MPI, DMC FRI 17 JAN 2020

Still massively undervalued despite

dimmer outlook for Maynilad
Maynilad is currently in negotiation with the government for the drafting of a new concession
agreement that excludes the “onerous” provisions which were part of the original contract.
It remains uncertain how much less the water concessionaires will earn compared to the old
BUY
contract or if operating the water concessions will remain feasible from a business standpoint. TICKER: MPI
We believe that the risk of an early termination of the contract (until 2022) without any form
of compensation has eased. We now believe that it is more likely that the new contract will FAIR VALUE: 8.66
allow Maynilad and MWC to operate beyond 2022, although with a lower level of effective CURRENT PRICE: 3.56
rate of return due to the removal of the corporate income tax pass through. UPSIDE: 143.26

Lowering estimates for Maynilad. For Maynilad, we now assume that the company will
no longer be able to recover its corporate income tax through its tariff going forward, SHARE PRICE MOVEMENT
although it will be allowed to continue operating until 2037. As a result, we are lowering
our 2020E earnings forecast for Maynilad by 11.8% to Php7.5Bil, and our 2021E earnings 110
forecast by 25.4% to 6.2Bil. The changes in our estimates resulted to a 46.2% decline in
Maynilad’s NAV to Php61.3Bil. 100

90
Reducing estimates, reiterate BUY rating on MPI. As a result of the changes in our
estimates for Maynilad, we are reducing our earnings forecast for MPI by 2.9% to Php17.5Bil
80

for 2020, and by 5.6% to Php18.9 Bil for 2021E. We are also reducing our FV estimate on 70

MPI by 7.6% to Php8.66/sh. Despite the reduction in our estimates, we reiterate our BUY 60
rating on MPI.
50
17-Oct-19 17-Nov-19 17-Dec-19 17-Jan-20
Reducing estimates, reiterate BUY rating on DMC. As a result of the changes in our
estimates for Maynilad, we are reducing our 2020E earnings forecast for DMC by 1.78%
MPI PSEi

to Php13.9Bil for 2020, and by 3.7% to Php14 Bil for 2021E. We are also reducing our FV
estimate on DMC by 7.2% to Php10.29/sh. Despite the reduction in our estimates, we
reiterate our BUY rating on DMC. ABSOLUTE PERFORMANCE
1M 3M YTD
FORECAST SUMMARY
MPI 16.72 -28.08 2.30
Year to Dec. 31 2016 2017 2018 2019E 2020E 2021E PSEi -0.63 -3.31 -2.07
Sales 44,820.0 62,512.0 83,029.0 83,985.1 88,167.1 95,026.6
% change y/y 20.4 39.5 32.8 1.2 5.0 7.8
EBIT 24,196.0 29,057.0 36,416.0 42,268.8 42,969.6 44,018.0
% change y/y 19.9 20.1 25.3 16.1 1.7 2.4 MARKET DATA
EBIT Margin (%) 54.0 46.5 43.9 50.3 48.7 46.3
EBITDA 27,154.0 32,121.0 39,733.0 44,791.8 43,799.6 47,697.0 Market Cap 111,919.19Mil
% change y/y 15.1 18.3 23.7 12.7 (2.2) 8.9 Outstanding Shares 31,437.97Mil
EBITDA Margin (%) 60.6 51.4 47.9 53.3 49.7 50.2 52 Wk Range 2.69- 5.28
Net Profits 12,492.5 13,151.0 14,130.0 15,993.2 17,544.8 18,857.8 3Mo Ave Daily T/O 153.40Mil
% change y/y 30.9 5.3 7.4 13.2 9.7 7.5
NPM (%) 27.9 21.0 17.0 19.0 19.9 19.8
EPS (Php) 0.397 0.418 0.449 0.509 0.558 0.600
% change y/y 30.9 5.3 7.4 13.2 9.7 7.5

RELATIVE VALUE
P/E(X) 9.0 8.5 7.9 7.0 6.4 5.9
P/BV(X) 0.7 0.7 0.6 0.6 0.6 0.5
ROE(%) 8.2 8.2 8.2 8.6 8.7 8.6 George Ching
Dividend yield (%) 2.8 2.8 3.1 3.1 3.1 3.1 Senior Research Manager
BVPS(P) 4.84 5.13 5.51 5.92 6.38 6.98 george.ching@colfinancial.com
*So urce: COL estimates

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.
 COMPANY UPDATE I MPI, DMC: STILL MASSIVELY UNDERVALUED DESPITE DIMMER OUTLOOK
FOR MAYNILAD

