Business World
Monday, September 21, 1998
By Ma. Elizabeth L. Sanchez
Reporter
The threat of extinction facing the country's national flag carrier is seen battering banks and utility stocks this week, analysts said.
Philippine Airlines (PAL) last Thursday announced it will close its operations alter midnight on Wednesday (Sept. 23). This ensued after its 6,000 ground crew union rejected the management's employee stock option plan (ESOP) and the suspension of its Collective Bargaining agreement (CBA) for 10 year's.
Among the stocks that have huge exposures to the beleaguered airline include state-controlled Philippine National Bank (PNB), oil refiner Petron Corp. (PCOR) and holding firm Macroasia Corp. (MAC).
Of PAL's 30 creditors which extended up to P85 billion, six are listed firms: PNB, Security Bank Corp. (SECB), China Banking Corp. (CHIB), Equitable Banking Corp. (EBC), Rizal Commercial Banking Corp. (RCB), and PCIBank (PCI).
The announcement on PAL's imminent closure took a heavy toll on PNB shares last Friday.
PNB
Hong Kong-based HSBC Markets, in its September 1998 report on Philippine corporations and financial institutions, said PNB recently wrote down its minor equity stake in PAL to P350 million from P752 million.
"Management asserted that PNB’s existing loan exposure to PAL is now fully secured and that it now expects PAL will be in a position to fully service its obligations overtime. We would regard such a caveat as somewhat unsatisfactory," the hSBC report, prepared before last Thursday's announcement of PAL's closure, said.
In an earlier disclosure to the Securities and Exchange Commission, PAL said its short and long-term loan exposure to PNB amounted to $80 million (about P3.5 billion). The exposure accounted for 16% of the bank's P22.5-billion capitalization as of the first half.
PNB's short-term loans were reported to Be backed by collaterals consisting of mortgage on a parcel of land and the PAL building.
PNB shares dropped by as much as 5.26% or P1.50 to close at P27 last Friday. At its current level, PNB is nearing its year-to-date low of P23.75 per share.
Orion-Squire Capital Inc., in its monthly report, said PNB is already trading at a huge discount of 77% to its 1998 full-year book value of PI72 per share.
"Although the stock's valuation is tempting, we remain skeptical given the bank's poor earnings prospect and deteriorating asset quality, Rodel Domdom, analyst at Orion Squire Capital, said.
He added the stock is at a tailend of a corrective cycle, which means its share price could hit bottom soon.
"PNB reached its all-time high at P552 in January 1994 which coincided with the 1993 (market) Bull run... a short-term formation (would) show a possible weakness which could take it to the P30 to P33 range where we expect it to bottom,” Mr. Domdom said.
PNB previously said there were 30 banks which have debt exposure to PAL.
PAL owes foreign and local creditors $2.1 billion (approximately P85 billion in loans). Of this amount $400 million was borrowed from local banks led by PNB and Allied Banking Corp., a universal bank owned by Lucio Tan.
“The lack of resolution (on PAL's woes) may further escalate banks' bad asset problems and prolong creditors' agony of finding a white knight to rescue operations," F. Yap Securities Inc. wrote in its weekly report
F. Yap Securities said this may also confirm the recent forecast of international credit ratings agency Standard & Poor's Corp. that total problem assets of banks will reach 15% to 30% of their total loans this year. This could affect local commercial banks with a total exposure of $400 million, it said.
However, some analysts said the news may no longer adversely drag down banking stocks. For one, their anaemic lending activities and swelling non-performing loans (NPL's) already weakened confidence in the sector.
Sentiment on listed banks has been weighed down by rising NPLs and lower profitability as a result of the crisis.
Of listed banks with exposure to PAL, only Security Bank (SECB) remained unchanged last Friday at P11. China Bank (CHB) fell 7% or P35 to P465 or P1.50 to P29.50; RCB was untraded while PCI shed P2.35 to P83 apiece.
PETRON
Oil refiner Petron Corp (PCOR) which has P202 million in receivables form PAL representing jet fuel sales to the airline, also stands to be affected by the developments, analysts said.
PCOR fell by as much as 5% or 15 centavos to P2.80 last Friday.
However, analysts said there are also some silver linings on PCOR which could shieled the stock from PAL’s debris.
The recently approved oil price hike would lessen the effect of the foreign exchange losses Petron has incurred.
