the financials and retailing industries. Accumulating once BPI breaks above PHP 110.00 is advisable. Set stop limit orders below PHP 101.20 and take profit at around PHP 126.5. For long-term investors, our fundamental target price for BPI is PHP 123.00.

DigiPlus Interactive Corp. (PLUS) — BUY ON PULLBACKS

PLUS posted a net income of PHP 436.8 million in the 1st quarter of 2023, a turnaround from the PHP 223.1 million in net losses incurred in 1st quarter 2022, driven by strong topline growth from its retail games business.

PLUS’ consolidated revenues surged to PHP 4.2 billion (1st quarter 2022: PHP 752 million), amid the solid performance of its online platform, BingoPlus. The recent earnings outperformance brought PLUS’ share price to its highest since August 2019. As for the company’s plans this year, under retail, PLUS targets to open more physical sites in different areas, especially in the provincial regions.

PLUS is also looking into additional game offerings and gaming machine acquisitions to support its growing operations. The company plans to add new online games to increase revenue and player retention. Accumulating once PLUS pulls back to PHP 3.15/PHP 3.10 is advisable. Set cut loss below PHP 2.90. Take profit at around PHP 3.62/PHP 3.70.

KEY DATA RELEASES

Thursday, June 1, 2023
– US Initial Jobless Claims as of May 27, 2023
– US S&P Global preliminary manufacturing PMI for May 2023 (consensus estimate: 48.5; April 2023: 48.5)
– PH S&P Global preliminary manufacturing PMI for May 2023 (April 2023: 51.4)

Friday, June 2, 2023
– US Change in Nonfarm Payrolls for May 2023 (consensus estimate: 188k; April 2023: 253k).
– US Unemployment rate for May 2023 (consensus estimate: 3.5%; April 2023: 3.4%).