FRI 17 JAN 2020

New water concession contract in the works

On December 3, 2019, President Duterte in a speech said he would file economic sabotage
cases against officials of water concessionaires (MWC and Maynilad) due to the “onerous”
provisions in the concession agreements and asked the Department of Finance (DOF)
and Department of Justice (DOJ) to change the contracts with the water concessionaires.
Following the president’s order, the government subsequently terminated the extension
of the water concession agreement from 2022 to 2037. Maynilad is currently in negotiation
with the government for the drafting of a new concession agreement that excludes the
“onerous” provisions which were part of the original contract. The timeframe indicated
by the government is for the draft contract to be ready within six months, although some
quarters within the government and the concessionaires want a quicker resolution so as
not to jeopardize the water concessionaires’ capex program for this year. The government
also added that it is open to extending the concession agreement of Maynilad beyond
2022 if a new concession agreement is in place.

Given that the government has yet to disclose the details of the new contracts, it remains
uncertain how much less the water concessionaires will earn compared to the old contract
or if operating the water concessions will remain feasible from a business standpoint.
The most contentious economic provisions for the government include Maynilad’s
ability to pass through corporate income tax to consumers and the liability against the
government for early termination of the concession agreement. However, given that the
water concessionaires and the government are willing to negotiate, we believe that the
risk of an early termination of the contract (until 2022) without any form of compensation
has eased. We now believe that it is more likely that the new contract will allow Maynilad
and MWC to operate beyond 2022, although with a lower level of effective rate of return
due to the removal of the corporate income tax pass through. Furthermore, there will
most likely be a revamp of the legal provisions of the concession agreement, such as
non-interference and Indemnity clauses against the government and the right to go to
international arbitration.

For Maynilad, we now assume that the company will no longer be able to recover its
corporate income tax through its tariff going forward, although it will be allowed to
continue operating until 2037. As a result, we are lowering our 2020E earnings forecast
for Maynilad by 11.8% to Php7.5Bil, and our 2021E earnings forecast by 25.4% to 6.2Bil.
The changes in our estimates resulted to a 46.2% decline in Maynilad’s NAV to Php61.3Bil.

COL Financial Group, Inc. 2

 COMPANY UPDATE I MPI, DMC: STILL MASSIVELY UNDERVALUED DESPITE DIMMER OUTLOOK
FOR MAYNILAD

FRI 17 JAN 2020

Reducing estimates, reiterate BUY rating on MPI

As a result of the changes in our estimates for Maynilad, we are reducing our earnings
forecast for MPI by 2.9% to Php17.5Bil for 2020, and by 5.6% to Php18.9 Bil for 2021E. We
are also reducing our FV estimate on MPI by 7.6% to Php8.66/sh. Despite the reduction
in our estimates, we reiterate our BUY rating on MPI. While near term sentiment on
MPI will most likely remain negative due to the uncertainties on Maynilad, we believe
that concerns are overblown given MPI’s depressed valuation. Based on MPI’s current
market price of Php3.80/sh, the company is trading at a 61.2% discount to its NAV which
implies that Maynilad, its toll road business and its stake in the hospital business are
already worthless. MPI is even trading at a discount to the value of its 45.5% stake in
Meralco (MER’s value is equivalent to 130% of MPI’s current market capitalization). Even
if we assumed the worst-case scenario where Maynilad would become worthless, capital
appreciation potential based on MPI’s current price is still 104% to Php7.63/sh.

Reducing estimates, reiterate BUY rating on DMC

As a result of the changes in our estimates for Maynilad, we are reducing our 2020E
earnings forecast for DMC by 1.78% to Php13.9Bil for 2020, and by 3.7% to Php14 Bil for
2021E. We are also reducing our FV estimate on DMC by 7.2% to Php10.29/sh. Despite
the reduction in our estimates, we reiterate our BUY rating on DMC. While near term
sentiment on DMC will most likely remain negative due to the uncertainties on Maynilad,
we believe that concerns are overblown given DMC’s depressed valuation. Based on
DMC’s current market price of Php6.73/sh, the company is trading at a 42.2% discount
to its NAV. This implies that Maynilad, its construction and nickel mining businesses are
worthless, and investors are only paying for SCC and DMCI Homes (The two account for
105% of DMC’s current market capitalization). DMC is also trading at only 6.4X 2020E P/E,
a discount relative to the 14.5X average P/E of its industry peers. Based on DMC’s current
market price, upside to our FV estimate of Php10.29/sh is significant at 52.9%. Even if
we assumed the worst-case scenario where Maynilad would become worthless, capital
appreciation potential based on DMC’s current price is still 39% to Php9.36/sh.

