Company Report

PHILIPPINE EQUITY RESEARCH

Metro Pacific Inv. Corp: Market overreacts to negative developments

Company Update
18 OCTOBER 2011

SHARE DATA
Rating BUY MPI’s share price has declined by as much as 34% for the year to date period due to several reasons including
Ticker MPI Meralco’s worse than expected performance during the first half, delays in the expansion of MPI’s toll road
Price Target (Php) 4.05 business, the acquisition of additional Meralco shares at an expensive price and dilution resulting from MPI’s
Current Price 3.12 recent capital raising activity. However, the sell-off is overdone. After factoring in all the negatives, MPI’s fair
Upside (%) 29.77 would would drop by only 4% to Php4.05. Moreover, earnings from MPI’s existing businesses are expected to
be resilient from the potential impact of a global economic slowdown given their highly defensive nature. At
Php3.12, there is a steep 29.8% upside to our revised FV estimate. We maintain our BUY rating on MPI.

MPI suffers from negative news flows. Sentiment for MPI has turned sour due to the negative
developments recently, including, Meralco’s worse than expected performance during the first
ABSOLUTE PERFORMANCE (%)
half, delays in the expansion of MPI’s toll road business, acquisition of additional Meralco shares at
1M 3M YTD
MPI -3.41 -13.09 -19.79
an expensive price, and dilution resulting from capital raising activity.
PSEi -2.48 -6.11 -1.14
Partly offset by the addition of SCTEX. On the positivie side, the SCTEX will finally be turned over
to MPI within this month, and would add around Php5.1 Bil or Php0.21/sh to MPI’s NAV.

Market overreacts to the negative developments. After factoring in the impact of the negative
MARKET DATA (Php) developments, partly offset by the addition of SCTEX, the recution in MPI’s FV is only 4%. This is
Market Cap 76,623.84 Mil
much less than the 34% decline in its share price recently.
Outstanding Shares 24,558.92 Mil
52 Wk Range (Php) 2.56-4.44
3 Mo Ave Daily T/O 105.29 Mil

FORECAST SUMMARY (PhpMil)

Year to Dec. 31 2009 2010 2011E 2012E
Sales 16,107.7 18,564.5 22,593.5 26,635.9
% change y/y - 15.3 21.7 17.9
EBIT 6,778.4 8,572.4 12,547.2 14,462.9
% change y/y - 26.5 46.4 15.3
EBIT Margin (%) 42.1 46.2 55.5 54.3
EBITDA 10,069.0 11,107.6 16,798.8 19,314.3
% change y/y - 10.3 51.2 15.0
EBITDA Margin (%) 62.5 59.8 74.4 72.5
Net Profits 2,299.6 2,870.8 4,475.6 5,567.0
% change y/y - 24.8 55.9 24.4
NPM (%) 14.3 15.5 19.8 20.9
EPS (Php) 0.11 0.12 0.18 0.23
% change y/y - 2.3 55.9 24.4

RELATIVE VALUE
P/E(X) 27.3 26.7 17.1 13.8
P/BV(X) 1.5 1.4 1.3 1.2
RESEARCH CONTACT ROE(%) 4.5 5.3 7.6 8.7
George Ching Dividend yield (%) 0.0 0.0 0.8 0.8
george.ching@citiseconline.com *Source: Citiseconline estimates

