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Stocks in Focus: WED 14 FEB 2018

AP: Reducing estimates on potential delays


in operation of power project
Commercial operation of power projects pushed back due to regulatory issues. The start (AS OF FEB 13, 2018)
of the commercial operation of the 68MW Manolo Fortich Hydroelectric plant and the 400MW INDICES
Pagbilao Coal Expansion Project could be slightly pushed back due to potential delays in securing Close Points % YTD%
PSEi 8,570.14 82.23 0.97 0.14
the necessary regulatory permits. The Manolo Fortich is expected to begin commissioning works
All Shares 5,053.21 27.31 0.54 1.27
at the end of the month, but it is still waiting for the Certificate of Endorsement (COE) from
Financials 2,206.01 7.12 0.32 -1.08
the Department of Energy in order to be able to begin commercial operation. Meanwhile, the Holding Firms 8,708.78 101.17 1.18 1.07
Pagbilao Coal Expansion project is already in the commissioning stage, but it is still waiting for Industrial 11,397.63 -72.99 -0.64 1.48
the Certificate of Compliance (COC) from the Energy Regulatory Commission. However, the Mining & Oil 11,396.77 112.32 1.00 -0.92
issuance of permits from the government could be delayed. Property 3,868.60 55.75 1.46 -2.75
Services 1,706.91 14.70 0.87 5.38

Reducing estimates, but maintaining BUY rating. After factoring in the delay in the operation
Dow Jones 24,640.45 39.18 0.16 -0.32
of Manolo Fortich and the Pagbilao Coal Expansion Project, we are reducing our earnings
S&P 500 2,662.94 6.94 0.26 -0.40
forecast for AP by 7.2% to Php25.4Bil for 2018E. We are also reducing our FV estimate on AP by Nasdaq 7,013.51 31.55 0.45 1.60
0.8% to Php51.6/sh after factoring in the changes in our earnings forecast. Despite this, we are
maintaining our BUY rating on AP.
INDEX GAINERS
Ticker Company Price %
Top Stories:
SMPH SM Prime Hldgs Inc 36.15 3.29
AEV Aboitiz Equity Ventures 73.95 2.71
JFC: Full-year profits end in line with estimates, to acquire additional 45% stake in Smashburger RLC Robinsons Land Corp 20.95 2.70
RCB: 2017 earnings grow 11%; in line with consensus estimate JGS JG Summit Hldgs Inc 74.90 2.6
DMC DMCI Hldgs Inc 13.70 2.24
Other News:
INDEX LOSERS
AEV, AC, AGI, FDC, JGS, MPI: Consortium submits Php350Bil proposal for NAIA uplift Ticker Company Price %
JFC Jollibee Foods Corp 277 -2.12
Market Summary SMC San Miguel Corporation 142 -2.07
LTG LT Group Inc 22.6 -1.31
The PSEi advanced on Tuesday, gaining 82.23 points or 0.97% to close at 8,570.14. PCOR Petron Corporation 9.36 -1.06
MBT Metrobank 97.3 -0.82

Index gainers led decliners 21 to 7, while 2 issues remained unchanged. Likewise, all sectors
except for Industrial (-0.64%) ended in green, with Property (+1.46%) leading the group. TOP 5 MOST ACTIVE STOCKS
Significant index gainers were SMPH (+3.29%), AEV (+2.71%), RLC (+2.70%), JGS (+2.60%), and Ticker Company Turnover
DMC (+2.24%). Meanwhile, the significant index decliners were JFC (-2.12%), SMC (-2.07%), and SMPH SM Prime Hldgs Inc 426,406,300
LTG (-1.31%). BPI Bank of the Phil Islands 409,458,800
SM SM Investments Corp 394,653,500
ALI Ayala Land Inc 326,682,400
Value turnover increased to Php7.7Bil from Php5.9Bil in the previous session. Meanwhile,
AC Ayala Corporation 289,386,200
foreigners continued to be net sellers for the thirteenth consecutive day, liquidating Php842Mil
worth of shares.

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
DAILY NOTES I PHILIPPINE EQUITY RESEARCH

WED 14 FEB 2018

Stocks in Focus:

