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

Market uncertainties remain high this year as the threat of a global recession and the ongoing war in Ukraine continue to affect investors’ sentiment.

If investors believe that a recession is imminent, they may sell off their stocks in anticipation of weaker earnings growth ahead, causing stock prices to decline.

Moreover, the perception of a global recession can 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 further contribute to the decline in stock markets.

The PSE Index has lost as much as 802 points or 11 percent from its peak in January this year, reaching 6,330. Although the market has shown signs of recovery in March with a slowdown in inflation and interest rates, investor sentiment remains negative.

A breakdown in the PSE Index below 6,330 support could send the market testing its previous low at 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 11.9 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, which can be computed by adding risk premium to the current 10-year bond yield, which is 6.3 percent.

Assuming a standard risk premium of five percent, we can calculate a total opportunity cost of 11.3 percent. Based on this rate, we can anticipate the PSE Index to decline to a PE ratio of 8.8 times or a level of 4,800.

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

For the first quarter of 2023, 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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1| Converge ICT Solutions, Inc

Price: P12.76    

Year-to-date loss: -19.6 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.

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 4 percent to P7.4 billion due to higher financing costs and the rising number of customers who discontinued their subscriptions.

CNVRG's share price lost by 50.2 percent last year due to the decline in its earnings outlook, making it the biggest loser in the PSE Index. This year, CNVRG continues to lead the top losers in the PSE Index with 19.6 percent loss.

The fall in the stock price of CNVRG has brought down its 12-month trailing PE ratio to 11.5 times, but if we compare this with other telecom stocks such as Globe Telecoms (PSE: GLO), which has a PE ratio of 8.2 times and PLDT (PSE: TEL), which is trading at 7.9 times PE, CNVRG is still relatively expensive.

Given the prospect of a slowdown in CNVRG’s earnings growth, the stock may fall further that could narrow its premium gap against GLO and TEL’s pricing multiple.

If we value CNVRG using the same price-to-earnings multiple of eight times as TEL and GLO, we can anticipate a further decline in the stock price to P8.50 per share. This would result in an additional loss of 33 percent from its current share price.

2| AC Energy Corp

Price: P6.24  

Year-to-date loss: -18.1 percent

AC Energy (PSE: ACEN) is one of the largest listed renewable energy companies in Southeast Asia with a total net attributable capacity of 4,000 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 by 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.

ACEN was the fourth top loser among PSE Index stocks in 2022, which has lost about 30.7 percent in value.

Based on ACEN’s net income of P4.4 billion against its current market capitalization, which has substantially declined, the stock still appears to be overvalued at 56 times PE ratio, compared to the current market PE of only 11.8 times.

Even if we compare ACEN’s current Enterprise Value (EV) of P276 billion against its reported EBITDA of P8.8 billion, the stock’s EV/EBITDA of 31.4 times still comes out expensive, which is more than 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.

3| Monde Nissin Corp

Price: P9.22 

Year-to-date loss: -16.8 percent

MONDE is 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 brand Quorn Foods 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 by 9.6 percent to P23 billion due to high costs of raw materials.

As a result, MONDE's core net income dropped by 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 to 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 to a significant decline in profitability from a net income of P321 million in 2018 to a net loss of P859 million in 2020.

MONDE’s declining earnings outlook has impacted its share price performance last year, which resulted to a loss of 31.6 percent, making it the third biggest blue-chip loser in 2022.

Using MONDE’s core net income at P6.6 billion, we can price the stock at PE ratio of 25 times, which is similar to its closest comparable, Universal Robina Corp (PSE: URC), which is trading at PE ratio of 26 times.

But given MONDE’s declining earnings in the past two years and the poor growth outlook of its meat alternative business, the stock’s pricing multiple could trade at discount to URC.

If we assume a 25 percent discount in PE multiple, we can project MONDE to trade at 18 times PE, down from its current PE of 25 times. At 18 times, we can project MONDE to eventually trade at P6.90 per share.

4| Globe Telecoms

Price: P1,836   

Year-to-date loss: -15.78 percent

Globe Telecoms (PSE: GLO) 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 GLO’s revenues comes from mobile service, 17.2 percent from home broadband, and 20.6 percent from corporate data, fixed line voice, and non-service revenues.

In 2022, GLO’s total revenues grew 4.2 percent from P168 billion in 2021 to P175 billion, from P160.5 billion in 2020, but operating income declined by 4.3 percent, from 23 billion in 2020 to P22 billion in 2021 due to higher general and administrative expenses and financing costs.

GLO, however, made up the shortfall in operating income by booking a one-time non-recurring gain from the sale of its data center business and telecom towers amounting to about P19 billion.

