Filinvest Land Inc., Attractively Priced But may Face Headwinds

Disclaimer: The following is unsolicited investment advice and must not be construed as a recommendation to buy or sell securities. Investors must seek professional legal counsel and invest at their own risk.

As Philippine equities continue to become more attractively priced, we may now start appraisal and valuation of some securities.

Filinvest's extensive property in up and coming Central Business District of the South, adjacent to the South Luzon Expressway (Metro Manila Skyway under construction).

This scale model shows more plans and room to grow on the property.

Filinvest Land Inc.

Data compiled by Pilifinance:

Computations:

10 year Earnings per Share Average (2005-2015): 0.13

Latest market price as of December 2, 2016: Php 1.72 per share

1) Adequate size of the Enterprise - FAILED
"subject to more than average vicissitudes."

Filinvest Land Inc. is one of the leading developers in the country, however it is a second-liner stock.

2) A Sufficiently Strong Financial Condition
 A - For Industrial Companies, Current Assets should be Twice Current Liabilities. Let us take a look at the latest 2015 Annual Report: - FAILED
Total current assets - 40,345,182,000 (from 2015 annual report: 30,133,130,000)       

Total current liabilities - 15,939,234,000 (from 2015 annual report: 33,426,062,000 - we assumed that all 15,946,927,000 loans payable might be payable short term)

To meet this criterion, Total current assets must at least be at least 2x current liabilities or 31,878,468,000 (or basing on the 2015 annual report: 34,958,270,000 to 66,852,124,000)
But Filinvest Land Inc. may not be fully considered an industrial company.

At best (if the entirety of the loans payable is considered long term):

30,133,130,000 current assets  < 34,958,270,000 (2 x current liabilities of 17,479,135,000)

B - Long-term debt should not exceed the net current assets or working capital: - FAILED
In my understanding, net current assets mean total current assets less total current liabilities:
Total current assets - 40,345,182,000 (from 2015 annual report: 30,133,130,000)        

Total current liabilities - 15,939,234,000 (from 2015 annual report: 17,479,135,000 to 33,426,062,000 if we assumed that all 15,946,927,000 loans payable might be payable short term)

=Net current assets - 24,405,948,000 (from 2015 annual report: -3,292,932,000 to 12,653,995,000

Total non-current liabilities - Bonds payable: 31,749,909,000

At best, 12,653,995,000 net current assets (if loans payable is excluded) < Bonds Payable: 31,749,909,000

To meet this criterion, Net current assets or working capital must be > Total non-current liabilities.
However, this criterion is another for an industrial company, of which Filinvest Land Inc, a conglomerate, cannot be fully classified.

C - For public utilities, the debt should not exceed twice the stock equity at book value: - PASSED
Total Liabilities - 65,497,910,000
Total Equity - 55,600,393,000

Total Liabilities must not exceed twice the total equity or 111,200,786,000

Total Liabilities 65,497,910,000 < 111,200,786,000 (2x Total Equity)

3) Earnings stability - PASSED
"Some earnings for the common stock in each of the past ten years."

4) Dividend Record - FAILED
"Uninterrupted payments for at least the past 20 years."

Filinvest Land Inc. may have only started paying dividends in 2008, or for only 7 years, but showed no default in payment of dividends in those 7 years. 

2008 dividend was Php 0.0200

2015 dividend was Php 0.0560 per share

(7 year dividend growth is 180%)

At the latest market price of December 2, 2016: Php 1.72 per share,

Dividend yield is at 3.26%

5) Earnings Growth - PASSED
A - "A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end."
That means to say at least 33.3% increase in earnings per share for the beginning and ending 3-year averages of the 10 year period.

3 year beginning Earnings per share (2004-2006): 0.049

3 year ending Earnings per share (2013-2015): 0.19

Difference between Beginning and Ending earnings: 0.141

Difference / beginning balance x 100 = 287.76% 

Passed. Not only has Filinvest Land Inc. met the minimum increase of 33% but has made an explosive growth in earnings of 287.76% in the past 10 years.

6) Moderate Price/Earnings Ratio - PASSED
"Current price should not be more than 15 times average earnings of the past 3 years."

Past 3-year average:  Php 0.19

Current price as of December , 2016: Php
Price / Earnings Ratio: 1.72  / 0.19  = 9.05

To pass this criterion, current price must be, at the most, 15 times latest earnings per share or Php 2.85. It's at 1.72.

As an additional computation, here is the P/E ratio for the 10 year period 2005-2015:

10-year Earnings per Share Average (2005-2015): 0.13

10-year P/E ratio: 13.23

In both cases, the P/E ratio poses an attractive purchase by Graham standards.