COL Financial Group, Inc. 3

 COMPANY UPDATE I MPI, DMC: STILL MASSIVELY UNDERVALUED DESPITE DIMMER OUTLOOK
FOR MAYNILAD

FRI 17 JAN 2020

Metro Pacific INCOME STATEMENT (IN PHPMIL)

Investments Revenues
2015
37,239
2016
44,820
2017
62,512
2018
83,029
2019E
83,985
2020E
88,167
Corporation (MPI) % Growth 10.1% 20.4% 39.5% 32.8% 1.2% 5.0%
EBIT 20,180 24,196 29,057 36,416 42,269 42,970
COMPANY BACKGROUND % Growth 18.1% 19.9% 20.1% 25.3% 16.1% 1.7%
EBITDA 23,587 27,154 32,121 39,733 44,792 43,800
Metro Pacific Investments Corporation % Growth 18.4% 15.1% 18.3% 23.7% 12.7% -2.2%
(MPI) is the Philippine investment arm of Interest Expense (4,465) (4,911) (7,372) (8,892) (10,837) (9,132)
Hong Kong-based First Pacific Company Other Income/Expense 6,198 8,460 11,036 12,734 9,698 9,638
Ltd. focused on the country’s infrastructure Pretax Income 16,899 20,937 24,676 29,185 31,298 33,674
industry. MPI holds interest in companies Tax Expense (1,825) (4,158) (5,649) (7,008) (7,216) (7,449)
Net Income 9,546 12,492 13,151 14,130 15,993 17,545
engaged in water distribution, toll roads,
% Growth 20.2% 30.9% 5.3% 7.4% 13.2% 9.7%
power distribution and hospitals. EPS 0.30 0.40 0.42 0.45 0.51 0.56
% Growth 20.2% 30.9% 5.3% 7.4% 13.2% 9.7%
REVENUE BREAKDOWN
BALANCE SHEET (IN PHPMIL)

8% 2015 2016 2017 2018 2019E 2020E

Cash & Equivalents 26,350 21,901 53,364 52,942 69,137 87,959
8% Trade Receivables 4,441 5,171 10,899 12,495 12,495 12,495
20% Inventories 0 0 0 0 0 0
8%
20% 45% Other Current Assets 5,555 4,728 10,432 12,892 12,892 12,892
45% PPE 8,016 10,480 67,606 71,926 70,013 67,975
20% Other Non-Current Assets 257,818 309,322 361,200 406,441 413,097 419,394
45% Total Assets 302,180 351,602 503,751 557,946 578,884 601,966
Accounts Payable 14,757 14,965 27,142 31,951 31,951 31,951
27%
27% ST Debts 12,699 5,510 19,452 16,081 16,081 16,081
Other Current Liabilities 6,457 6,569 8,283 8,230 8,230 8,230
27% LT Debts 83,433 99,945 185,277 210,866 210,866 210,866
Other Non-Current Liabilities 34,057 36,532 47,918 51,815 51,815 51,815
Water Water
Toll roads Toll roads andHospital
Hospital others and others Others
OthersTotal Liabilities 151,403 163,521 288,072 318,943 318,943 318,943
Water Toll roads Hospital and others Others Total Equity 150,777 188,081 215,679 239,003 259,941 283,022
Total Liabilities & Equity 302,180 351,602 503,751 557,946 578,884 601,965

CASHFLOW STATEMENT (IN PHPMIL)

2015 2016 2017 2018 2019E 2020E
Net Income 9,546 12,492 13,151 14,130 15,993 17,545
Depreciation & Amortization 4,318 4,890 7,277 9,265 10,063 6,030
Other Non-Cash Exp (Gains) 1,794 (2,836) (2,406) 516 (9,861) 4,146
Interest Expense (Income) 4,465 4,911 7,372 8,892 10,837 9,132
Decrease (Increase) in Working Cap -1,579 -539 1,114 -807 7,112 -79
Operating Cash Flow 18,544 18,918 26,508 31,996 34,145 36,773
Capex -42,485 -24,308 -81,160 -51,867 -14,806 -12,680
Other Investments -5,422 -12,807 68,312 26,426 0 -2,126
Investing Cash Flow -47,907 -37,115 -12,848 -25,441 -14,806 -14,806
Proceeds (Payment) Debts 26,719 9,385 26,682 23,576 0 0
Payment of Cash Dividends -3,144 -3,144 -3,144 -3,458 -3,458 -3,458
Others 4,532 10,942 -11,818 -20,901 314 314
Financing Cash Flow 28,107 17,183 11,720 -783 -3,144 -3,144
Change in Cash -1,256 -1,014 25,380 5,772 16,195 18,823