GEORGE CHING
SENIOR RESEARCH MANAGER
AP: Reducing estimates on potential delays in
operation of power projects
ABOITIZ POWER CORPORATION
BUY Commercial operation of power projects pushed back due to regulatory issues. The
PHP51.60 start of the commercial operation of the 68MW Manolo Fortich Hydroelectric plant and the
400MW Pagbilao Coal Expansion Project could be slightly pushed back due to potential
delays in securing the necessary regulatory permits. The Manolo Fortich is expected to begin
commissioning works at the end of the month, but it is still waiting for the Certificate of
Endorsement (COE) from the Department of Energy in order to be able to begin commercial
operation. Meanwhile, the Pagbilao Coal Expansion project is already in the commissioning
stage, but it is still waiting for the Certificate of Compliance (COC) from the Energy Regulatory
Commission. However, the issuance of permits from the government could be delayed. In
December 2017, The Office of the Ombudsman suspended all four commissioners of the ERC
for one year. (for allegedly giving due preference to Meralco and its power supply agreements
with affiliated power generation companies by extending the deadline for their compliance
with the competitive selection process). This put to a halt all activities pertaining to the
approval of Power Supply Agreements and the issuance of COCs. While the Court of Appeals
issued a 60 day Temporary Restraining Order in early February to stop the suspension of the
four ERC commissioners, we believe that the 2 month suspension of the ERC commissioners
will likely delay the issuance of the COC needed by AP to begin the operation of its power
projects.

We previously assumed that both the Manolo Fortich and the Pagbilao Expansion Project
would begin commercial operation at the start of 1Q18. Our new forecast now assumes that
both of these projects will begin operating in 3Q18, around six months later than our previous
forecast.

Reducing estimates, but maintaining BUY rating. After factoring in the delay in the
operation of Manolo Fortich and the Pagbilao Coal Expansion Project, we are reducing our
earnings forecast for AP by 7.2% to Php25.4Bil for 2018E. We are also reducing our FV estimate
on AP by 0.8% to Php51.6/sh after factoring in the changes in our earnings forecast. Despite
this, we are maintaining our BUY rating on AP. We continue to like AP given its vertically
integrated structure which will allow it to expand its power generation portfolio despite
concerns of oversupply in the market. Furthermore, valuations have become increasingly
attractive after the stock’s recent sell-off. Note that AP’s share price is down 8.5% in the past
twelve months, significantly underperforming the PSEi which is up 18.9% during the same
period. Moreover, AP is now trading at only 11.5X 2018E P/E, a discount relative to the 12X
average P/E of industry peers. While AP’s dividend yield is expected to dip to 2.9% in 2018 (as
a result of the lower 2017E earnings), we expect this to improve to 4.3% in 2019 due to the
improvement in earnings next year. Based on AP’s current market price of Php39.75/sh, upside
to our FV estimate of Php51.6/sh is significant at 29.7%.

COL Financial Group, Inc. 2


DAILY NOTES I PHILIPPINE EQUITY RESEARCH

WED 14 FEB 2018

Top Stories:

ANDY DELA CRUZ


JFC: Full-year profits end in line with estimates,
RESEARCH ANALYST
maintain HOLD
JOLLIBEE FOODS CORPORATION
HOLD Full-year profits rise 15.0% y/y to Php7.1 Bil. JFC’s net income in 2017 grew by 15.0% y/y
PHP257.00 to Php7.1 Bil, in line with COL and consensus estimates as it accounts for 103.6% and 101.8%
of COL and consensus forecasts, respectively. However, JFC’s operating profits ended slightly
below COL and significantly below consensus estimates as it grew by a slower pace of only
9.4%. This was due to the lackluster operating income performance of JFC in 4Q17 which
declined by 4.6% to Php1.5 Bil. According to JFC, the rapid rise of raw material costs and store
and manufacturing expenses greatly reduced its gross profit margins, affecting its profitability.
JFC did not disclose the reason for the higher net income figure versus its operating profits but
we think that this may be due to the bigger loss of its 60% stake in the operation of Dunkin
Donuts in China. Note that as of 9M17, Dunkin Donuts in China already booked a net loss of
Php420.1 Mil.

Nevertheless, revenues remained upbeat for the year, growing by 15.6% y/y to Php131.6 Bil.
This is in line with COL (101.0% of forecast) and consensus (101.7% of forecast) estimates. This
was driven by a sizable 465 new stores in 2017 and a healthy 7.0% same-store sales growth.
The revenue growth was driven by its domestic restaurant systemwide sales which grew by
13.2% y/y to Php135.2 Bil and its international restaurant systemwide sales which grew by
23.4% y/y to Php36.0 Bil.

