Morning Brief: 30 March 2011

Deal shakes up telco sector PHILIPPINE LONG DISTANCE Telephone Co. (PLDT) yesterday moved to increase its dominance of the local telecommunications industry, announcing that it would be taking control of a Gokongwei-led competitor. PLDT will acquire a 51.55% stake in Digital Communications Philippines, Inc. (Digitel) -- the firm behind the low-price Sun Cellular brand -- from JG Summit Holdings, Inc. in a transaction valued at P69.2 billion. A mandatory offer to minority investors for the rest of the firm, if taken up fully, is expected to bring the deal’s total value to P74.1 billion. JG Summit, in return, will get a 12.8% stake in PLDT. The purchase involves 3.28 billion shares in Digitel along with zero-coupon convertible bonds and inter-company advances owed JG Summit, PLDT President Napoleon L. Nazareno said in a press conference. PLDT will swap one new share for every P2,500 worth of Digitel assets to be acquired. Minority shareholders were given the option to sell at a discounted P1.60 apiece or swap their stakes for PLDT’s shares at a premium of P2,500 per. The deal, which officials said would result in a combined cellular market share of some 67% -- no estimates were provided regarding other services -- is expected to be completed by end-June, the two companies said. The Sun Cellular and Smart cellular brands will be kept separate, while "Digitel fixed line operations can complement those of PLDT’s." Lance Y. Gokongwei, president and chief operating officer of JG Summit Holdings, said the share swap was a "very difficult decision" that would help maintain their participation in the industry. JG Summit Holdings will be given one board seat in PLDT as a result of the transaction, he said, with the post going to JG Summit Chairman James L. Go. Rival firm Globe Telecom, Inc., in a statement, said it was prepared to keep competing in the mature industry. "The Digitel and PLDT merger will not fundamentally change our strategy. We stand ready to compete, and to defend and grow our market share," Globe President and CEO Ernest L. Cu said. "This industry has always been intensely competitive, and we have been a strong challenger to a dominant incumbent all this time. We will continue to focus on delivering relevant products to our retail and corporate customers, providing differentiated customer service and enhancing our network to deliver the best experience possible to our subscribers," Mr. Cu added. Jose Mari Lacson, analyst at Campos, Lanuza & Co., Inc., said: "PLDT is not out to kill the competition, but growth of Globe will be limited." A price war that was accelerated by the entry of Digitel has eroded telco margins in the country’s saturated market, with penetration at around 90% against a population estimated to be nearing 100 million. PLDT Chairman Manuel V. Pangilinan said the deal would dilute stakes held by Hong Kong’s First Pacific Co. Ltd. and Japan’s NTT Communications. First Pacific’s stake will drop to 22% from 26% while NTT Communications’s stake will decrease to 18% from 21%. PLDT -- valued at $8.9 billion -- saw it shares close unchanged at P2,036 per yesterday ahead of the deal’s announcement. The firm will come under one-hour trading halt starting at 10:00 a.m today, the Philippine Stock Exchange said. JG Summit and Digitel -- valued at $269 million -- were last traded on Monday at P24.50 and P1.83 per share, respectively. Trading was suspended yesterday on the firms’ request. Shares of Globe Telecom -- valued at $2.1 billion -- closed at P746 apiece yesterday, 7% or P49 higher. Mediaquest Holdings, Inc., a unit of the Beneficial Trust Fund of PLDT, has a minority stake in BusinessWorld. -- reports from K. A. Martin and Reuters Inflation to exceed 5% -- Tetangco INFLATION is expected to top 5% in the coming months -- likely prompting further changes to monetary policy -- but the average rate for the year will still be within the 3-5% target, the Bangko Sentral ng Pilipinas (BSP) chief yesterday said. "Inflation will peak in the second and third quarter and in some months will exceed the target," central bank Governor Amando M. Tetangco, Jr. said at the sidelines of a Management Association of the Philippines (MAP) meeting yesterday. "In some months it will be more than 5% and in some it will be less," he added. Still, the outlook is that the rise in consumer prices will eventually taper off, resulting in an "average that is well within target". The BSP, said Mr. Tetangco, needs to "make sure that inflation expectations remain anchored and that any possible second effects would be dealt with at an early stage". "If we will take any action, it is going to be gradual". Analysts expect the central bank to keep raising policy rates. "I see inflation breaking the 5% target, rising up to 5.5%," University of Asia and the Pacific economist Cid L. Terosa said in a telephone interview. "I think it is inevitable for the central bank to raise rates. The market can absorb further rate hikes as they have other options, but end consumers have little left to do when inflation continues to rise," he added. The BSP, which has warned that its 4.4% inflation forecast for 2011 was at risk, last week set a 25 basis point rate hike, its first adjustment since July 2009. "Our view is that the central bank will continue to raise rates, as it is only in the beginning of a tightening cycle," Standard Chartered economist Simon Kwok-Cheung Wong said in an e-mail. The central bank’s policymaking Monetary Board is scheduled to hold its next review on May 9. Mr. Tetangco, in his speech at the MAP meeting, said the country was still set for modest economic growth despite disruptions such as civil unrest in the Arab world and the disaster in Japan. "Stronger private consumption, overall improvement in [the] business outlook, healthy banking system and infrastructure growth because of PPPs (public-private partnerships) will offset the risks posed by escalating commodity prices and [a] possible decrease in remittances due to crises in the MENA (Middle East and North Africa) and Japan," he said. "Effects of the recent events will likely to be just in the first half. In the long-term the effect will be positive." Economic managers have ordered a review of existing macroeconomic targets, with some Cabinet officials and Mr. Tetangco saying that the 2011 gross domestic product goal of 7-8% will likely be missed. -- with a report from Reuters