MPI suffers from negative news flows
Sentiment for MPI has turned sour due to the negative
developments recently, including:
• Meralco’s worse than expected performance during
the first half. During 1H11, Meralco’s earned Php7.8Bil,
only 44.5% of our full year forecast. Earnings suffered as
sales volume fell due to the lower than expected industrial
consumption and the unusually cool temperature.
• Delays in the expansion of MPI’s toll road business. Both
the NLEX-SLEX connector road and the NLEX segment 9
and 10 projects face delays. There is still no clear indication
as to when the bidding for the NLEX-SLEX connector road
will take place due to delays in the implementation of the
government’s PPP initiatives and still unresolved issues
surrounding the right-of-way. It is also uncertain whether
the winning bidder will need to absorb the Php7Bil right-
of- way expense which will increase the cost of the project
by 78% to Php16Bil. This will inevitably lead to higher
tariffs, negatively affecting traffic volume. Meanwhile, the
NLEX segment 9 and 10 also faces delays due to right-of-
way acquisition by the government. Although the project
will still most likely push through, potential returns will
drop as MPTC is given less time to operate the project.
• Acquisition of additional Meralco shares at an
expensive price.
• Dilution resulting from capital raising activity. MPI
recently sold 2.4Bil common shares to raise Php8.6Bil for
the expansion of its toll road business. The new shares
represent 9.8% of the expanded capital and were sold at
a 29% discount to NAV, resulting to dilution. Management
said that the funds will be used to finance a major toll
road acquisition, although the details have not yet been
disclosed.
Partly offset by the addition of SCTEX
On the positivie side, the SCTEX will finally be turned over to
MPI within this month, and would add around Php5.1 Bil or
Php0.21/sh to MPI’s NAV. MPTC will have to book Php1.9 Bil
in cumulative operating losses during the first five years of
18 OCTOBER 2011
operation as the government initially gets a bigger share in the
toll road’s revenues and as MPTC shoulders the government’s
debt service requirements amounting to Php1.2 Bil annually.
However, we expect earnings to increase by a CAGR of 14%
from Php520Mil in 2018E to Php1.0Bil in 2023E, driven by traffic
growth and annual inflation adjustment on the tariff.
Market overreacts to the negative
developments
After factoring in the impact of the negative developments,
partly offset by the addition of SCTEX, the recution in MPI’s FV
is only 4%. This is much less than the 34% decline in its share
price recently.
Here is a summary of the changes in our assumption:
MPTC – Due to the delay in the implementation of the
government’s PPP initiatives and still unresolved issues
surrounding the right-of-way of the NLEX-SLEX connector road,
we are taking a more conservative stance and reduced the
Php5.9Bil or Php0.24/sh NAV estimate of the connector road
from our FV estimate. We slightly reduced our IRR assumption
for the Segment 9 and 10 to 17% from 18%, given that there will
be less time for MPTC to recoup its investments in the projects
due to the delay. This resulted to a Php345Mil or Php0.014/sh
reduction in the NAV estimate. However, we expect the SCTEX
to boost MPI’s NAV by Php5.1Bil or Php0.21/sh.
Meralco – We lowered MER’s 2011E and 2012E net income
forecast by 1.9% and 2.7% to Php17.2Bil and Php17.3Bil,
respectively. This reduced MPI’s earnings by Php120Mil and
Php170Mil, or 2.5% and 2.7% of MPI’s total earnings for the said
years. The reduction of MER’s earnings slashed MPI’s NAV by
Php2Bil or Php0.08/sh.
Outstanding shares - MPI recently sold 2.4Bil common shares
to raise Php8.6Bil for the expansion of its toll road business.
Management said that the funds will be used to finance a major
toll road acquisition, although the details have not yet been
disclosed. The new shares represent 9.8% of the expanded
capital. Given that the new shares were sold at a 29% discount
to NAV, the impact is a Php0.08/sh reduction in our NAV
estimate. Share sale reduces NAV by Php0.08/sh.
MPI/Company Update/ page 2
 18 OCTOBER 2011

Exhibit : MPI sum-of-the-parts FV estimate

NAV estimate (PhpMil)
% share Old New % change NAV/sh

Maynilad 58.0% 48,301 48,301 0.00 1.97

Tollways 66.9% 33,372 32,125 -3.74 1.31

Beacon 50.0% 29,845 27,828 -6.76 1.13

Healthcare 35.0% 1,758 1,758 0.00 0.07

Landco 34.0% 406 406 0.00 0.02

Less: net debt of parent - -10,670 -10,670 0.00 -0.43

NAV - 124,352 121,088 -2.63 4.93

Less: Holding company discount 22,304 21,651 -2.93 0.88
Fair Value 102,048 99,437 -2.56 4.05
So ur ce: C it isecO nline est im at es

Maintaining BUY rating

Despite the reduction in our earnings forecasts and FV estimate,
we maintain our BUY rating on MPI. Although MPI suffered
from numerous challenges, the magnitude of the sell-off is
unwarranted in our view. As discussed earlier, the negative
developments would only reduce MPI’s fair value by 4%, while
MPI’s share price has declined by as much as 34%. Even if we
assumed that none of MPI’s expansion projects push through,
its existing businesses would still be worth Php3.80/sh, 21.8%
higher than its current share price.

Meanwhile, earnings from MPI’s existing businesses are

expected to remain stable despite a potential slowdown in the
economy because of their highly defensive nature. At Php3.12/
sh, there is a 29.8% upside to our revised FV estimate.

MPI/Company Update/ page 3

 18 OCTOBER 2011

INVESTMENT RATING DEFINITIONS

BUY HOLD SELL

Over the next six to twelve Over the next six to twelve Over the next six to twelve
months, we expect the share months, we expect the share months, we expect the share
price to increase by 15% or price move within a range of price to decline by more
more. +/- 15%. than 15%.

TOP PICK DEFINITION

A stock that is included in our “Top Pick” list has to meet the following criteria: 1.) It must belong to a sector with neutral to positive outlook; 2.) It must
have double digit earnings growth for the current and the succeeding fiscal year; 3.) Its share price appreciation potential must be above 15% as of the
date it was included in the list; and 4.) It must have an upward intermediate term trend.

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MPI/Company Update/ page 4