Financial Adviser: 5 Worst-Performing Blue Chip Stocks in the First 9 Months of 2022 and How to Profit from Them

Rising uncertainties from peso depreciation, inflation and interest rates continue to hound the stock market, as the PSE Index lost another 414 points in the third quarter.

The PSE Index has lost much as 23.9 percent since it peaked in February this year and may probably lose some more in the coming weeks after it broke the psychological support at 6,000-level last week.

Although inflation has slowed down to 6.3 percent in August after reaching 6.4 percent in July, the highest in four years since 2018, there are fears that inflation will continue to go up after the dollar exchange rate accelerated last quarter to a historic high at P59.26.

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 times, which is historically low, but given the uncertainties and sentiment, pricing multiples may fall further.

For example, we can value the stock market based on the current opportunity cost. We can compute this by adding risk premium to the current 10-year bond yield, which is 7.2 percent.

If we think this crisis will be resolved soon, we can add a risk premium of only three percent to derive a total opportunity cost of 10.2 percent. At this rate, we can expect the PSE Index to bottom at 9.8 times PE ratio or 5,116 level.

But if we feel that uncertainties will continue to rise, especially in the global markets, we can raise our risk premium to five percent so that we derive a higher opportunity cost of 12.2 percent.

At this rate, we can expect that the downtrend in the PSE Index could accelerate to as low as 8.2 times PE or 4,278 in the coming weeks.

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

Stocks that have tumbled the most have the highest potential of providing huge returns when they recover, although not all badly beaten stocks will recover first.

All five worst-performing blue-chip stocks in the first half of 2022 that we featured recently in this column remained the same, except for Alliance Global (PSE: AGI), which improved its ranking to number six.

For the first three quarters of 2022, let’s take a look at the five biggest blue-chip losers to date and where you can possibly pick them up:

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Financial Adviser: 5 Worst Performing Blue Chip Stocks in the First Half of 2022 and How to Profit from Them

1| Converge ICT Solutions, Inc

Price: P13.10

Year-to-date loss: -58.93 percent

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

CNVRG has been dominating about 60 percent of the new fixed broadband subscriptions over the past three years. About 77 percent of its total revenues is contributed by its residential business, while 23 percent comes from its high-speed fixed broadband solutions to companies.

CNVRG’s total revenues have been growing rapidly by an average of 69 percent per year from P1.9 billion in 2016 to P15.6 billion in 2020. This growth in revenues has enabled the company’s net income to increase by an average of 56 percent per year from P574 million in 2016 to P3.4 billion in 2020.

Last year, 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 to grow by 111 percent to P7.1 billion.

This year, CNVRG’s total revenues for the first six months of the year grew by 36.2 percent to P16.05 billion from P11.8 billion in the same period last year. This increased CNVRG’s net income by 21 percent to P3.95 billion from P3.25 billion in 2021.

If we annualize this latest earnings results, we can expect CNVRG’s total net income by year-end to reach P8.7 billion.

The recent fall in the stock price has brought down its 12-month trailing PE ratio to only 12.12 times, which is still relatively more expensive than Globe Telecoms (PSE: GLO) and PLDT (PSE: TEL).

With the current negative sentiment in the market, CNVRG’s stock price may further fall that could narrow its premium gap against GLO or TEL’s pricing multiple.

CNVRG has already broken its historical low at P13.06 by falling as low as P12.66 recently. Assuming CNVRG falls to 10 times PE ratio, which is comparable to GLO and TEL, share price could fall to a new low at P10.90 per share.

2|  AC Energy Corp

Price: P5.60

Year-to-date loss: -49.09 percent

AC Energy (PSE: ACEN) is one of the largest listed renewable energy companies in Southeast Asia with a total net attributable capacity of 3,750 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.

Last year, ACEN’s total revenues grew 27 percent, from P20.5 billion in 2020 to P26.1 billion in 2021. 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.

This year, ACEN’s total revenues for the first six months of the 2022 continued to grow by 19 percent, but gross profit fell by 42 percent as margins declined to 7.8 percent from 22 percent last year due to higher electricity costs.

Lower gross profits resulted to lower net income for ACEN, which declined by 18.8 percent to P2.18 billion from P2.69 billion in the same period last year.

Based on ACEN’s trailing 12-month net income of P4.7 billion against its current market capitalization, which has substantially declined, the stock still appears to be overvalued at a PE ratio of 46.8 times, compared to current market PE of only 11 times. 