7) Moderate Ratio of Price to Assets - PASSED
"Current price should not be more than 1 1/2 times the book value last reported."

Book Value per Share: Php 2.3
Current price as of December 2, 2016: Php 1.72

1.5x Book Value per Share: Php 3.45


***"However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier (15) times the ratio of price to book value (1.5) shall not exceed 22.5."

P.s. Some modern versions of this rule make use of the formula called the Graham Number:
 Square root of 22.5 times earnings times book value to arrive at a specific figure in between the two

   ___________________________
  /
\/  (earnings x 15)   X   (book value x 1.5)

OR

   ___________________________
  /
\/  22.5   X   earnings    X   book value

OR

   ___________________________
  /
\/   22.5  X  Php 0.19   X    Php 2.3

=

Php 3.14 Value, with respect to latest 3 year earnings and book value at the prescribed multipliers

>>As you can see Graham uses EARNINGS in the form of historical averages and Net ASSETS in the form of book value to gauge the VALUE in the market price.

>>He also gauges SAFETY by applying certain financial ratios to the debt, equity and current accounts.

The Graham Number, as seen in our previous post: (http://pilifinance.blogspot.com/2016/05/the-graham-number.html)
takes into account the square between these two factors.

However, as Pilifinance prescribed in our post on The Graham Number, we used an even more conservative multiplier of P/E ratio of 10, and an less than or equal book value of 1.
That changes Benjamin Graham's multiplier from 22.5 to 10.
Using 10 as a multiplier, we arrive at the figure:

   ___________________________
  /
\/   10  X  Php 0.19   X    Php 2.3

=

Php 2.09 Value, with respect to latest 3 year earnings and book value at the Pilifinance multipliers

IN CONCLUSION:

I. QUANTITATIVE:

With regards to price, Filinvest Land Inc. already constitutes a considerable bargain with an excellent earnings growth record and assets to back more of the market quotation.

However, Filinvest Land Inc. has also failed 3 tests, ranked according to importance as follows:

A) Financial Condition

B) Size of Enterprise

C) Dividend Record

But, it may be argued, 

regarding A) that these tests were specifically made of industrial companies, and Graham's views might differ with real estate companies, to which Filinvest Land Inc. is a part of.

regarding B) that even if Filinvest Land Inc. is a second-liner or not a leading stock, the Philippine Stock Exchange in general has very stringent requirements for listing companies, and small enterprises that may be vulnerable in "more than average vicissitudes" are usually excluded. However we reserve the example of the Uniwide Sales Group, a PSE listed firm that was insolvent during the Asian Financial Crisis.

regarding C) that Filinvest Land Inc. was only listed in 2007, the same year of its first dividend, and a relatively young enterprise.

So of all these three, the most significant risk might come from the failure of the standard of financial condition of company. More study and prudence must be done by the investor on this part.

II. QUALITATIVE

IN ADDITION to financial ratios and tests, we also look at the qualitative aspect of the business. Recent political and economic developments abroad and locally might have a significant impact on Filinvest Land Inc.'s business.

1) Trump win in the USA. Filinvest Land Inc.'s investment properties and office leasing business heavily rely on the Business Process Outsourcing or BPO Industry. If President Trump proceeds with his protectionist agenda to repatriate jobs to the USA, the Philippine BPO industry may suffer, and so will the demand for Filinvest Land Inc.'s office space.

2) Devaluation of the peso. It has been stated in the 2015 Filinvest Land Inc. bond prospectus that depreciation of the peso may pose a risk to the supply and acquisition of raw materials such as lumber, cement, and steel needed for construction and delivery of projects.

3) Interest rates. A weaker currency may also mean raising of interest rates in the near future, which may pose another problem for the demand of real estate projects. Higher mortgage and bank interest rates will not only make debt servicing more expensive for the company, but make it more expensive for consumers to buy real estate, lowering demand and the company's bottom line.

4) General economic slowdown. Increasing geopolitical risks and instability here and abroad, and the overall prosperity in the past few years may be a precursor to a general slowdown in the economy in the following years. Bloomberg has included the Philippines as one of the most vulnerable ASEAN emerging market to a Trump Presidency, citing its heavy reliance on OFW remittances and the BPO Industry. Increasing political turmoil, a change in Government and agenda are also risks to the continuity to the Philippine infrastructure and economic growth story.

