Stock Market Weekly: Sideways trading with slight downward bias

WHAT HAPPENED LAST WEEK

Last week, the Philippine Stock Exchange index (PSEi) rose by 0.34% week-on-week (w-o-w) to close at 6,873.23 (+23.07 points), extending gains for the 4th consecutive week. Investors digested (i) the 27.8% y-o-y increase in November 2023 foreign direct investments (FDI), (ii) the results of the MSCI quarterly review, with marginal increase in Philippine’s country weight, effective March 1, 2024, (iii) the Bangko Sentral ng Pilipinas (BSP) policy rate decision, and (iv) the 3.8% y-o-y increase in December 2023 OFW cash remittances.

There were no additions or deletions for the MSCI PH Standard Cap Index. Meanwhile, for the MSCI PH Small Cap Index, SP New Energy Corporation (SPNEC) will be added, while MREIT, Inc. (MREIT) will be deleted, effective March 1, 2024.

Moreover, BSP kept the Target Reverse Repurchase (RRP) Rate at 6.50%, with the baseline inflation forecast at 3.6% and 3.2% for 2024 and 2025, respectively. The Philippine Senate also approved the second reading of Senate Bill No. 253, which proposes a PHP 100 across-the-board minimum wage increase for private sector workers.

On the international front, US January 2024 inflation came out hotter-than-expected at 3.1% (estimates: 2.9%), tempering expectations of a US Fed rate cut in the 1st half of 2024. Several Asian markets also halted trading in celebration of the Lunar New Year during the week, with markets in Shanghai closed for the entire week.

WHAT TO EXPECT THIS WEEK

This week, we expect the market to trade sideways with a slight downward bias as the PSEi trades near overbought levels at 68.5. The market will also digest the changes in the FTSE index and look ahead for further leads, including PSEi earnings releases.

Local fuel prices are expected to increase on Tuesday (February 20, 2024) by about PHP 0.90 to PHP 1.10 per liter of diesel, PHP 1.40 to PHP 1.60 per liter of gasoline, and PHP 1.00 to PHP 1.20 per liter of kerosene.

Resistance: 6,700/6,600

Support: 6,900/7,100

ANALYSIS

The PSEi surged by +0.34% w-o-w to close at 6,873.23, marking its 4th winning streak. The bulls continue to dominate as the benchmark index briefly broke above the 6,900 resistance level.

The PSEi continues to trade above key moving averages (50-day, 100-day, and 200-day). However, it is currently hovering near overbought conditions with the technical indicator RSI at 68.5. Hence, a potential pullback is imminent.

If the PSEi continues its ascent, it can retest the next resistance levels 6,900 and 7,100. Otherwise, it can retrace the next support levels at 6,700 to 6,600. Trade cautiously as the market is treading near overbought levels. Lighten up if the PSEi pulls back and breaks below the 6,700 support level.

STOCK CALLS FOR THE WEEK

SSI Group, Inc.* BUY ON PULLBACKS | FMSEC TARGET PRICE: PHP 5.80

In our recent company report “An overlooked Philippine retailer,” we initiated coverage on SSI with a BUY call and a target price (TP) of PHP 5.80. Fundamentally, SSI stands to benefit from its improved position post-COVID, with overlooked investment potential stemming from (i) growing spending of the country’s mid-to-high income class, (2) brand and store expansion initiatives, and (3) enhanced profitability compared to peers.

Additionally, the current valuation presents an attractive opportunity, trading at significantly lower multiples than both global and local industry benchmarks, with a 2.5x FY24F P/E and 0.4x FY24F EV/EBITDA, compared to the global median of 11.8x/6.4x and Philippine peers’ median of 9.4x/5.0x, respectively, indicating a potential for substantial upside.

Currently, the stock is trading significantly above key moving averages (200-day and 100-day), as momentum indicators (RSI: 80) signal that the stock is already at overbought levels. Thus, we advise waiting for the stock to pull back near the previous support at ~PHP 3.00 for a more favorable risk-reward ratio, as profit-taking might take place at current price levels.

SP New Energy Corporation. BUY ON BREAKOUT | FMSEC TARGET PRICE: N/A

MGen Renewable Energy Inc. (MGreen), a subsidiary of Manila Electric Co. (MER), has acquired an additional 2.17bn shares of SP New Energy Corp. (SPNEC) from Solar Philippines Power Project Holdings Inc. (SPPPH) for PHP 12.5 billion, representing 4.34% of the company.

The transaction increased the total stake of MGreen and its affiliates to 55.96%. Furthermore, MSCI announced that SPNEC will be added to the MSCI Philippines Small Cap Index effective March 1, 2024. SPNEC is projected to get an index weight of 2.2%. This bodes well for MER and SPNEC as it could expand the generation portfolio and provide vertical integration synergies to both companies.

In addition, with SPNEC’s inclusion in the MSCI Philippines Small Cap Index, this will provide more liquidity for the stock. In terms of price action, after hitting its 52-week high last March 2023, SPNEC declined by as much as 42% following the lifting of the company’s six-month suspension owing to a breach of minimum public ownership requirements.

SPNEC has established support around PHP 1.05 but is currently trading on a downward channel. For a more favorable risk-reward ratio, it is advisable to accumulate once SPNEC breaks above the upper trend line around PHP 1.20 to PHP 1.25.

Security Bank Corporation. BUY ON BREAKOUT | CONSENSUS TARGET PRICE: PHP 109.52

The Bangko Sentral ng Pilipinas (BSP) reported that the proportion of non-performing loans (NPLs) of Philippine banks to their total loans settled at 3.23% in December 2023, declining from 3.4% last November 2023.

Meanwhile, Philippine banks’ net income rose to PHP 354.93 (+14.4% y-o-y) on the back of high interest income and trading gains. The strong figures from the BSP could boost positive sentiment for counters under the financial sector as it offers optimism ahead of full-year 2023 earnings releases of banks.

Previously, Security Bank Corp.’s (SECB) 9-month 2023 revenues came in higher by 6% y-o-y to PHP 31.2 billion. Net interest income increased 12% y-o-y to PHP 24.7 billion, while non-interest income was at PHP 6.5 billion, driven by the income from service charges, fees, and commissions, which grew +10% y-o-y to PHP 4.3bn.

Retail+MSME loans grew (+22.0% y-o-y), driven by the growth in home loans (+15.0% y-o-y), credit cards (+34.0% y-o-y), auto loans (+23.0% y-o-y), and MSME loans (+71.0% y-o-y). With SECB’s MACD recently breaking above zero and signal line, the stock could potentially create fresh breakouts. Thus, accumulating SECB once it breaks above 100-day MA and PHP 74.05 on strong volume is advisable. Set stop limits below PHP 68.00 and take profits around PHP 85.16

KEY DATA RELEASES

1. US Initial Jobless Claims as of February 17, 2024, on Thursday, February 22, 2024 (estimates: 218k, prior: 212k); and

2. US S&P Global preliminary manufacturing PMI for February 2024 on Thursday, February 22, 2024 (estimates: 50.5; January 2024: 50.7