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Sunday, January 27, 2013

Petron Corporation (PCOR)

Company Profile

Petron Corporation (PSE:PCOR) was incorporated in 1966 as Esso Philippines, Inc. and later renamed to Petrophil Corporation when the Philippine National Oil Company (PNOC) acquired Esso. In 1994, PNOC sold 40% of its shares in PCOR to Aramco Overseas Company B.V. (AOC), a wholly owned subsidiary of Saudi Arabian Oil Company (Saudi Aramco).

PCOR's principal business involves the refining of crude oil and the marketing and distribution of refined petroleum products, mainly for the domestic market. The Company sells a full range of refined petroleum products, including industrial fuel oil, diesel, gasoline, liquefied petroleum gas (LPG), jet fuel, kerosene, asphalt, solvent and mixed xylene and propylene. Straight-run fuel oil, diesel, and mixed xylene and propylene are exported while lubricating oils and greases are manufactured at PCOR's Lube Oil Blending Plant at the Pandacan Terminal. From the refinery, PCOR moves its products mainly by sea to its 31 depots and terminals situated all over the country. Through this nationwide network, PCOR supplies fuel oil, diesel, LPG and jet fuel to various industrial customers, power companies and international and domestic carriers.

As of end of December 2011, Petron's major shareholders comprised of Sea Refinery Corporaion, Petron Corporation Employees' Retirement Plan (PCERP), and San Miguel Corporation.

At present, PCOR has seven subsidiaries, namely, New Ventures Realty Corporation, Petrogen Insurance Corporation, Overseas Insurance Corporation, Ltd., Petron Foundation, Inc., Petron Freeport Corporation, Petron Marketing Corporation, and Petron Singapore Trading Pte. Ltd.

Income and Operations

After posting a P2.1 billion loss in the 2nd quarter of 2012 for its consolidated operations, the company managed a turnaround in the 3rd quarter recording a modest P500 million net income. For the first three quarters of 2012, Petron realized a consolidated net income of P932 million even while the company
continued to experience depressed margins because of volatility in global oil markets in the 2nd and 3rd quarters of 2012.  The Malaysian operation contributed P155 million in consolidated net income.

Looking at Petron Corporation's Revenue-Net Income chart, its revenue from the 2nd quarter of 2012 is slightly higher than 3Q, but it reported a net loss of P2.057 billion, mainly because of lower gross profit.

Why did PCOR report a net loss for the 2Q of 2012? Its 2.16% gross margin is too low to cover administrative expenses. Another factor is the high interest expense and financing charges. PCOR recorded P5.124 billion for the full year 2011, but as of 2012, its IEFC has already reached P5.76 billion. The higher finance charges were attributed to losses from commodity hedging transactions. It is common practice for volatile commodities such as oil to hedge its prices as protection from price movements and market conditions. It is a double-edged sword though, as the financial situation may move in an entirely different position than what you hedged it for.

Stocks Valuation

PCOR has been moving sideways for most of 2012. It currently trades at a very high 123x PE, but seems to have found a strong support at P10.20-P10.40.

What's to Like?

Petron Corporation is still one of the leading oil companies in the country today. The reputation and the network they built can't easily be outdone and temporary setbacks will not bring this company down. Its somewhat disappointing results may prove to be a good entry point if you're patient enough to wait.

Why Get Cautious?

The drastic decline in gross profit brings into question the management ability of the company. Granted most of it can be pinned to their petroleum products' higher average cost per barrel, but they can easily pass the charges to their customers as the oil prices are still deregulated. I also view their losing hedging positions as uncalculated risk given that it has continually dipped for the past few years.

Buffett Recommends...

How much trust are you willing to put on its management, particularly San Miguel Corporation, its largest stockholder, that they can turn this situation around? That should be the main question you should ask if you are considering investing or is currently invested in Petron Corporation. If you are not confident that the current management is doing their best to run this company, then no amount of profit can satisfy you no matter how patient you get.

Saturday, January 12, 2013

Effect of Shares Buyback on Stocks

What is a Share Buyback?

A share buyback is the repurchase of outstanding shares by a company of its own shares in the market. It reduces the total number of shares outstanding and the bought back stocks will be classified as treasury shares.

Buybacks can be carried out in two ways:

1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.

2. Companies buy back shares on the open market over an extended period of time.

Reasons for Buyback

A buyback allows companies to invest in themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. This effectively boosts its share price, and gives shareholders capital gains.

Below table best illustrates how a share buyback can increase the value of the stock. Assuming that the stock price per share remained at Php5 before and after the buyback, earnings per share will  increase because treasury shares are not entitled to dividend or income allotment.