OUR OPINION:

Although Filinvest Land Inc. is priced attractively, backed by its good performance record, the investor must also take into account headwinds that are increasingly probable. The good performance of the company itself may be evidence of management competence, and its relative size and impressive growth record may prove to have more opportunities. But for the defensive and conservative investor, it may be best to wait it out.

In the face of external headwinds and increasing internal debt, it is best to proceed on the side of caution and watch out for more developments, politically and economically. Specifically the actions of Trump. increasing political instability in the Philippines, interest rates ,investor sentiment and the over-all economic conditions in the country. 

However, outside of these factors, Filinvest Land Inc. is a performer, and must not be ignored as an attractive stock purchase, but perhaps, at a less uncertain time.

Ayala Corp: A Study of Graham Principles

With the market falling, it's time again to do our homework in search of bargain opportunities.

Reading Benjamin Graham's The Intelligent Investor, Chapter 14: Stock Selection for the Defensive Investor, we take a look at a real life sample and apply the principles stated by Graham.

Let's look at the 10 year data for Ayala Corp. one of the Philippines' largest conglomerates, a certified "blue chip" or leading company for sure.

The 10 year data that I compiled is:

AYALA CORPORATION
         Book Value per Share     Earnings Per Share   Dividends
2015         298.80                          33.38                        5.76
2014         261.63                          29.35                        4.80
2013         230.68                          20.39                        4.80
2012         208.78                          16.92                        4.00
2011         183.98                          14.43                        4.00,20%
2010                                              17.01                        4.00
2009                                              11.77                        4.00
2008                                              15.17                        4.00,20%
2007                                              31.47                        8.00,20%
2006                                              23.89                        4.00
2005                                              19.82                        0.06

1) Adequate size of the Enterprise - PASSED
One of the biggest companies in the Philippines, it definitely fits this criterion. This is definitely not a small company "subject to more than average vicissitudes."

2) A Sufficiently Strong Financial Condition
 A - For Industrial Companies, Current Assets should be Twice Current Liabilities. Let us take a look at the latest 2015 Annual Report: - FAILED
Total current assets -        262,850,558,000
Total current liabilities -  205,967,464,000

To meet this criterion, Total current assets must at least be - 411,934,928,000
Although Ayala Corporation may not be fully considered an industrial company, it has also stakes in Real estate, utilities, education and infrastructure.

B - Long-term debt should not exceed the net current assets or working capital: - FAILED
In my understanding, net current assets mean total current assets less total current liabilities:
Total current assets -        262,850,558,000
Total current liabilities -  205,967,464,000

=Net current assets - 56,883,094,000

Total non-current liabilities - 259,563,276,000

To meet this criterion, Net current assets or working capital must be > Total non-current liabilities.
However, this criterion is another for an industrial company, of which Ayala Corporation, a conglomerate, cannot be fully classified.

C - For public utilities, the debt should not exceed twice the stock equity at book value: - PASSED
Total Liabilities - 465,530,740,000
Total Equity      - 328,543,983,000

Total Liabilities did not exceed twice the total equity or 657,087,966,000

3) Earnings stability - PASSED
"Some earnings for the common stock in each of the past ten years."

4) Dividend Record - PASSED
"Uninterrupted payments for at least the past 20 years."

5) Earnings Growth - FAILED
A - "A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end."
That means to say at least 33.3% increase in earnings per share for the beginning and ending 3-year averages of the 10 year period.

Let's do the yer 2005 to 2015:
2007                                              31.47                      
2006                                              23.89                    
2005                                              19.82

3-year average for the beginning: 25.06

2015                                              33.38                    
2014                                              29.35                    
2013                                              20.39                    

3-year average for the ending:     27.71

From ending to beginning of the 10 year period, that is only an increase of 10.57%
To pass this criterion, increase in earnings per share in the 10 year period must be at least 33.3%

6) Moderate Price/Earnings Ratio - FAILED
"Current price should not be more than 15 times average earnings of the past 3 years."

Earnings per share in the past 3 years:
2015                                              33.38                    
2014                                              29.35                    
2013                                              20.39                    

3-year average:     Php 27.71

Current price as of November 17, 2016: Php 762
Price / Earnings Ratio:  762 / 27.71 = 27.5 times earnings

To pass this criterion, current price must be, at the most, 15 times latest earnings per share or Php 408.15.

7) Moderate Ratio of Price to Assets - FAILED
"Current price should not be more than 1 1/2 times the book value last reported."

   Book Value per Share     Earnings Per Share   Dividends
2015         298.80                          33.38                        5.76

Book Value per Share: Php 298.80
Current price as of November 17, 2016: Php 762

1.5x Book Value per Share: Php 448.2

To pass this criterion, Current price (Php 762) must not exceed (Php 448.2).