U.S. Stocks Advance Amid Gains From Home Depot, Energy Shares U.S. stocks advanced, sending the Standard & Poor’s 500 Index to a three-week high, as Home Depot Inc. (HD) drove consumer companies higher and energy shares rose amid speculation production will increase in the Middle East. Home Depot rose 2.9 percent, the most in the Dow Jones Industrial Average, as the largest U.S. home-improvement retailer sold $2 billion in bonds to help finance buybacks. Rowan Cos. and Schlumberger Ltd. (SLB) rallied more than 4.4 percent as oil gained 0.8 percent. AK Steel Holding Corp. (AKS) gained 5.2 percent as SAC Capital Advisors LP reported a stake. Apollo Group Inc. (APOL), owner of the biggest U.S. for-profit college, fell 4.3 percent following lower enrollment. The S&P 500 rose 0.7 percent to 1,319.44 at 4 p.m. in New York. It rebounded after falling to 1,305.26, compared with yesterday’s 50-day average of 1,306.11, a bullish sign to some traders. The Dow gained 81.13 points, or 0.7 percent, to 12,279.01, three days before a U.S. government report forecast to show non-farm payrolls increased by 190,000 in March. “It’s hard not to want to be a part of this market when there’s clear economic momentum being driven by the jobs market,” said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $340 billion. “Any other week, these downgrades of Greece and Portugal would knock the market down.” Treasuries Drop on Federal Reserve View After $35 Billion Five-Year Sale Treasuries tumbled and the U.S. paid the highest yields in almost a year at a government debt auction for a second day as the St. Louis Federal Reserve’s president reiterated that the central bank may need to trim back bond purchases with the economy strengthening. Yields on five-year notes climbed for a ninth day in the longest losing streak since before Lehman Brothers Holdings Inc. collapsed in 2008 as the Treasury paid the highest yield at a five-year debt auction since April 2010. James Bullard of the St. Louis Fed said in Prague today that the central bank may need to cut about $100 billion from its $600 billion plan to buy Treasuries through June under what’s become known as its policy of quantitative easing. “The auction was not very good,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “There are not many takers coming into the market. People don’t know what the Fed is going to do. The market’s in a state of confusion.” Yields on existing five-year notes climbed five basis points, or 0.05 percentage point, to 2.23 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent security maturing in February 2016 dropped 7/32, or $2.19 per $1,000 face amount, to 99 17/32. Two-year note yields gained as much seven basis points to 0.82 percent, the highest level since Feb. 17. Five-year note yields touched 2.24 percent, the highest since March 4.