COL Financial Group, Inc. 4

 COMPANY UPDATE I MPI, DMC: STILL MASSIVELY UNDERVALUED DESPITE DIMMER OUTLOOK
FOR MAYNILAD

FRI 17 JAN 2020

INVESTMENT THESIS: KEY RATIOS

Major beneficiary of government’s PPP 2015 2016 2017 2018 2019E 2020E
GPM (%) - - - - -
initiatives
EBITDA Margin (%) 63.3% 60.6% 51.4% 47.9% 53.5% 49.7%
We believe that MPI would be one of the
OPM (%) 54.2% 54.0% 46.5% 43.9% 50.3% 48.7%
biggest beneficiary of the government’s PPP NPM (%) 25.6% 28.4% 21.0% 17.0% 19.0% 19.9%
initiatives given its focus on infrastructure Times Interest Earned (X) 4.5 4.9 3.9 4.1 3.9 4.7
and strong financing capability. We Current Ratio (X) 1.10 1.18 1.37 1.41 1.70 2.04
believe that MPI’s expertise in operating Net D/E Ratio (X) 0.9 1.0 1.5 1.6 1.3 0.9
infrastructure companies like MNTC, Days Receivable 43.5 42.1 63.6 54.9 54.3 51.7
Asset T/O (%) 12.3% 12.7% 12.4% 14.9% 14.5% 14.6%
Maynilad and Meralco will give it an edge in
ROAE (%) 3.6% 3.8% 3.1% 2.7% 2.8% 3.0%
participating in the PPP projects. It also has
an advantage in obtaining cheap financing
MAJOR CORPORATE DEVELOPMENTS (5-YEARS)
given it is an affiliate of First Pacific Ltd of
HK. Acquired PLDT's remaining 25% stake in Beacon for Php21.8Bil 06/01/2017

Maynilad: Huge underserved population Sold 4.2% stake in MER @Php250/sh. 06/01/2017
and favourable concession agreement
translate to attractive earnings growth Acquired PLDT's 25% stakein Beacon 05/01/2016
potential
Maynilad’s billed volume has huge growth Sold 3.6Bil shares to GT Capital (11.4% of expanded capital) 05/01/2016

potential given that it only serves 92%

Acquired 10% stake in MER from Beacon for Php26.5Bil 04/01/2015
of the population of its concession area.
Maynilad also benefits from a highly-
Raised Php8.8Bil via top up placement (1.8Bil common shares) 02/01/2015
favorable concession agreement wherein
it currently is allowed to increase tariffs
Acquired 5% stake in MER from Beacon at Php13.24Bil 06/01/2014
and earn a 7.89% after-tax return on
operating expenses, capital maintenance
Sold 40% of hospital business for Php11.2Bil 05/01/2014
and investment expenditures. It is also
protected against inflation and forex risk Sold via top up placement 1.33Bil common shares at PHp4.60/sh 01/01/2013
through annual inflation adjustments and
quarterly forex adjustments on its water
rates.

MER: Higher GDP growth to boost

power demand
MPI has an effective 41.2% stake in MER.
We like MER given that it will be the main
beneficiary of the country’s rising power
demand, resulting from the country’s
accelerating GDP growth Meralco believes
that there is a high correlation between
the country’s GDP growth and power
consumption.

COL Financial Group, Inc. 5

 COMPANY UPDATE I MPI, DMC: STILL MASSIVELY UNDERVALUED DESPITE DIMMER OUTLOOK
FOR MAYNILAD

FRI 17 JAN 2020

Valuation NAV VALUATION

Methodology
Valuation
Value (PhpMil) Value (Php/Sh) % of GAV % of NAV Methodology
Maynilad 32,374 1.0 11.4% 10.7% DCF
Tollways 89,256 2.8 31.3% 29.5% DCF
Meralco/Beacon 153,200 4.9 53.7% 50.6% DCF
Healthcare 5,930 0.2 2.1% 2.0% P/E
LRT 4,289 0.1 1.5% 1.4% DCF
Total 285,049 9.1 100.0% 94.1%
Less: Net Debt -17,987 -0.6
Equity Value 303,037 9.6
Less: Holding Company Discount 31,149 1.0
FV Estimate 271,887 8.6

COL Financial Group, Inc. 6

 COMPANY UPDATE I MPI, DMC: STILL MASSIVELY UNDERVALUED DESPITE DIMMER OUTLOOK
FOR MAYNILAD

FRI 17 JAN 2020

I MP OR TA NT R AT ING 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.

I MP OR TA NT DISC L AIM ER
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.

C O L R E S EAR C H T EAM

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

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

C O L F INANC IAL G R O UP, I NC.

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. 7