***"However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier (15) times the ratio of price to book value (1.5) shall not exceed 22.5."

P.s. Some modern versions of this rule make use of the formula called the Graham Number:
 Square root of 22.5 times earnings times book value to arrive at a specific figure in between the two

   ___________________________
  /
\/  (earnings x 15)   X   (book value x 1.5)

OR

   ___________________________
  /
\/  22.5   X   earnings    X   book value

=

   ___________________________
  /
\/  (Php 408.15)   X   (Php 448.2)

**See #6 and #7 above

OR

   ___________________________
  /
\/   22.5  X  Php 27.21   X    Php 298.80

=

Php 427.71 Value, with respect to latest 3 year earnings and book value at the prescribed multipliers


>>As you can see Graham uses EARNINGS in the form of historical averages and Net ASSETS in the form of book value to gauge the VALUE in the market price.

>>He also gauges SAFETY by applying certain financial ratios to the debt, equity and current accounts.

The Graham Number, as seen in our previous post: (http://pilifinance.blogspot.com/2016/05/the-graham-number.html)
takes into account the square between these two factors.

However, as Pilifinance prescribed in our post on The Graham Number, we used an even more conservative multiplier of P/E ratio of 10, and an less than or equal book value of 1.
That changes Benjamin Graham's multiplier from 22.5 to 10.
Using 10 as a multiplier, we arrive at the figure:

   ___________________________
  /
\/   10  X  Php 27.21   X    Php 298.80

=

Php 285.14 Value, with respect to latest 3 year earnings and book value at the Pilifinance multipliers

IN CONCLUSION:

Current market price as of  November 17, 2016  (Php 762) is too high a price to pay for Ayala Corporation shares for the conservative investor, as prescribed by Benjamin Graham.

Not only did it fail certain tests such as the minimum 33.3% 10 year earnings growth, and certain tests for the industrial company, which may warrant a higher safety net or risk premium, but the current market price of P762 is too high even if these tests were met.

For Pilifinance, it may be wiser to wait for the prices to go down the following levels:


TARGET or BUY Prices for AYALA CORPORATION based on 2015 Financial Statements:
(BUY ON OR BELOW THESE PRICES)

Following suggested multipliers by Benjamin Graham:

EARNINGS WISE: P 408.15
ASSETS WISE:       P 448.2
COMBINED:           P 427.71


Following suggested multipliers by Pilifinance:

EARNINGS WISE: P 272.1
ASSETS WISE:       P 298.8
COMBINED:           P 285.14

Average of both suggestions: P 356.43

>>>>>>>>>
or ROUGHLY
A price of P300 OR BELOW would be a sure BUY for AYALA CORPORATION SHARES
<<<<<<<<<

Preserving Value: An Endeavor in a Falling Market

Disclaimer: The following is unsolicited investment advice and must not be construed as a recommendation to buy or sell securities. Investors must seek professional legal counsel and invest at their own risk.

So what do you do with falling prices?

[Photo credits to Philstar.com]

IMPORTANT EDIT 12/14/2016

>> Concept: Every investor looks forward to the future. Nevertheless, the future itself can be approached in two different ways, which may be called the way of PREDICTION (or projection) and the way of PROTECTION.

-Ben Graham, Chapter 14, Stock Selection for the Defensive Investor, The Intelligent Investor

In this section, Graham outlines the difference between two approaches in the future. Based on the factors that determine market price, which are known set of facts and future expectations. One approach is offensive, and the other is defensive. The differences outlined here:

2 Approaches to the future:

PREDICTIONS (Projection)                    PROTECTION

-based on expectations                        -based on facts

-emphasizes future price                      -emphasizes current price

-offensive                                             -defensive

-growth                                                -safety

-predict future strength and                  -adequate margin of safety/value over price

     growth in earnings                               to absorb future unfavorable developments

-qualitative approach i.e. prospects,     -quantitative/statistical/protective approach

management, other immeasurable         i.e. measurable relationships between price

& important factors that fall under          and earnings, assets, dividends

the heading of quality

End of important edit.

The following article written beforehand mainly focuses on the first approach, the predictive approach.

Background 

What do you do when prices are falling? Well you grab something that's not falling. One of the first things that come into mind is gold. Gold has always been regarded as the real money, a safe haven for investors in times of turmoil. Gold is commodity, among others such as barrels of oil, bushels of wheat, grain, rubber, palm oil etc. Holding these physical assets may help preserve value in case of currency devaluation, since these may be resold at fair value or exchange value.