Exhibit 1: Results summary


% of Forecast
in PhpMil 4Q16 4Q17 % Change FY16 FY17 % Change
COL Consensus
Revenues 31,620 37,060 17.2 113,811 131,573 15.6 101.0 101.7
Operating Income 1,549 1,477 (4.6) 6,465 7,075 9.4 97.0 94.0
Operating Margin (%) 4.9 4.0 - 5.7 5.4 - - -
Net Income 1,776 1,984 11.7 6,165 7,089 15.0 103.6 101.8
Net Margin (%) 5.6 5.4 - 5.4 5.4 - - -

Source: JFC, COL Estimates, Bloomberg

4Q17 revenues up 17.2% y/y to Php37.1 Bil. Revenues of JFC continued to be strong in the
fourth quarter of 2017 as it rose by 17.2% y/y to Php37.1 Bil. This was driven by the healthy
7.0% same-store sales growth, a 9.0% incremental growth from its store expansions, and a
1% impact from foreign currency exchange rates. For the quarter, its Philippine restaurant
systemwide sales grew by 14.8% y/y to Php37.8 Bil and its international restaurant systemwide
sales grew by 21.3% y/y to Php10.3 Bil. JFC’s international business continue to be the fastest
growing thanks to its Southeast Asia (excluding Philippines, +41.0% y/y), North America
(+20.6% y/y), China (+18.4% y/y), and the Middle East (+17.7% y/y).

COL Financial Group, Inc. 3


DAILY NOTES I PHILIPPINE EQUITY RESEARCH

WED 14 FEB 2018

Operating income declined by 4.6% y/y to Php1.5 Bil in 4Q17. As discussed earlier, JFC’s
operating income in 4Q17 dropped by 4.6% y/y to Php1.5 Bil. The figure brought JFC’s full-year
operating income to end at Php7.1 Bil, behind COL (97.0% of full-year forecast) and consensus
(94.0% of full-year forecast) estimates. JFC attributes the its lower operating profits to the rise
in raw material costs and store and manufacturing expense. The rate of the rise of raw material
costs was faster than JFC’s selling price increases, thus affecting its gross profit margin.

We think that our more conservative stance in 2018 (Php7.7 Bil net profits) compared
to consensus (Php8.0 Bil net profits) is still within reach despite the said development.
Nevertheless, JFC seems optimistic for 2018 as it aims to recover the lost profit margin (despite
rising inflation rate) due to its gradual price increases set for the year.

To acquire an additional 45% of Smashburger for US$100 Mil. JFC announced the
acquisition of an additional 45% stake in Smashburger Master LLC (Smashburger) via its wholly-
owned subsidiary Bee Good! Inc. for US$100 Mil. Note that the first 40% stake in Smashburger
amounted to US$99.5 Mil. Following the transaction, this puts the total equity stake of JFC in
Smashburger to 85%. According to JFC, the acquisition is expected to be complete in one to
two months. Note that JFC’s cash as of end 9M17 is around Php16.5 Bil (US$316.5 Mil). We think
that this allows JFC to fully cover the transaction cost in cash.

Considering this, JFC may consolidate Smashburger into its books starting 2Q17. Although it
has an internal target to hit break-even for Smashburger operations by end-2018, the higher
stake of JFC in Smashburger could still potentially drag JFC’s profits at least in the short-term.
Recall that Smashburger incurred a net loss of Php845.4 Mil in 9M17.

Aggressive capex set for 2018. JFC disclosed that its capex for 2017 landed at Php8.8 Bil,
higher than our Php7.6 Bil forecast largely due to the significantly higher number of stores
opened for the year (465 stores compared to our forecast of 295 stores). For 2018, JFC also
allotted Php12.0 Bil in capex mostly for new stores and the renovation of existing stores. This is
significantly higher than our 2018 capex forecast of Php7.7 Bil.

Maintain HOLD. We are maintaining our HOLD rating for JFC with a fair value estimate of
Php257.0/sh. At its current price of Php277.0/sh, JFC is trading at 37.8X 2018E P/E, significantly
above its local and global peers’ average. The stock is also already trading above our fair value
estimate. Nevertheless, we continue to like JFC fundamentally given its dominant position
in the domestic quick service restaurant industry as well as the improving profitability of its
international business. We believe that pullbacks are opportunities to buy the stock.

COL Financial Group, Inc. 4


DAILY NOTES I PHILIPPINE EQUITY RESEARCH

WED 14 FEB 2018

CHARLES WILLIAM ANG, CFA


RCB: 2017 earnings grow 11%; in line with consensus
DEPUTY HEAD OF RESEARCH
estimate
JOHN MARTIN LUCIANO
RESEARCH ANALYST 2017 earnings grow 11%; in line with consensus estimate. RCBC’s net income during the
RIZAL COMMERCIAL BANKING
fourth quarter jump 146% to Php904Mil from Php367Mil in the previous year. However, the
N/A jump in earnings was largely due to the low base set last year. Recall that the bank posted weak
N/A net interest income in the previous period. This brought the full-year earnings up by 11% y/y
to Php4.3Bil. Compared to consensus estimate, earnings ended in line, representing 98.7% of
full-year forecast. Meanwhile, net interest income during the full year expanded 15% y/y. The
2017 earnings translate to an ROE of 6.7%

