Financial Adviser: 5 Worst Performing Blue-Chip Stocks in the First Nine Months of 2023 and How to Profit from Them

The year is almost over yet the stock market shows no significant improvement. Persistent market uncertainties remain large, driven by the looming threat of a global recession and the ongoing conflicts in Ukraine and the Middle East. These factors continue to cast a shadow on investors' sentiment, contributing to the market's stagnant state.

The downtrend in the PSE Index and the low volume turnover of trading reflect the market's anticipation of an economic slowdown in the months ahead.

Despite encouraging corrections in the inflation rate, the rise in interest rates this year has kept investors at bay, compelling them to keep their funds outside of the stock market.

Moreover, growing fears of a global recession could lead to a decrease in consumer and business confidence, resulting in reduced spending and investment, which, in turn, can negatively impact the overall economy and contribute further to the decline in stock market.

The PSE Index has lost as much as 1,126 points or 16 percent from its peak in January this year, reaching 5,920. Although the market has shown signs of recovery lately amidst a correction in inflation and interest rates, investor sentiment remains negative.

The recent breakdown of the PSE Index below 6,000 is a strong indication that the stock market is likely to trend lower towards the historical support level of 5,700.

While most stocks nowadays may look cheap, there is no assurance that a sustainable recovery is underway. In fact, share prices may get cheaper with the prevailing market pessimism.

The Price-to-Earnings (PE) ratio of the market currently stands at 11.7 times, which is historically low. Still, given the uncertainties and sentiment, pricing multiples may fall further.

For example, we can value the stock market based on the current opportunity cost, calculated by adding a risk premium to the current 10-year bond yield, which is 6.6 percent.

Assuming a standard risk premium of five percent, we can calculate a total opportunity cost of 11.6 percent. Based on this rate, we can estimate the fair value of the PSE Index at a PE ratio of 8.6 times. At a market PE of 8.6 times, we should expect the PSE Index to decline by 25 percent from its current level to 4,650.

It may take some time before the market finally recovers. In the meantime, it would be good for investors to be aware of potential value stocks in the market.

For the first nine months of 2023, let’s take a look at the five biggest blue-chip losers to date and where you can possibly pick them up.

ALSO READ

Financial Adviser: 5 Worst-Performing Blue-Chip Stocks in the First Quarter of 2023 and How to Profit from Them

Why Do Companies Voluntarily Delist From the Stock Market?

1| Converge ICT Solutions, Inc

Price: P8.07

Year-to-date loss: -49.2 percent 

Converge ICT Solutions (PSE: CNVRG) holds the title of the largest high-speed fixed broadband operator in the Philippines, boasting a 55-percent market share for download speeds of 25 Mbps and higher.

Over the past three years, CNVRG has maintained dominance, securing approximately 60 percent of new fixed broadband subscriptions. Its residential business contributes to about 77 percent of total revenues, while the remaining 23 percent is derived from providing high-speed fixed broadband solutions to companies.

CNVRG’s total revenues have been growing rapidly by an average of 196 percent per year from P1.9 billion in 2016 to P33.7 billion in 2022. This growth in revenues has enabled the company’s net income to increase by an average of 53 percent per year from P574 million in 2016 to P7.4 billion in 2022.

In 2021, CNVRG’s total revenues continued to increase, rising by 69 percent to P26.5 billion. The huge increase in revenues boosted its total net income by 111 percent to P7.1 billion.

But last year, CNVRG’s total revenue growth slowed down to 27 percent to P33.7 billion, while its total net income grew only by four percent to P7.4 billion due to higher financing costs and the rising number of customers who discontinued their subscriptions.

This year, CNVRG's total revenue experienced a gradual recovery, increasing by seven percent to reach P26.2 billion for the first three quarters, compared to P24.5 billion in the same period last year. Consequently, its net income saw a modest growth of four percent, reaching P6.4 billion from P6.1 billion in the previous year

CNVRG's share price declined by 59 percent so far this year from its high of P19.98 per share in January due to its poor earnings outlook, making it the biggest loser in the PSE Index for the second time in a row.

CNVRG was also the biggest loser last year, dropping 50.2 percent from P31 per share in 2021 to P15 per share by end of 2022.

As previously anticipated in this column last April, CNVRG’s share price did decline to P8.50 per share. The fall in the stock price of CNVRG has brought down its 12-month trailing PE ratio to only 7.6 times, making it relatively cheaper compared to other telecom stocks such as Globe Telecoms (PSE: GLO), which has a PE ratio of 9.0 times and PLDT (PSE: TEL), which is trading at 24.0 times PE ratio.

Given the relative pricing of CNVRG, the stock offers a good opportunity for short-term trading.  If we value CNVRG at similar price-to-earnings ratio of GLO and TEL, let’s say at 10 times PE, we can anticipate a short-term recovery in the stock price towards P10.50 per share level. This would result in a gain of 31 percent from its current share price.

However, given the slowdown in the earnings growth prospects of CNVRG and the absence of regular dividends, its share price may continue to drift lower, widening its discount in PE multiples against GLO and TEL.