Other options may be holding other assets such as real estate. Just imagine old kings, feudal lords, conquistadors, and haceinderos. Real estate has long been regarded as the real wealth succession strategy by the rich and powerful.

However, gold, commodities, and real estate are not the only options to preserve value. The concept of Utility tells us how something satisfies our wants and needs by reflecting on how much a person is willing to pay for it. 

Anything that has potential use or utility or demand in the future may be used to preserve value or even make a profit, only if you can foresee the future need for it. For example, during times of crisis such as war, food may become scarce. Hence, if you can buy and accumulate canned goods before the war happens, it may be a good way to preserve value. The same can be said in operating a trading business. Buy items that you anticipate will have higher demand in the future, and hence fetch higher prices.

You can see that your main asset is the one in between your ears. As long as you can objectively look at the situation, make accurate assessments, and translate that into probable predictions, you have a higher probability of success.

Going back to your investment portfolio...

What would you do in the case of falling prices in the stock market?



Protecting your gains should be the priority. Going back to the basics:
-When you anticipate the market to go up, you either HOLD your existing shares or BUY even more.
-When you anticipate the market to go down, you SELL your shares.

Even to Benjamin Graham, it is in the investor's interest to sell shares when the prices are exceptionally high. It is acceptable because the investment is made when you buy below the stock's intrinsic value. The investor always has the option to sell his shares at an advantage when he is offered generous prices for it. Graham warns however, on focusing too much on the price since such an attitude inevitably leads to speculation.

To the average Filipino stock market investor, real estate, gold, and commodities may not be readily available. What else could he buy to preserve the value of his portfolio?

A more convenient alternative may simply be switching to another currency. A currency that is not only holding but even appreciating in value. Swiss Francs and Japanese Yen are recognized globally as a safe haven for currency traders, however, these might not also be readily available, unlike the US Dollar which is the global currency.

This now brings us to the question, "Should I convert my pesos to dollars?"

This question has been answered by financial planner Henry Ong in his opinion column in the Philippine Daily Inquirer on November 2013.
Henry Ong says, "The peso-dollar exchange rate is inversely related to the stock market so that when the market falls, the peso depreciates.
About 68 percent of the time, the movement of the peso-dollar exchange rate is explained by the stock market."

In other words, we may not be able to short the Philippine stock market, but we can buy the US Dollar with a 68% correlation.

And this happens as foreigners dump their Philippine shares for pesos, the peso supply increases and then as they convert their liquidated pesos back to dollar to repatriate back to their country, the demand for dollar increases, causing the exchange rate to go up.

During Christmas Season, the reverse usually happens. The peso appreciates when the OFWs send their Aguinaldo's and dollars back to relatives in the Philippines and the supply of dollar increases. The relatives will now need to convert these dollars to peso to spend for their Noche Buena and the demand for peso increases, causing the exchange rate to go down.

It will be useful for the currency speculator to foresee these changes in supply and demand, as well as other factors that might affect the value of the dollar and peso.

For example, what advantages are seen in favor of the US Dollar?
1) The US Dollar is still undervalued relative to a basket of currencies of its trading partners. This is shown in the US Dollar Spot or US Dollar Index (USDX, DXY). Currently these are the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. As long as the USDX is below 100, it means the dollar is undervalued relative to the currencies of its trading partners.

2) The US Elections this coming November 8, pitting Republican Donald Trump and Democrat Hillary Clinton are sending jitters to investors in the US Dollar. It is said that Democrats always have a good effect on the US economy, hence this should be a favorable development for the US Dollar. As of the moment of writing, surveys show that there is a high probability of a Clinton win, hence, this should be a favorable opportunity to buy the dollar before it materializes on November.

3) Low oil prices. Oil price is inversely related to the US Dollar. A falling oil price means higher US Dollar

4) Increasing perception of political instability brought by President Rodrigo Duterte's "inflammatory" and anti-US and EU rhetoric. According to reporter Karen Davila, when a country turns its back on the US, the first that suffers is that country's economy.

5) Doubts surfacing on the competence of the new administration with regards to diplomacy i.e. going into uncharted territory forging new alliances with China and Russia. There have been reports of some US and EU investors putting their plans on hold. The President has also been criticized by various groups on his Drug War with more than 3,600 people killed since the start of the campaign, handling of the issues at the West Philippine Sea, and various other issues, resulting in Filipinos erupting into a virtual "civil war" on social media.