Crude Oil Advances as Equities Increase Amid Signals Economy to Recover Oil rose for the first time in four days in New York as an advance in U.S. equities signaled the economic recovery may accelerate. Crude gained 0.8 percent, erasing an earlier drop, as the Standard & Poor’s 500 Index increased amid advances in consumer stocks and St. Louis Federal Reserve President James Bullard said the Fed may be able to cut about $100 billion from its plan to buy Treasury securities as the economy rebounds. “We’re seeing equities move higher, and that’s giving a little bit of positive sentiment toward crude,” said Matt Smith, a commodities analyst for Summit Energy Services Inc. in Louisville, Kentucky. “The remarks by Mr. Bullard indicate the potential for the economy is looking a little better.” Crude for May delivery gained 81 cents to settle at $104.79 a barrel on the New York Mercantile Exchange. Oil has risen 28 percent in the past year. Prices pared gains after the settlement when the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles increased 5.69 million barrels last week to 356.4 million. May oil rose 54 cents, or 0.5 percent, to $104.52 a barrel in electronic trading at 4:31 p.m. Brent crude for May settlement on the London-based ICE Futures Europe exchange rose 36 cents, or 0.3 percent, to $115.16 a barrel. The S&P 500 gained 0.7 percent to 1,319.44 and the Dow Jones Industrial Average rose 0.7 percent to 12,279.01. If uncertainties in the global economy are resolved, the Fed could “pull up a little bit shy of our total of $600 billion,” in planned purchases of Treasury securities, a measure known as quantitative easing, Bullard told reporters today in Prague, where he was attending a financial conference.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

BDO UNIBANK INC.

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001

Philippine Markets: 28 March 2011

28 March 2011

USD/PhP: 43.45 + 0.145 PSEi: 3913.98 + 38.17
USD/JPY: 81.72 PFINC: 877.18 +9.55
EUR/USD: 1.4078 BDO: 49.90 - 0.50
GBP/USD: 1.5986 BPI: 55.05 + 1.25
PDSTF3M: 1.2942 MBT: 63.20 + 0.95
Prices as of 4:00pm Source: Bloomberg, Reuters


PH stocks up nearly 1%
By Doris Dumlao
Philippine Daily Inquirer

MANILA, Philippines—Buoyant global markets and selective stock plays set the stage for an upbeat local stock-market opening on Monday.

The main-share Philippine Stock Exchange index gained by 38.17 points, or 0.98 percent, to finish at 3,913.98.

The gains were led by the financial and property counters, which both surged by over 1 percent. All other counters were also up.

Value turnover amounted to P4.26 billion. There were 78 advancers as against 40 decliners and 46 unchanged stocks.

Telco stocks Digitel and PLDT led the day's gains followed by Digitel's parent firm JG Summit. Traders said Digitel is becoming more interesting to investors based on both corporate fundamentals and a potential merger and acquisition play.

Gaming stocks Belle and Leisure & Resorts were likewise up on favorable prospects for the privately run casino businesses.

Other stocks that traded favorably were Meralco, Ayala Land, Metro Pacific Investments, Semirara Mining, Metrobank, Ayala Corp., DMCI, AGI and SM Prime Holdings.

On the other hand, EDC, Cebu Air, Aboitiz Power, FPH and Globe Telecom traded in the red.

