Stock Market Weekly: Upward bias on easing US inflation

WHAT HAPPENED LAST WEEK

Last week, the Philippine Stock Exchange index (PSEi) ended -1.38% lower week-on-week to 6,379.03 (-89.04 points) on the back of lackluster trading volumes as investors remained on the sidelines. The market digested the lower-than-expected local manufacturing Purchasing Managers’ Index (PMI) for June at 50.9 and the release of the June 2023 inflation print at 5.4% (consensus estimate: 5.5%; BSP’s forecast: 5.3% to 6.1%). By the end of the week, the market declined, tracking Asian peers, amid the hawkish Federal Open Market Committee (FOMC) minutes and the stronger-than-expected wage numbers.

WHAT TO EXPECT THIS WEEK

This week, we anticipate a volatile market and expect sideways trading with an upward bias as investors closely watch the US inflation print for June and the corresponding implications for monetary policy. The market is pricing in a deceleration to 3.1% from 4.0% in May 2023. On the local front, investors are also awaiting the latest data on the trade balance and overseas Filipino remittances for May 2023.

PSEi TECHNICAL ANALYSIS AND TRADING PLAN

Resistance: 6,400/6,750

Support: 6,000/6,200

Last week, the market continued to trade sideways with a downward bias and ended the week at 6,379.03, sitting along in the 6,400-support region for the main index. The PSEi stayed under its key moving averages (20-day, 50-day, 100-day, and 200-day) with the technical indicator moving average convergence/divergence (MACD) remaining below both the signal and zero lines, which indicates that the bears remain in control.

We believe that should the 6,400 area give in, the market can retest the next support levels at around 6,200 to 6,000. Moreover, we think that only a break above the 6,750 resistance could negate the current bearish sentiment in the market.

Lighten up if the PSEi bounces but fails to break above 6,750. Add to your position once the market decisively breaks above 6,750.

STOCK CALLS FOR THE WEEK

D&L Industries, Inc (DNL): Buy on Breakout/ FMSBC Target Price: PHP 8.63

DNL is currently consolidating after trading at oversold relative strength index (RSI) levels at the start of June 2023. It recently formed a continuation diamond pattern which is a long-term bullish pattern. According to Technical Insight, our automated chart pattern recognition software, a continuation diamond bullish pattern begins during a downtrend as prices create higher highs and lower lows in a broadening pattern.

Breaking out of the diamond’s boundary line signals the resumption of the prior uptrend. The MACD confirms a bullish trend for the counter as well, showing upward momentum since the start of June. We think that DNL can sustain this uptrend if it breaks above its key moving averages (50-day, 100-day, and 200-day). Accumulating once DNL breaks above PHP 7.70/PHP 7.75 on strong volume is advisable. Set stop limit orders below PHP 7.08 and take profits at around PHP 8.86/PHP 8.91.

Jollibee Foods Corp. (JFC): Buy/ FMSBC Target Price: PHP 275

Our constructive view on JFC is premised on mid-teens system-wide sales to growth, amid the resumption of store openings, upward price adjustments, post-COVID resurgence, and increased contribution of foreign businesses

We also see margins continuing to improve despite rising operating expenses and higher advertising and promotional spending. We see the latter to be driven by better store economics, higher gross margins, gains from the business transformation program, and the turnaround of Smashburger and Coffee Bean & Tea Leaf (CBTL).

Those who bought from our buying level of PHP 226.00 should continue to hold. Meanwhile, those looking to accumulate can buy JFC once the stock pulls back to PHP 226.00. Set stop limit orders below PHP 207.00 and take profits at around PHP 260.00. For long-term investors, our target price for JFC is PHP 275.00 (+19% from the last closing price).

Century Pacific Food, Inc. (CNPF): BUY ON BREAKOUT / FMSBC Target Price: PHP 29

CNPF expects that its public float will increase from 31% to 34%, which they believe will improve its trading liquidity and allow for greater investor participation in the stock. As for our outlook for CNPF, we mentioned in our report (“El Niño Boost”) that we project a meaningful recovery in CNPF’s margins next year driven by a healthy correction in skipjack tuna prices (c.15% of COGS).

Our view is premised on: (i) a long overdue correction in tuna prices, which has peaked every four to five years since 2006, with the last peak in October 2017 (>5 years ago); and (ii) 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.) Philippine exports year-on-year for May 2023 on Tuesday, July 11, 2023 (consensus estimate: -14.9%; April 2023: -20.2%)

2.) Philippine imports year-on-year for May 2023 on Tuesday, July 11, 2023 (consensus estimate: -16.2%; April 2023: -17.7%)

3.) US Consumer Price Index (CPI) YoY for June 2023 on Wednesday, July 12, 2023 (consensus estimate: 3.1%; May 2023: 4.0%)

4.) US Initial Jobless Claims as of July 8, 2023, on Thursday, July 13, 2023

5.) Overseas Filipino (OF) cash remittances YoY for May 2023 on Friday, July 14, 2023 (consensus estimate: 4.5%; April 2023: 3.7%)