And what might be the disadvantages?
1) A Trump win the upcoming US Elections.

2) Bank of America Merril Lynch issues a recession warning due to central bankers' stimulus efforts such as Quantitative Easing.

3) Removal of the US Dollar as world currency, which is feared by some groups such as Mike Maloney.

Given this data, it is our unsolicited opinion that the peso will continue to fall until the Philippine situation has been resolved peacefully and stability & confidence has been restored. The local Filipino investor can use this information not only to protect his gains from the previous bull market, but to provide additional income in the ensuing bear market while remaining vigilant for bargain opportunities.


The conservative investor is reminded that such an operation is speculative in nature, and anyone willing to engage must consider carefully specific events and understand the overall situation to increase the chances of success.

The preservation of value, wealth preservation or capital preservation is a major undertaking by many wealthy families and countries; from European royalty to American industrialists turned Wall Street asset managers.

For individual companies like Apple, remaining profitable means investing in R&D, research and development, creating new products and solutions, solving new problems, remaining in control of market share, and keeping the profits coming as the only way to maintain their formidable position and wealth. 

For the general public, preserving value may mean maintaining their Purchasing Power amidst rising costs and inflation.

The only way to preserve wealth is to remain relevant, if not cutting edge.
Hence those who wish to preserve their wealth must always be on the lookout for opportunities waiting to happen and develop systems that enable you to automatically take advantage of these situations and opportunities.

References:
Article by Henry Ong entitled "Shall I convert my pesos to dollars?" published by the Philippine Daily Inquirer on November 13, 2013 [http://business.inquirer.net/152019/should-i-convert-my-pesos-to-dollars]

TED Educational video on Utility: [https://www.facebook.com/TEDEducation/videos/1272510129428857/?pnref=story]

How oil affects USD/CAD
[http://www.babypips.com/school/undergraduate/sophomore-year/intermarket-correlations/black-crack.html]

Bank of America Issues Recession Warning
[http://www.cnbc.com/2016/10/09/bank-of-americas-recession-warning-this-market-is-scary.html]

Crash Predictions by Mike Maloney
[https://www.youtube.com/user/whygoldandsilver]

US, EU investors put their plans on hold
http://www.philstar.com/headlines/2016/10/10/1632121/us-eu-investors-put-philippine-plans-hold

Market Update: Final Quarter 2016

The Philippines: Market Update, First 100 Days

Since our last update in May 5 months ago, significant changes have occurred in the market environment and political landscape as a whole.

We admit that such a short term view, and one that focuses on market movements and prices, is actually speculative in nature rather than an investment operation. However, certain factors provide insight to the workings of the economy and might prove useful to the conservative investor.

A confluence of events, foreign and local have resulted in an exodus of funds led by foreign investors out of the country. By this we mean hot money in the capital markets.

Since the winning of President Rodrigo Duterte in May, the Philippine market has rallied back to the 8,000 level in raucous anticipation and optimism prompting us to write a mid-year market update cautioning investors from investing in inflated price levels.

Abroad, there was growing anxiety in anticipation of the US Federal Reserve raising interest rates, that will supposedly make US securities more attractive because of higher yields resulting in fund mangers pulling hot money from emerging markets back to the US.

On the local front, President Duterte throws a series of anti-American and European expletives after being criticized for his costly Anti-Drug war. The Philippine President has been criticized all over the world after more than 3,600 have been killed since the campaign started. The President has also been described as a  "loose-canon" after cursing the US ambassador, the Pope, United Nations Secretary General Ban Ki-Moon and US President Obama. Lately, he has also caused a stir among Jewish people after making Hitler comments.

Since then, the Philippine President has landed cover after cover on international publications such as Time Magazine, Wall Street Journal, The Economist, New York Times, South China Morning Post, Le Monde etc. 

Despite the Federal Reserve not raising interest rates September, foreign funds continued to dump Philippine shares making the Philippine Stock Exchange Index the worst performer among its Asian peers. Foreign funds have sold for more than 23 straight days, the longest outflow since 2007.

US-Philippine diplomatic relations have been strained after the President's series of anti-US rhetoric, and investors are beginning to doubt the future of the Philippine economy since the US is the Philippines' biggest trading partner and largest contributor of foreign aid. US investments amounted to 5 Billion pesos while China, the prefered partner of President Duterte, has investments of only 0.1 billion. We are investing more in China than China invests in us, said former DFA envoy to the US Ambassador Jose Cuisia. American soldiers have also begun to leave, as Mr. Duterte expressed suggestions to end the Philippine-American joint military exercises.

