Philippine investors should buy power producers including Energy Development Corp. and Aboitiz Power Corp. to outperform the nation’s benchmark stock index in the first half of 2010, First Metro Investment Corp. said.
The recommended energy producers’ shares including First Gen Corp. will advance by between 21 percent and 33 percent through June, said Eduardo Banaag, whose Save & Learn Equity Fund is the second-best-performing stock fund in the Philippines since it started on October 12, 2005. The Philippine Stock Exchange Index may add 8.9 percent to 3,360 by end-June, he said.
“Power companies are expanding and earnings will come out higher than consensus,” Banaag said in an interview. “These stocks offer the best of both worlds; you get certainty of cash flows and the benefit of earnings growth.”
Five of the 10 biggest gainers in the Philippine Stock Exchange Index so far this year are power producers and energy- related companies. These stocks have risen at least 6.6 percent since end-2009, outpacing the benchmark’s 1 percent advance.
Banaag predicts Energy Development, the nation’s biggest producer of geothermal power, will rise 21 percent to 6.30 pesos a share by end-June, while Aboitiz Power, which owns hydro- electric plants, will gain 22 percent to 11.25 pesos. Energy Development has climbed 11 percent this year, the second-biggest percentage gain in the benchmark, while Aboitiz Power has risen 7 percent.
First Gen, the nation’s biggest power producer and owner of Energy Development, may jump 33 percent to 14 pesos, he said. First Gen has advanced 8.3 percent this year, the benchmark’s fourth-biggest percentage gain.
“Energy Development and Aboitiz Power will reach new highs in sales and net income by 2011; just look at the capacity they have added,” Banaag said. “First Gen is extremely unreasonably priced compared with its profitability.”
Power plant acquisitions, improving efficiencies and higher electricity prices will inflate earnings at Energy Development, Aboitiz Power and First Gen, Banaag said. Energy Development’s profit may grow at a compound annual rate of 408 percent in the period 2009 to 2011 while Aboitiz Power profit may increase 26 percent, he said.
At least a quarter of Save & Learn is invested in the three power producers and the fund is still adding to its holdings, according to Banaag. Save & Learn has gained 113 percent since it started, beating the benchmark’s 58 percent climb.
Aboitiz Power is trading at 8.67 times operating profit, compared with its three-year average of 17 times, while First Gen is valued at 3.71 times against its 6.04 three-year average, Banaag said.
“Expect upgrades in earnings forecasts and share price estimates,” Banaag said. “These stocks present profitability at reasonable levels.”