PCOR has raised has raised its ump prices two weeks ago by as much as P0.07 per liter following a P0.0625-per-liter increase by Pilipinas Shell Petroleum Corp. last August . The adjustment was reportedly made to cover for losses due to the volatility in the peso-dollar exchange rate.
However, seen rocking the bottomline of the company, analysts said, was the proposal by state-run National Power Corp. to source its power plants from other power providers. This may mena a hydro-based facility which could cut PCOR’s fuel supply to Napocor. About 50% of PCOR’s fuel services are supplied to Napocor.
Analysts said PCOR is currently undervalued reloative to the market in terms of price to earnings.
“It’s share price is trading at an all-time low…the extent of the recent decline (in the market) and the extreme oversold (bargain) condition of the stock would no doubt trigger a rally . Should it do so, we expect it to be at an upside of P3.40 to P3.50.,” Cilette Liboro, Vice-President for Research at Orion-Squire Capital, said in amonthly report.
MACROASIA
Holding firm Macroasia Corp. (MAC) seemed to buck the trend of PAL-linked stocks. It inched two centavos up to P1.02 last Friday with volume of chares traded worth P191,400.
“In light with the development, you would expect MAC to get hit but apparently there wasn’t much trade on the stock,” Grace Cerdenia, Research Chief at F. Yap Securities, said.
PAL shares in MAC were sold last June worth P755 million. The shares were allegedly sold to beer magnate Lucio Tan. MAC, hoever, has denied knowledge of the sale which involved 686 million shares priced at P1.10 per share.
The shares are said to comprise 68% of PAL’s outstanding capital stock in Macroasia, which is into charter flight operations, in-flight catering and real estate.
PAL acquired its stake in Macroasia in March last year, prompting talk of a back-door listing by the airline which has long announced plans to go public.
While share prices are expected to take a hit from PAL’s closure, analysts said the development’s multiplier effect on the effect on the economy is seen to tbe more disturbing.
“Although the air traffic industry accounts for only less than 5% of the combined transport, communication and storage sector (of the domestic output), its size belies its influence,” Noel Reyes, Research Chief at Anscor Hagedorn Securities Inc., said.
He added that the decline in the air transport sector’s growth to 7.3% in the second quarter from 8.5% a year ago was largely attributed to the 20% slump in air transport growth brought about by the shutdowns in PAL operations.
“PAL’s full closure, we estimate, can cost the economy as much as another 0.5% drop in growth in the fourth quarter,” Mr. Reyes said.
Analysts said only a :white knight” at this point can prevent the closure of the airline.
“Whoever buys PAL as long as they service the same routes and would allow local players to still supply fuel, there may be hope,” an analyst from a foreign brokerage said.
OUTLOOK
Meanwhile, speculations on mergers and takeovers would continue to hound the market this week, analysts said.
M&A talk sent the 30-issue Philippine Stock Exchange composite index 8.54% or 92.43 points to 1,174.61 last week.
Following the Phisix’s lead, the broader All-Shares Index gained 20.24 points or 5.43% last week to 393.09. Average value turnover rocketed to P4.27 billion, boosted by block sales of phone issue Philippine Long Distance Telephone (TEL) and by cement holding firm Bacnotan Consolidated Industries Inc. (BCI) over its transfer of ownership of its three cement subsidiaries to Swiss financial firm Holderbank Glarus AG.
However, the market broke its four-day rally on Friday, with the index dipping 94.63 points or 7.45%.
“The Phisix’s upside appeared limited as the buy-in news relating to (TEL) has already been factored in. Unless another surprising events props up, lack of domestic incentives would push fund managers to lock-in gains on rallies,” F. Yap Securities said.
It also said attention may revert back to global concerns as the prevailing reluctance of the Group of Seven industrial nations to lower interest rates will leave financial markets in a state of disarray.
“Acknowledging short-term fiscal interventions (be it in the foreign exchange or stock markets) have failed, global investors are clamoring relaxed monetary policies to spur a regional recovery,” F. Yap Securities said.
For Jeffrey Espe, Research Head at I.B. Gimenez Securities Inc., the market has a tendency to reverse its trend after a few days of gains, in such orevalent conditions. “We expect the market to trade within a range of 1,100 and 1,250,” Mr. Espe said.
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