Because of this, GLO’s net income for 2022 grew by 41.6 percent to P34.6 billion from P23.7 billion in the previous year. Without the non-recurring income, GLO’s net income would have declined by 33 percent to P15.9 billion.

If we get the sum of Globe’s current market cap at P264 billion and its debt of P233 billion minus its cash of P18 billion, we will derive an Enterprise Value or EV of P479 billion.

To get the EV/EBITDA ratio of Globe, we simply divide this by its EBITDA from 2022 at P79 billion to derive a ratio of 6.06 times.

In 2021, GLO’s average EV/EBITDA was 8.25 times. If we price GLO at least at seven times EV/EBITDA, which is roughly 85 percent of its historical average, we will get an EV for GLO at P553 billion.

Using this target EV of P553 billion, we can work backward to get the implied market cap of Globe at P338 billion, which translates to a target price of P2,350 per share, or a potential upside of 28 percent from its current share price.

GLO has been a consistent dividend payer since 2003. Last year, it paid a total cash dividend of P106, which gave a dividend yield of 4.8 percent based on its share price of P2,180 by end of 2022.

This year, GLO has already paid P25 per share cash dividend for the first quarter and it is expected that it will pay P75 per share in each of the remaining three quarters for a total dividend of P100 per share.

At total cash dividend of P100 per share this year, current dividend yield stands at 5.44 percent. If GLO’s share price further weakens to P1,700 level, dividend yield should rise to 5.9 percent, which should offer an excellent buying opportunity.

5| Semirara Mining and Power Corporation

Price: P29.30   

Year-to-date loss: -15.07 percent

Semirara Mining and Power Corporation (PSE: SCC) is the largest coal producer in the Philippines, and the only power producer in the country that owns and mines its own fuel source (coal).

SCC operates the largest and most modern pit mine in the Philippines with operating capacity of 16 million metric tons of coal per year. SCC also installed a generating capacity of 900 MW, with an additional 1,200 MW in the pipeline.

SCC’s revenues, which is comprised of 65 percent coal sales and 35 percent power revenues, have been growing by an average of eight percent per year pre-pandemic, from P22.8 billion in 2010 to P44.2 billion in 2019.

SCC’s steady revenue growth resulted to an annual net income growth of 10 percent—from P3.9 billion in 2010 to P9.6 billion in 2019.

During the pandemic in 2020, SCC’s total revenues fell 36 percent to P28.2 billion from P44.2 billion in 2019, which cut its net income by about two-thirds to only P3.3 billion.

But in 2021, with the recovery in global prices for coal, SCC’s total revenues more than doubled to P52 billion from P28.2 billion in 2020.

This increased SCC’s net income by over three times to P16.2 billion from P3.2 billion the previous year.

Last year, SCC’s total revenues from coal and power continued to rise, increasing 74 percent to P91 billion, almost doubling its revenues of P52 billion in 2021.

SCC’s strong revenue performance more than doubled its net income to P39.8 billion from only P16.2 billion in 2021.

Because of the strong earnings, SCC also increased its cash dividends this year by more than double from P1.50 per share in the first quarter of 2022 to P3.50 per share.

SCC is expected to declare another dividend this October. Last year, it paid P3.50 per share, which was double that of the P1.75 per share it paid in 2021.

If SCC will double last year’s dividend this year, we should expect a cash dividend of P7.00 per share in October. This will bring total expected cash dividend of P10.50 per share for 2023, which translates to a huge 35.8 percent dividend yield at the current share price.

On the other hand, if SCC decides to keep the same cash dividend of P3.50 this year, the total expected cash dividend will be P7.00 per share, which gives a dividend yield of 23.8 percent, which is still very attractive.

Based on SCC’s net income of P39.8 billion, the stock is trading at only 3.1 times Price-to-Earnings (PE) ratio. Even if SCC’s revenue momentum growth slows down this year that may cause its earnings to correct by 50 percent, buying the stock at current share price will give an attractive PE ratio of only six times.

SCC was the third best performing blue-chip for 2022 with a total share price return of 63.9 percent. The recent fall in the stock could be due to the ex-dividend adjustment in the share price, which should give a good opportunity to buy the stock.

Risk of global recession could drive the share price of SCC lower to its historical support at P20 level. Given the prospect of another dividend this October, assuming it’s only P3.50 per share, buying the stock below P29.30 still gives an attractive yield.

For example, at a P27 share price, a P3.50 cash dividend would yield a return of 12.9 percent, but if the stock falls to P21, the dividend yield would increase to 16.7 percent.

Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice hong@financialadviser.ph or follow him on Twitter @henryong888