2| AC Energy Corp

Price: P4.90

Year-to-date loss: -35.7 percent

AC Energy (PSE: ACEN) is one of the largest listed renewable energy companies in Southeast Asia with a total net attributable capacity of 4,500 MW.

About 40 percent of its total capacity is contributed by its operations in the Philippines while the balance of 60 percent is shared by Vietnam, Indonesia, India, and Australia.

ACEN, which sources its renewable energy mainly from solar and wind power, currently operates about 68 percent of its total capacity, while 32 percent is still under construction.

In 2021, ACEN’s total revenues grew 27 percent to P26.1 billion from P20.5 billion the previous year. The increase in revenues boosted its total net income by 22 percent to P5.3 billion from P4.3 billion in 2020, due to higher earnings contribution from its international operations.

Last year, ACEN’s total revenues continued to grow by 35 percent to P35 billion, but gross profits led to a decline in its EBITDA by 25 percent from P11.7 billion in 2021 to P8.8 billion due to higher costs of electricity.

Nevertheless, ACEN’s net income for 2022 grew 149 percent to P13 billion from P5.3 billion in 2021. This was due to the one-time gain booking of P8.6 billion from its Australian revaluation gains. Without it, net income would have declined by 16.9 percent to P4.4 billion.

This year, ACEN’s total revenues for the first nine months grew 13 percent to P28.6 billion from P25.2 billion in the same period last year.

However, the higher cost of electricity sales and overhead expenses, which increased by 26 percent, led the company to incur operating losses of P2.47 billion. In addition, financing charges of P1.3 billion resulted in ACEN's total losses before other income adjustments reaching P3.8 billion

Despite this, ACEN was still able to report a net income of P7.7 billion, which grew 44 percent from P5.1 billion from the previous year due to other income of P10.2 billion, which primarily came from revaluation of its investments. 

ACEN was the fourth top loser among PSE Index stocks in 2022, which has lost about 30.7 percent in value, and this year, it’s the second biggest loser with 35.7 percent year-to-date loss.

Based on ACEN’s trailing net income of P15.5 billion against its current market capitalization, which has substantially declined, the stock’s PE ratio has fallen to 12.5 times compared to its PE ratio at the beginning of the year at over 50 times PE.

However, if we compare ACEN’s current Enterprise Value (EV) of P212 billion against its reported EBITDA of P8.8 billion, the stock’s EV/EBITDA of 24 times still comes out expensive, which is almost double the average EV/EBITDA ratios of global renewable companies at 14 times.

If we price ACEN based on average EV/EBITDA of 14 times, we will derive an EV of P123 billion, which translates to a market cap of P94 billion. At this projected market cap, we should expect ACEN’s stock price to fall as low as P2.40 per share in the months ahead.

3| Wilcon Depot

Price: P19.80

Year-to-date loss: -32.9 percent

Wilcon Depot (PSE: WLCON) is the leading home improvement and construction supplies retailer in the Philippines, offering extensive selection of local and international brands across all categories with 18 branches spread all over Metro Manila and 68 stores in key cities and municipalities of Luzon, Visayas, and Mindanao for a total of 86 operating stores nationwide.

WLCON's total revenues have experienced robust growth, expanding by 18.2 percent over the past six years, climbing from P12.3 billion in 2016 to P33.6 billion in 2022. This steady rise in revenues has translated into an impressive annual net income growth rate of 27 percent, surging from P886 million in 2016 to P3.8 billion in 2022

This year, WLCON’s total revenues for the first nine months of 2023 grew only by four percent to P25.9 billion from P24.7 billion in the same period. Higher operating expenses, which increased by 17 percent and higher finance charges, led WLCON’s net income to fall eight percent from P2.9 billion last year to P2.7 billion.

As a result, WLCON’s stock price has been falling this year, losing 43 percent of its value from a high of P34.45 per share in January to P19.80 per share today. Despite the fall, WLCON’s PE ratio at 22.4 times, which has significantly fallen from its historical average of 42 times, is still relatively expensive compared to market average of 11.6 times.

The uncertainties surrounding WLCON’s earnings outlook, stemming from the slowdown in the property sector and high-interest rates, may persist, continuing to dampen investor sentiment on the stock.

Currently, WLCON’s premium over market average is over 90 percent, which may not be anymore realistic given the market environment. If we adjust WLCON’s premium to 60 percent, this will mean that the stock’s PE ratio will have to fall to 18.5 times.

At 18.5 times PE, WLCON’s stock price will have to decline further by 18 percent to P16.40 per share level over the medium term.

4| JG Summit Holdings

Price: P38.40

Year-to-date loss: -23.66 percent

JG Summit Holdings (PSE: JGS) is one of the largest and most diversified conglomerates in the Philippines majority owned and controlled by the Gokongwei family.

About 50 percent of JGS’ revenue is contributed by its subsidiary, Universal Robina Corporation (PSE: URC), one of the largest snack food and beverage company in the ASEAN region. Following closely is the pioneer budget airline, Cebu Pacific Air (PSE: CEB), contributing 19 percent, and top property developer Robinsons Land (PSE: RLC), contributing 16 percent.