S&P Ratings have warned against increasing political instability and that further upgrades in the next two years are unlikely.

The Philippine Peso slid made its sharpest drop since the 2008 Financial Crisis, from P46 to P48 on the dollar in less than 2 months.

Putting A Price on the Future. Will you buy it or not?

As businessmen, not only do we have to turn problems into profits, but it is also part of our job to project estimates into the future. Does the future hold good prospects or bad?

As stewards of corporate assets, it is in our shareholders' interest that we maximize value with correct timing and create frameworks and paradigms of the future that will guide business decisions. The accuracy of our predictions and educated guesses may ultimately spell the success or failure of the enterprise.

After reading Chapter 11: Security Analysis for the Lay Investor of Benjamin Graham's Intelligent Investor and the accompanying Commentary by Jason Zweig, I gained the following insights:

How you value your assets tell what kind of investor you are.

You can value an asset by its:

A) cost or book value, 

B) estimated future cashflows or

C) market value.

If you focus solely on market value or the price a buyer is willing to accept, you are most likely to be a property flipper or stock trader.

However, if you focus on estimated future cashflows from the property, assess financial statements for book values assets and follow the general story of the company, then you are most likely to be a real investor who looks into fundamentals.

Warren Buffet is one such investor. I have read that Warren values a stock or a company like a piece of rental real estate property. He estimates future cash-flows (i.e. rental income) over a period of time he wishes to hold the asset, or how long he thinks the current level of income will be sustained. 

He then factors in the advantages and disadvantages of the company. Following the story of the company, he looks at advantages like moats, competitive advantages (brand identity, monopoly, scale, secret formulas as intangible assets, and resistance to substitution), management, everything. He also looks at disadvantages. The habit of raising cash from financial activities make it appear as if profits are growing, when all they do are sell more stock or buy more loans. You also have to take into account a potential flood of new shares in the future. If the company is in the habit of "watering down" stock your future earnings will be diluted and divided among more shares. Also be wary of firms run by managers, for the managers, rather than the owners by paying themselves hefty paychecks, or perpetually selling their shares. 

Finally once these are accounted for in the valuation of the future, Warren adds a margin of safety, an allotment for the risks seen and unseen into the future. Assets in the balance sheets such as surplus cash in the current accounts, and the book value of the assets may serve as a final safety net for investor.

Insights into the general market conditions will also prove useful. Hence a general understanding of the workings of the economy, its interactions with different socio-political conditions is required.

Recent developments have made me realize how the entire economy runs on confidence. Confidence in the prospects of business reflects in the stock market, foreign direct investments and currency. These affect inflation rates and interest rates, then affecting policy and spending. Finally it affects production, the broader economic indicators like GDP, the fiscal position of the country, and its global standing and perception, specifically credit ratings.

For the investor in fundamentals, it is always important to ask the question:

***Where do and where will profits come from?***

Study the sources of growth and profit. Estimate how long it will be sustained in the future. Follow the story of the source of profits and the story of the enterprise. Study factors to be discounted, the moat, competitive adventage. Then make your pricing!!

5 Investment Ideas You Probably Haven't Tried Yet

"He who can be entrusted with little can also be entrusted with bigger things."

Pilifinance hits 2 birds with one stone (+ 3 bonus ideas!)

In this article, Pilifinance tackles 2 main investments you can actually buy, and 3 other investment ideas to help you think out of the box.

#hanapbuhay

[Disclaimer: Pilifinance does not endorse any of these investments, does not guarantee safety of your investment. This article is written mainly to inform and give new ideas on new ways to invest.]

1) Metrobank long-term tax-exempt deposits at 3.5% per year.

LTNCDs or Long-term Negotiable Certificates of Deposits are negotiable certificates of time deposit or long term bank deposits.

This offering has a duration of 7 years, with a yearly interest rate of 3.5%.

Minimum amount of investment is P50,000 and in tranches of P50,000 therearfter.

These are tax-exempt to the general public if held for until maturity or more than 5 years.

This time deposit is insured by the Philippine Deposit Insurance Corporation up to P500,000 per person. LTNCDs cannot be redeemed before maturity, but may be sold in the secondary market.

Deadline: This offering is available to the public until September 12, 2016.

Pilifinance Quick Computations:

After 7 years, you will be given back your principal that can earn up to 24.5% interest. 

That means, your P50,000 will earn P12,250 in 7 years or P1,750 per year.

Pilifinance Insights:

Metrobank is taking advantage of the current low interest rate environment to increase liquidity, while locking in the low-interest rates.