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001

Morning Brief: 28 March 2011

Ratings drop for Aquino www.bworldonline.com PUBLIC SATISFACTION with President Benigno S. C. Aquino III’s performance has fallen and controversies such as his purchase of a luxury car apparently have not helped, a new Social Weather Stations (SWS) survey found. Most Filipinos still approve of Mr. Aquino but his latest net satisfaction rating is down 13 points to +51 (69% satisfied minus the 18% dissatisfied) from November’s +64 (74% satisfied, 10% dissatisfied), results of a March 4-7 poll made exclusive to BusinessWorldshowed. Interviewed on the issue of the president’s purchase of a Porsche late last year, nearly half or 48% said it was not a good example for the chief executive of a country like the Philippines, notwithstanding details such as the car was not brand new and that Mr. Aquino had used his own money. A political analyst warned that results pointed to "uneasiness," while Malacañang said a dip in Mr. Aquino’s numbers had been expected following his overwhelming election win last year. Scores in all areas but one, socioeconomic classes and gender were down from November last year. In Luzon, urban areas, among the ABC class and among males, Mr. Aquino particularly saw his net ratings dip into "good" territory from "very good." His sole gain was in the Visayas to a "very good" +60 from +56 in November. A "very good" net rating of +53 also came from Mindanao but this was down from +65 previously. It dropped 21 points to a "good" +48 in the Balance of Luzon from a "very good" +69, and by a slightly smaller 18 points to a "good" +41 in Metro Manila from a "very good" +59. Rural satisfaction dipped to a net +55 from +67, both "very good," while urban satisfaction fell further to a "good" +47 from a "very good" +61 in November. By socioeconomic class, Mr. Aquino’s net rating dived by 26 points to a "good" +49 from an "excellent" +75. Less substantial drops among the class D or masa and the class E allowed the president to maintain "very good" ratings of +51 (from +63) and +50 (from +64), respectively. Satisfaction among men dropped to a "good" +47 from a "very good" +65, while women were apparently more forgiving as their rating of +55 -- down from +63 -- kept Mr. Aquino’s net score in "very good" territory. The SWS classifies net satisfaction scores of +70 and above as "excellent"; +50 to +69, "very good"; +30 to +49, "good"’ +10 to +29, "moderate"; +9 to -9, "neutral"; -10 to -29, "poor"; -30 to -49, "bad"; -50 to -69, "very bad"; and -70 and below "execrable." Many respondents, meanwhile, objected to purchase of a Porsche 911, with the SWS finding pluralities of 52% in the Visayas, 51% in Mindanao and 46% in the Balance of Luzon. Pluralities of 50% and 45%, respectively were also recorded among the masa and the class E. Mixed results were recorded in Metro Manila (44% agree, 44% disagree and 13% undecided) and among the class ABC (48% agree, 46% disagree, 6% undecided). Asked to comment, Palace officials noted that Mr. Aquino’s scores remained in the "good" to "very good" range. "Overall, across almost all sectors of society, the President continues to enjoy majority support," Presidential Spokesperson Edwin Lacierda said in a text message. Sec. Ricky Carandang of the Presidential Communications Development and Strategic Planning Office took a more pragmatic view. "In general, you tend to see a dip in the numbers after the euphoria of the election wears off. Still, this should remind us that the public is eager to see the results of our reforms sooner rather than later," he said in a separate text message. As for the unpopular sports car purchase, the Palace insisted that the SWS results involved "public opinion on a private decision" and were "not relevant" to judgments on the President’s performance. "The public recognizes it as a private issue. Hence, it does not connect the car with the President’s performance," Mr. Lacierda said. Mr. Carandang said the public reaction was "understandable," but emphasized that "there was never any doubt that the Porsche was purchased by the President with