JGS also has significant stakes in PLDT (PSE: TEL) with an 11.2 percent share and Meralco (PSE: MER) at 26.4 percent. JGS also owns 37 percent of SingLand or Singapore Land Group Limited (SGX: U06), a leading property developer in Singapore.

Prior to the pandemic, JGS’s total revenues over the past 10 years have been growing by an average of 11.5 percent per year from P94 billion in 2009 to P179 billion in 2019. This steady growth resulted in annual earnings growth of 24 percent from P8.5 billion to P31.3 billion in 2019.

During the 2020 pandemic, JGS’s total revenues fell 24 percent to P137 billion, resulting in a net loss of P468 million for the first time. However, last year, JGS’s total revenues made a strong recovery, surging 41 percent to P301 billion from P221 billion in 2021.

This surge propelled JGS’s operating income to increase by 84 percent, rising from P9.9 billion in the previous year to P18.2 billion. Nevertheless, higher financing costs and foreign exchange losses in 2022 caused JGS’s net income to drop to only P650 million.

This year, JGS’s total revenues continue to rebound, showing a growth of 15 percent in the first nine months of 2023, reaching P251 billion from P217 billion in the same period last year.

With higher operating income and no foreign exchange losses, JGS’s net income made a significant turnaround, reaching P26.2 billion compared to a net loss of P3.6 billion in 2022.

Despite JGS's encouraging financial performance, its stock price continued to fall this year, dropping by as much as 40 percent from its high of P58.2 per share in January.

At current share price of P38.40, the stock is trading at PE ratio of 20.5 times, which is relatively higher than its historical PE average of 18 times. If we price the stock at 18 times, we should expect its share price to correct further down to P32.6 level, which could be a good level to accumulate for the long term.

5| Monde Nissin Corp

Price: P7.91

Year-to-date loss: -28.61 percent

Monde Nissin (PSE: MONDE) is the country’s largest noodle and biscuit manufacturer. For over 40 years, the company has built a portfolio of top brands such as Lucky Me!, SkyFlakes, Fita, M.Y. San Grahams, Nissin, Mama Sita’s, and Dutch Mill.

In 2020, MONDE’s main brand, Lucky Me! dominated the instant noodle market with 68 percent market share, while Dutch Mill brand controlled the yogurt drinks market with 73.2 percent.

MONDE’s other market-leading brands such as SkyFlakes and Fita are number one in the biscuit market with 30.5 percent market share, while Mama Sita’s leads in oyster sauce brands with 56 percent market share.

In 2015, MONDE acquired meat alternative product manufacturer, Marlows Food Limited, which owns the Quorn Foods brand, for roughly P40 billion.

About 80 percent of MONDE’s annual net sales comes from its branded food and beverage business. Its noodle business contributes about 50 percent of the total net sales, while its biscuit business about 30 percent. The balance of 20 percent comes from MONDE’s meat alternative business from overseas.

Last year, MONDE’s total revenues grew 6.7 percent from P69.2 billion in 2021 to P73.9 billion, but its gross profit declined 9.6 percent to P23 billion due to high costs of raw materials.

As a result, MONDE's core net income dropped 20.7 percent to P6.6 billion from P8.2 billion the previous year. This marks the second consecutive year of declining earnings for MONDE. In 2021, MONDE's net income also decreased 5.4 percent, from P8.6 billion in 2020.

MONDE also booked a one-time non-recurring loss of P20.5 billion due to the impairment of goodwill in relation to its acquisition of Marlow Foods Ltd. This resulted in a huge net loss of P13 billion, which wiped out the company’s retained earnings.

MONDE’s meat alternative business, Quorn Foods, has been declining since 2018 from P15.4 billion to P15 billion in 2020. This has resulted in a significant decline in profitability from a net income of P321 million in 2018 to a net loss of P859 million in 2020.

This year, MONDE’s total revenues for the first nine months of 2023 recovered by eight percent to P59.6 billion from P54.8 billion in the previous year, which resulted in a three percent increase in net income of P5.8 billion.

MONDE’s declining earnings outlook has impacted its share price performance this year, losing 47 percent from its high of P14.92 per share, making it one of the biggest blue-chip losers in 2023 for the second time in a row.

As previously projected in this column last April, MONDE indeed declined to P6.90 per share target price last August and went to as low as P6.10 per share. The stock since recovered and currently trading at P7.91 per share.

If we annualize MONDE’s nine-month earnings, we should expect a full year net income of P7.7 billion. At this level, the stock will have a prospective PE ratio of 18.5 times.

Compared to its closest comparable, Universal Robina Corp (PSE: URC), which is trading at PE ratio of 16 times, MONDE is relatively more expensive. If we price MONDE equal to URC’s 16 times, the stock should fall back to P6.90 per share.

Given uncertainties over MONDE’s earnings outlook based on the past two years and the poor growth outlook of its meat alternative business, it is also possible the stock could trade at discount to URC.