Even if we compare ACEN’s current Enterprise Value (EV) of P242 billion against its reported EBITDA of P11.7 billion, the stock’s EV/EBITDA of 20.7 times still comes out expensive, which is 32 percent higher than 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 P163 billion, which translates to a market cap of P143 billion.

At this projected market cap, we can expect ACEN’s stock price to fall as low as P3.60 per share.

3| Globe Telecoms, Inc

Price: P2,030

Year-to-date loss: -37.89 percent

Globe is the leading telecommunications and technology provider in the country with 87.4 million mobile subscribers, 3.1 million home broadband customers, and over 1.1 million landline subscribers.

About 62.1 percent of Globe’s revenues comes from mobile service, 17.2 percent from home broadband, and the 20.6 percent from corporate data, fixed line voice, and non-service revenues.

Last year, Globe’s total revenues grew 4.0 percent to P167.7 billion from P160.5 billion in 2020, but operating income margins declined from 15.8 percent in 2020 to 13.7 percent due to higher general and administrative expenses and financing costs.

Despite the lower operating income, Globe booked a one-time gain of P4.3 billion, resulting from the dilution of its ownership in Mynt, the operator of GCash.

The one time-gain enabled Globe’s net income to increase 27 percent from P18.6 billion in 2020 to P23.7 billion in 2021. But without it, the company’s income before income tax would have declined by 8.8 percent.

This year, Globe’s total revenues for the first six months continued to slow down, growing marginally by 3.2 percent to P87.3 billion from P84.6 billion in the same period last year.

But Globe managed to report a 51 percent increase in net income of P19.7 billion from P13.0 billion in 2021 due to the one-time booking of non-recurring income of P10.7 billion from the sale of its data center business.

Again, without it, the company’s pre-tax income would have declined by 12.2 percent to P13.5 billion from P15.4 billion.

One of the causes for the decline in Globe’s core earnings can be traced to its rising depreciation costs. The company’s depreciation expense for the first six months increased by 20 percent from P18.5 billion last year to P22.3 billion.

The increase in depreciation expenses lowered Globe’s operating income by three percent, but if we put this non-cash item back, EBITDA actually increased by eight percent to P40.5 billion from P37.3 billion last year.

Globe’s EBITDA margin improved by eight percent from 49 percent last year to 51 percent this year due to lower cost of sales and operating expenses.

Improving EBITDA margins along with a sustained revenue recovery in the second half should help Globe end the year with positive growth in its core earnings.

If we get the sum of Globe’s current market cap at P292 billion and its debt of P240 billion minus its cash of P16 billion, we will derive an EV of P516 billion.

To get the EV/EBITDA of Globe, we simply divide this by an estimated EBITDA for the year at P81 billion to derive a ratio of 6.37 times.

Last year, the company’s average EV/EBITDA was 8.25 times. If we price Globe at least at seven times EV/EBITDA, which is roughly 85 percent of its average last year, we will get an EV for GLO at P567 billion. Using this target EV of P567 billion, we can work backward to get the implied market cap of Globe at P343 billion, which translates to a target price of P2,524 per share. 

GLO’s projected debt could decline to P213 billion after its planned debt repayment using the proceeds from the sale of its towers, while its cash reserves could increase to P77 billion after the rights offer and sale-and-leaseback transaction.

Using these assumptions, we can project that Globe’s EV/EBITDA ratio could fall to 5.19 times.

Again, given the same EV of Globe at P567 billion at EV/EBITDA ratio of 7.0 but different debt and cash profile, we can derive that its implied market cap at P431 billion will mean that the target price of the stock is at P3,170 per share.

4| Ayala Land, Inc

Price: P22.85

Year-to-date loss: -37.74 percent

Ayala Land (PSE: ALI) is the largest and most diversified real estate conglomerate in the country. ALI is engaged in property development, commercial leasing and hotel operations. ALI also owns 71.66 percent of Ayala Land Logistics Holdings (PSE: ALLLHC), the leading developer and operator of industrial parks and 66 percent of AREIT, Inc (PSE: AREIT), one of the largest real estate investment trust companies in the country.

ALI’s net income has been growing by an average of 21 percent per year from P7.1 billion in 2011 to a high of P33.2 billion in 2019 prior to the pandemic, on the back of strong revenue growth, which steadily increased by 17 percent annually.

But during the 2020 pandemic, ALI’s net income plunged 73.7 percent, falling close to its 2011 net income at P8.7 billion for the first time in eight years. Since then, ALI’s net income has not yet recovered to its pre-pandemic level.