his own money and not with public funds." Ramon C. Casiple, political analyst at the Institute for Political and Electoral Reforms, said Mr. Aquino had made a bad judgment call. "He should have known what the political ramifications would be when he bought that car," Mr. Casiple said in Filipino. The people, he pointed out, "go by impression." More worrisome, said Mr. Casiple, is that "This survey already reflects disappointment ... it’s not distrust but uneasiness, particularly because this administration has policies that tend to alienate people..." He claimed that dissatisfaction would increase given more recent issues, among these the move to postpone the elections in the Autonomous Region of Muslim Mindanao and the official response to displacements hitting overseas Filipino workers. "One day you applaud a decision and on a subsequent day you don’t understand what they are doing ... Unfortunately, the picture coming out is that there is no direction ... we’re talking of reaction only," Mr. Casiple said. The SWS polled 1,200 adults nationwide for the March 4-7 survey, which had sampling error margins of ±3% for national and ±6% for area percentages. Last week pollster Pulse Asia, Inc. reported that a Feb. 24 to March 6 poll had found Mr. Aquino’s performance and trust ratings basically unchanged from October. It said 74% approved of his performance, down from 79%, while his trust rating also slipped to 75% from 80%. Rotating brownouts loom By MYRNA M. VELASCO www.mb.com.ph MANILA, Philippines -- Fears of rotating brownouts this summer were raised following the tripping of the San Jose-San Manuel transmission line of the National Grid Corporation of the Philippines (NGCP), causing power outages in Metro Manila and nearby areas despite the relatively low demand for electricity last Saturday. The brownouts lasted from 2 p.m. to 5 p.m. A day after the incident, system operator NGCP was still clueless on what caused the line to trip which triggered massive power loss, primarily in Metro Manila and neighboring areas. “It is too early to say whether the tripping is a function of overloading or not. We will just have to wait for the report,” NGCP spokesperson Cynthia Alabanza said, stressing that their technical people are still investigating the incident. Power industry players are apprehensive over the reliability of the transmission system with the power line tripping with relatively low demand. They are also fidgety as to the implications of such incident especially during the summer months when demand for electricity picks up. Alabanza argued that “overloading” could not have been the only cause of the tripping, as she indicated that even falling trees or storm-tossed tree branch crashing on a transmission line may trigger a line tripping and consequent power outages. She pointed out that in the case of the brownout incidents triggered by the San Jose-San Manuel line, the initial efforts “were focused on putting the three downed transformers back online.” As of yesterday, NGCP reported that the lines have already been fully energized. Meanwhile, Manila Electric Company external communications manager Joe Zaldarriaga explained that “if there is a transmission constraint, there is no other recourse but for us to undertake load shedding which results in rotating power interruptions to balance the system.” Meralco said it implemented manual load dropping (MLD) for three hours following information transmitted by NGCP on the tripping of its line. The Department of Energy (DoE) noted that it will look into the matter, as it stressed that “this incident is isolated and need not be interpreted as summer brownouts.” The tripping of the NGCP line, which is a crucial transmission backbone for power supply to Metro Manila, caused the shutdown of some power plants – mainly the Sual 2, Masinloc, San Roque 3, and Pantabangan generation facilities. Earlier, the DoE said it was confident there would be no rotating brownouts this summer if generating capacity and demand for power are the only considerations. But it conceded that transmission constraints and technical glitches could trigger power outages.