Hence, this low interest rate applies to you the money lender. Lower interest rates mean lower income.

The interest rate environment in the Philippines fluctuates from around 2% to 12%, but take note that no matter how high inflation and interest rates go, interest in LTNCDs usually are locked to the rate at offering. Pilifinance thinks the main risk of this investment, is inflation rate risk.

However, this opportunity may be appropriate for retirees or more conservative folks sitting on a huge pile of cash, as a way to diversify their retirement portfolio.

 

For more information, visit your local Metrobank branch. Reminder, this opportunity is up until September 12 only.

Source: http://business.inquirer.net/214241/metrobank-offers-long-term-deposits-at-3-5-pa

2) Petron Corporate Bonds

Another option, corporate bonds offered by Petron. These are loans to the public backed by the issuing company. 

Offering date is on October 10-14, 2016.

There are two maturities/tenors:

-Series A: 5 Years, tentatively 3.5% to 4.25% per year

-Series B: 7 Years, tentatively 4.125% to 4.625% per year

(These rates are before taxes.)

Minimum investment: P50,000

Multiples of P10,000 for additional investments thereafter.

To buy, visit your nearest branch of any of the underwriting banks: 

Security Bank, BDO and BPI.

Banks may also accept reservations in advance of the offering date.

Pilifinance Insights:

When buying bonds or stock or securities of a company, it pays to study the company's latest balance sheet and financial statements. The Philippine Rating Services Corporation rates Petron as a AAA company, meaning these should be among the safest bonds offered by Philippine Rating Services Corporation. However, these are not bank deposits and are not guaranteed by the PDIC. These bonds may default and you may lose your investment in the event the company goes bankrupt. Aside from default risk, there is also the inflation risk as tackled above.

3) PhilCrowd.com: Franchise Crowd-funding Cooperative

Ever wanted to profit from franchises like Potato Corner or 7-11 but don't have the cash to fund the entire operation from scratch? PhilCrowd Cooperative offers a solution.

From P25,000, you can now participate in owning your very own 7-11 store or other available franchises.

Plus one-time membership fee P2,500.

For more information: visit http://www.philcrowd.com

Pilifinance Insights:

Whenever you part with your money, especially in non-conventional institutions like big banks and the well regulated financial markets,

It is impertative to practice DUE DILIGENCE/Do your research.

Before you part with your money, study all the details of the investment proposition:

How exactly are you going to get back your money? 

How difficult is it to encash or liquidate your investment?

Can you encash your investment at any time or is there a holding period?

Are there penalties and additonal fees for early redemption?

What is the projected ROI or return on investment?

How long will it take before you can earn it?

Study the financial statements of the corporation or cooperative. 

Gather reviews and feedback from other members or investors.

Check the legitimacy of the company or cooperative.

Foresee all possible risks and problems like financial problems in the cooperative, people running away with your investment, possible scams. 

Start small. Invest only what you are willing to lose.

Pilifinance has very limited knowledge of PhilCrowd Cooperative we leave it to you to do your due diligence. This is not a transaction with a big company, bank or stock market so the risk of losing your investment is much higher.

Since this is a cooperative set-up, it is possible also that you might not have control of the day to day operations of the franchise, the site selection and other factors. 

4)  "Lending Club" Corporation

Lending Club introduces peer-to-peer lending, brokering or pairing borrowers and investors through America's largest online lending marketplace. 

Although initially, it might remind you of junk bonds or loans that default, Lending Club boasts of a facility that not only screens borrowers, but also spreads your investment into fractions of loans (spread to about 100 different loans) to diversify your portfolio and protect you from default. Currently it is available to USA residents only.

I have heard that Millionaire Acts author Mr. Tyrone Charles Solee maybe organizing a local chapter who invests in this, you may contact him.

5) Citihub Social Impact Rental Business

As featured in ANC Market Edge with Cathy Yang, co-founder Nikki Yu presents this temporary housing concept for low-income commuters in Manila who need a roof to sleep under over the work week.

Citihub uses container crates re-engineered into dormitory-like shelters. The idea is similar to the capsule accomodations in Japan. The rent is currently pegged at P57 a night.

Kapandesal Multipurpose Cooperative is the proprietor of the business. You must apply for membership in order to invest, but 

For a minimum investment of P50,000 you will be able to participate in this REIT (Real estate investment trust) -like arrangement.

Source: http://news.abs-cbn.com/business/08/15/16/have-p50k-to-invest-citihub-offers-20-25-pct-annual-rent-income

For more information visit: http://www.citihub.com.ph