Although ALI was able to increase its net income last year by 40 percent year-on-year to P12.2 billion, as its total revenues increased by eight percent to P103.8 billion, its net income represents only 36.7 percent of its 2019 earnings.

This year, ALI’s total net income continues to recover, albeit at a slower pace, growing by 14 percent to P3.2 billion from P2.8 billion in the same period last year.

If we use the historical contribution of ALI’s first quarter to its full year net income at 22 percent, we can estimate that ALI’s net income by year end will amount to about P14.5 billion, which represents 18.9 percent growth from last year.

But if we use the average net income projections of top foreign brokers in the market, we can see that institutional investors expect ALI to end the year stronger at P17.7 billion, which represents 45 percent earnings growth.

The same market consensus also projects ALI’s net income to grow by 41 percent to P25 billion by 2023 and 18 percent to P29.5 billion by 2024.

The recent fall in the stock price of ALI at P22.85 per share has brought the company’s market valuation back to 2011 levels when the company’s net income was in around P7 billion.

But this year’s expected net income is nowhere near the P7 billion. At projected earnings of P17.7 billion this year, ALI certainly deserves a higher market valuation.

Perhaps for reference, the last time that ALI’s net income reached P17 billion level was in 2015, and during that time, ALI’s stock price averaged P34.45 per share.

If we compare the trailing 12-month earnings of ALI against its current market capitalization, we will derive a PE ratio for the stock at 23.64 times. This PE ratio makes the stock look expensive despite its recent huge correction if we compare this to the market’s PE of only 11 times.

If we focus on the projected net income of ALI at P17.7 billion, given its modest recovery this year, we will derive a more reasonable prospective PE ratio target of 19 times.

Given this expected recovery, the current share price of P22.85 at prospective PE of 19 times offers a long-term potential upside of 52.6 percent to its historical PE of 29 times.

If we follow market consensus that ALI’s net income by 2024 will recover to P29.5 billion, we can estimate that the projected annual earnings growth in the next three years from 2021 will be 34 percent per annum.

To put this in the right perspective, we can factor the expected earnings growth in the pricing multiple by using the Price-to-Earnings to Growth or PEG ratio.

According to legendary investor Peter Lynch, a stock is considered fairly valued if its PE ratio is equal to its growth ratio, meaning its PEG ratio is equal to 1.0, but when a PEG ratio falls below 1.0, the stock is deemed undervalued.

Given ALI’s expected growth rate of 34 percent in the next three years, the stock’s current PEG ratio is only 0.82.

To value ALI at PEG ratio of 1.0 will mean the stock must be priced at P29 per share in the medium term, but prospectively, based on target PE of 19.9 times, the stock can have long-term value of P41 per share.

5| Megaworld Corporation

Price: P2.04

Year-to-date loss: -35.24 percent

Megaworld Corporation (PSE: MEG) is one of the leading property developers in the Philippines. It is primarily engaged in the development of large scale, mixed-used planned communities that comprised of residential, commercial and office developments.

MEG has developed over 20 integrated urban townships to date in the country, including Eastwood City in Quezon City, Newport City in Pasay City and McKinley Hill in Fort Bonifacio.

MEG’s revenues have been growing by an average of 14.3 percent per year in the past 10 years prior to the pandemic from P17.7 billion in 2010 to P67.7 billion in 2019, translating to an annual earnings growth of 16.9 percent from P4.0 billion in 2009 to P17.9 billion in 2019.

During the 2020 pandemic, MEG’s total net income fell by 45 percent to P9.8 billion, as total revenues declined by 35.4 percent to P43.5 billion from a high of P67.4 billion in 2019.

But last year, MEG’s total revenues recovered by 16.6 percent to P50.7 billion, bringing its net income to rise by 35 percent to P13.4 billion.

This year, MEG’s net income for the first half of 2022 continued to improve, growing by 17.5 percent to P5.88 billion from P5.0 billion in the same period last year, as total revenues increased by 24 percent to P25.5 billion.

The recent fall in the stock price of MEG has brought down its Price-to-Earnings (PE) ratio to only 4.49 times, which is 57.6 percent cheaper than its pre-pandemic historical PE of 10.6 times.

MEG is also trading at 67 percent discount to its book value of P6.30 per share, which is comparably low given historical price-to-book value ratio at 1.0.

Given MEG’s strong earnings recovery, the market should eventually price the stock near its historical PE of 10.6 times, which will roughly double its current share to over P4.00 per share. 

Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888