Exhibit 1: Results Summary


% FY17E
4Q16 4Q17 % Change FY16 FY17 % Change
Consensus
Net interest income 3,850 4,857 26.2 15,707 18,000 14.6 NA
Non-interest income 1,412 1,670 18.3 7,114 7,100 -0.2 NA
Operating expenses 4,292 4,802 11.9 17,355 17,800 2.6 NA
Net income 367 904 146.3 3,868 4,304 11.3 98.7
source: RCB, Bloomberg

Net interest income starts to recover. After posting weak net interest income in 2016, net
interest income has started to show signs of recovery in 2017. During the fourth quarter, net
interest income expanded 26% y/y to Php4.9Bil. This brought the full-year total to Php18.0Bil,
up 15% y/y. The expansion was driven by both higher volume and margins. According to
the bank, loan portfolio expanded 16% y/y to Php353Mil. All segments contributed to the
growth with corporate, SME, consumer, and credit card receivables rising 12%, 39%, 15%,
and 29%, respectively. Meanwhile, net interest margin improved by ~30 bps to 3.5%, based
our estimates. We believe the improvement was likely brought about by both lower cost of
funding and higher loan yields.

Slow operating expenses growth due to high base. The bank’s operating expenses in the
fourth quarter climbed 12% y/y to Php4.8Bil. This brought the full-year total to 17.8Bil, up by
just 3% y/y. The slow growth was largely due to the high base set in the previous year. Recall
that the BSP imposed a penalty amounting to Php1Bil in relation to the Bangladesh Bank Cyber
Heist. Excluding the said fine, we estimate operating expenses for the full year expanded 9%
y/y.

The consensus rating on RCB is a BUY with an FV estimate of Php64.00/sh

COL Financial Group, Inc. 5


DAILY NOTES I PHILIPPINE EQUITY RESEARCH

WED 14 FEB 2018

Other News:

RESEARCH ANALYSTS AEV, AC, AGI, FDC, JGS, MPI: Consortium submits Php350Bil proposal for
FRANCES ROLFA NICOLAS NAIA uplift
ANDY DELA CRUZ
JUSTIN RICHMOND CHENG
A consortium of seven conglomerates submitted a Php350Bil proposal to transform the Ninoy
JOHN MARTIN LUCIANO
Aquino International Airport (NAIA) into a regional airport hub. The seven companies are
ADRIAN ALEXANDER YU
Aboitiz Infra Capital Inc., AC Infrastructure Holdings Corp., Alliance Global Group Inc., AEDC,
Filinvest Development Corp., JG Summit Holdings Inc., and Metro Pacific Investment Corp.
The first phase aims to improve and expand current terminals, which would cost Php100Bil
and be completed within 48 months. Once completed, the airport’s capacity will grow from
the current 30Mil passengers to 65Mil passengers per year. Meanwhile, the second phase will
involve the construction of a second runway, taxiways, passenger terminals, and associated
support infrastructure. This will further raise the capacity to 100Mil passengers per year. (Source:
Philstar)

Changes in Shareholdings

Acquired or Price per


Stock Volume Person (Designation)
Disposed share
Maria Cristina C. Gotianun
SCC 2,100 A 35.70
(Director, EVP & Chief Information Officer)
Victor A. Consunji
SCC 2,200 A 35.70
(Director, President & COO)
Ma. Edwina C. Laperal
SCC 2,100 A 35.70
(Director)
Victor A. Consunji
SCC 100,000 A 35.34
(Director, President & COO)
Maria Cristina C. Gotianun
SCC 100,000 A 35.34
(Director, EVP & Chief Information Officer)
6,000 35.30
100,000 35.34
Ma. Edwina C. Laperal
SCC 2,000 A 35.40
(Director)
1,000 35.50
1,000 35.55
20,000 Margaret G. Ang
MRSGI A 3.52
119,000 (Director)
Source: PSE

COL Financial Group, Inc. 6


CALENDAR OF EVENTS DAILY NOTES I PHILIPPINE EQUITY RESEARCH

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PSE: EX-DATE PH P9.00 C A S H D IV IDEND HO LIDAY: C H I N E S E N E W YE A R L R : E X-DAT E PH P0 . 0 7 C A S H D IVID END

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UB P: EX-DATE PH P1.90 C A S H D IV IDEND HO LIDAY: E D S A R E V O LU T I O N A N N I V E R SA RY

COL Financial Group, Inc. 7


DAILY NOTES I PHILIPPINE EQUITY RESEARCH

WED 14 FEB 2018

IMPORTANT RATING DEFINITIONS


BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to
12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor
or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve
months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be
incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are subject to change
without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/
or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade
them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA


VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA


DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENG


RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com

JOHN MARTIN LUCIANO ADRIAN ALEXANDER YU


RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com adrian.yu@colfinancial.com

COL FINANCIAL GROUP, INC.


2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 8