                       EPS        =        Net Income     /     Total Outstanding Shares

Companies will buy back shares to increase its value and can be a source of capital in the future. They will often reason that their current stock price is undervalued and as such, buying back shares may be beneficial because it can provide additional cash when the treasury shares are disposed at a higher price.


Investors will have to be watchful as companies may opt for buybacks merely to improve its financial ratios or manipulate its stocks price to go up. It is important that the actions of the management are analyzed so as not to deceive the investing public of their true intentions. Finally, as with anything with Mr. Market, there is no certainty that the stock price of a company which entered into a buyback program will be profitable.    

Sunday, January 6, 2013

Metro Pacific Investments Corporation

Company Profile

Metro Pacific Investments Corporation (PSE:MPI) was incorporated on March 20, 2006 as a holding company for investments in real estate and infrastructure projects. MPI is 59.05%-owned by Metro Pacific Holdings, Inc.

MPI holds interests in water and sewerage utility company, Maynilad Water Services, Inc., through DMCI-MPI Water Company; toll roads through Metro Pacific Tollways Corporation (MNTC) and its subsidiaries, Manila North Tollways Corporation and Tollways Management Corporation; hospitals through Medical Doctors Inc. and Davao Doctors Hospital Inc., Riverside Medical Center, Inc., and East Manila Hospital Manager's Corporation; and real estate through Metro Pacific Corporation.

In 2010, MNTC participated in a public bidding conducted by the Bases Conversion and Development Authority (BCDA) for the right to manage, operate and maintain the 94-kilometer Subic-Clark-Tarlac Expressway Project (SCTEx) on an "as is, where is" basis for a period of 25 years extendable by another eight years or until October 30, 2043.

On July 20, 2011, MNTC and BCDA signed a Business and Operating Agreement (BOA) covering the assignment by BCDA to MNTC of its rights, interest and obligations under the Toll Operations Agreement relating to the management, operation and maintenance of the SCTEx.

Income and Operations

MPI currently operates on 4 core business segments:

  • Water Utilities  – The water utilities business segment primarily relates to the operations of DMCI-MPIC Water Company and Maynilad in relation to the provision of water and sewerage services.
  • Toll Operations – The toll operations business segment primarily relates to the operations and maintenance of toll facilities by MPTC and its subsidiary, Manila North Tollways Corporation and an associate, Tollways Management Corporation.
  • Healthcare  – The healthcare business segment primarily relates to the operations and management of hospitals, nursing and medical schools and such other enterprises that  have similar undertakings provided for by MPIC’s associates’ Medical Doctors, Inc. and Davao Doctors Hospital and subsidiaries Riverside Medical Center Inc., East Manila Hospital Managers Corp, Colinas Verdes Hospital Managers Corp and Asian Hospital Inc.
  • Power Distribution  – The power distribution business segment primarily relates to the operations of Meralco in relation to the distribution and supply of electricity.

MPI also has real estate operations through Neo Oracle.

Consolidated core net income increased by 27% from 3,945 million to 5,025 million as of 3Q2012. The higher earnings were brought about by 14% increase contribution from Maynilad, 4% in MPTC, 33% increase in its power segment and 107% in healthcare.  

Stocks Valuation

The current upsurge in MPI's stock price has made its valuation a bit expensive. It currently trades at 16-17x PE and enjoyed an uptrend movement for last week after moving sideways for almost six months. 

What's to Like?

MPI aggressively eyes expansion on its hospital network. It also acquired additional 2.7% stake in Meralco earlier in 2012. It plans to expand further its water business, possibly looking at potential partnerships abroad, particularly in Vietnam. It has also forged a partnership with Ayala Corporation to jointly pursue PPP projects. Overall, it can be said that MPI is in full swing for expansion.    

Why Get Cautious?

Metro Pacific's financial indicators are actually pretty low at this point. While its net income margin is at 24%, it only posts 6.2% Return on Assets and 8.4% on Return on Equity. The net income margin looks good, but the low RoA and RoE means that has not fully utilized its assets. 

Buffett Recommends...

Metro Pacific Investments Corporation is certainly a company to watch out for. Behind the business guidance and knowledge of Manny Pangilinan, it is only a matter of time until its aggressive moves are rewarded and converted into real income. Buying now even at a perceived expensive price will prove to be worth it five to ten years from now. 

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The information provided in our review may not be as relevant today given the time gaps and change in varying economic conditions. While we strive to account every business possibilities that may affect a company's profitability, this is not a recommendation to buy or sell these particular stocks. We cannot be held liable for any investment decisions made in consequence to our articles.