Investors focus on jobs NEW YORK (CNNMoney) -- As Wall Street continues to digest events overseas, investors will focus on the U.S. job market this week. The Labor Department's March jobs report typically sets the stage for the rest of the month because of how important jobs are to driving future economic activity. While the U.S. economy grew by 3.1% in the last three months of 2010, job creation has not kept pace. "There remains a lot of concern that the U.S. remains in this jobless recovery," said Daniel Morgan, portfolio manager with Synovus Trust Company. Economists surveyed by Briefing.com expect the U.S. economy created 185,000 jobs last month and the unemployment rate remained steady at 8.9%. Wall Street will also get the closely-watched Institute for Supply Management manufacturing index and two reports on the housing market. Investors will also have to balance this week's economic data with ongoing concerns about Japan's nuclear reactors, Europe's debt problems and Libya's civil war. It's been a roller coaster ride for U.S. markets as the first quarter of 2011 heads into its final trading week. Stocks struck multi-year highs in mid-February, fueled partly by a strong earnings season, but a spate of international crises have put a damper on market momentum. "Investors were pretty enthusiastic at the start of the quarter, but the Mid East and Japanese problems have been like punches to the face," Morgan said. That said, U.S. stocks have bounced back from every crisis so far. The Dow is on pace to end the quarter up 5.5% while the S&P is up 4.5% and the Nasdaq Composite has gained 3.4%. "The market has weathered a lot of this bad news pretty well because underlying it all is a greater willingness to take risk," said Brian Gendreau, market strategist at Financial Network, a financial advisory firm. On the Docket: Monday: The Commerce Department will release February personal income and spending figures at 8:30 a.m. ET and the National Association of Realtors will issue its January pending home sales report at 10 a.m. ET. Pending home sales are expected to increase 0.3% while personal incomes are expected to rise 0.3% and personal spending is to rise 0.5%. Tuesday: Investors will get March consumer confidence figures from the Conference Board. With the turbulence in the oil markets and Japanese nuclear crisis, economists expect consumer confidence to fall sharply to a reading of 65.0 from last month's reading of 70.4. Also out on Tuesday is the S&P Case-Shiller home price index for January. Wednesday: The ADP private-sector jobs report is the first of three labor-related reports that investors will get this week. Wall Street is looking for an addition of 210,000 private-sector jobs.The ADP report has a mixed record of accuracy but it's typically used to forecast Friday's more-important government jobs report. In earnings, discount retailer Family Dollar (FDO, Fortune 500) will report its results before the opening bell. Thursday: Investors get weekly jobless claims at 8:30 a.m. ET, followed by the Chicago Fed's purchasing managers' index for March at 9:45 a.m. ET and the Commerce Department's February factor orders report at 10 a.m. ET. Weekly jobless claims are expected to edge higher to 383,000 claims from last week's 382,000 claims. The Chicago PMI index is expected to fall to a reading of 69.5 and factory orders are expected to rise 0.4%. Friday: In addition to the jobs report from the Labor Department, investors will get the Institute for Supply Management's March manufacturing index and the Commerce Department's February construction spending report, both released at 10 a.m. ET. Economists expect the ISM manufacturing index remained steady at a reading of 61.4 while construction spending fell by 0.7%. The major automakers such as General Motors (GM) and Ford (F, Fortune 500) will release their monthly sales reports starting at around 12 p.m. ET.

Oil Trades Below $106 as Europe Debt Concerns Outweigh Middle East Unrest Oil traded below $106 a barrel in New York as concerns that European nations’ debt may cut demand overshadowed the threat of the Libyan conflict spreading in the Middle East and restricting crude supplies. Futures slipped 0.2 percent on March 25 after the European Union cut the amount committed to an emergency support system for the euro region. Libyan rebels recaptured the oil port of Ras Lanuf, while 12 people died in clashes in Syria. Crude for May delivery traded at $105.46 a barrel, up 6 cents, in electronic trading on the New York Mercantile Exchange at 10:08 a.m. Sydney time. The contract fell 20 cents to $105.40 on March 25. Prices climbed 4.3 percent last week and are 28 percent higher the past year. Oil in New York has rallied 24 percent since protests began Feb. 15 in Libya, a member of the Organization of Petroleum Exporting Countries. The conflict is the bloodiest in uprisings that have toppled the presidents of Tunisia and Egypt and spread to Algeria, Bahrain, Iran, Oman and Yemen. Brent crude for May settlement traded at $115.66 a barrel, up 7 cents, on the ICE Futures Europe exchange in London. The contract dropped 13 cents to $115.59 on March 25.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

BDO UNIBANK INC.

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001