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07 June 2013 Asia Pacific/Philippines Equity Research Conglomerates Metro Pacific Investments (MPI.PS / MPI PM) Rating OUTPERFORM* Price (06 Jun 13, P) 5.86 INITIATION Target price (P) 7.90¹ Upside/downside (%) 34.8 Mkt cap (P mn) 152,456 (US$ 3,620) Hospitals biz deserves a second look Enterprise value (P mn) 189,919 ■ Initiate with OUTPERFORM. We initiate coverage on Metro Pacific Number of shares (mn) 26,016.46 Investments with an OUTPERFORM rating and a P7.90 target price, Free float (%) 43.9 52-week price range 6.29 - 3.92 implying 35% potential upside. Our target price is SOTP-based and ADTO - 6M (US$ mn) 6.1 translates to an implied 2014E PER of 20.6x and PBR of 2.0x (sector *Stock ratings are relative to the coverage universe in each average of 18.0x and 2.2x, respectively). The company focuses on water, analyst's or each team's respective sector. ¹Target price is for 12 months. power, toll roads, and hospitals. We forecast that hospitals will contribute 11% to 2014E net profit but we estimate that its NAV contribution is more Research Analysts substantial at 20%. Alvin Arogo ■ Multi-year growth potential for hospitals. Metro Pacific manages and 63 2 858 7716 [email protected] operates various privately held hospitals and we forecast its total beds to witness an 18% CAGR to 3,000 by 2015. This would be the main driver for Gab Roque 63 2 858 7756 the 47% CAGR in its net income contribution, in our view. This is higher than [email protected] the 22% p.a. average of the two fastest growing healthcare stocks in NJA. Over the long term, we believe growth will be driven by the potential for higher per capita healthcare spending and capacity investments, as these have a high positive correlation with improvements in GDP per capita. ■ On solid ground. We believe Metro Pacific’s investments in utilities and toll roads provide a combination of earnings visibility and growth. We forecast that its consolidated net profit and operating cash flow will see 23% and 12% CAGR, respectively, from 2013E to 2015E. ■ Abundant supply of catalysts and has scope for further re-rating. We believe that there is an abundant supply of catalysts in 2H13 (Fig 5). Despite the 32% year-to-date stock price increase, we believe that there is scope for further gains as the stock’s 2014E PER of 15.3x is below its past five-year average of 17.7x. Our SOTP valuation also suggests that ex-hospitals, MPI’s fair value is P6.40 or just 9% above its current stock price. Key investment risks are failure to execute hospitals M&A and unfavourable regulatory decisions. Share price performance Financial and valuation metrics Year 12/12A 12/13E 12/14E 12/15E Price (LHS) Rebased Rel (RHS) Revenue (P mn) 27,806.8 32,275.6 37,009.6 42,126.6 8 120 EBITDA (P mn) 15,647.8 17,916.0 20,571.4 23,574.8 6 110 EBIT (P mn) 11,802.1 13,396.4 15,577.5 18,094.7 100 Net profit (P mn) 6,530.2 8,386.6 9,970.7 12,244.7 4 90 EPS (CS adj.) (P) 0.26 0.32 0.38 0.47 2 80 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Change from previous EPS (%) n.a. Consensus EPS (P) n.a. 0.30 0.35 0.42 The price relative chart measures performance against the EPS growth (%) 21.4 21.7 18.9 22.8 PHILIPPINE SE COMPOSITE INDEX which closed at 6609.01 P/E (x) 22.1 18.2 15.3 12.5 on 06/06/13 On 06/06/13 the spot exchange rate was P42.12/US$1 Dividend yield (%) 0.46 0.63 0.83 0.98 EV/EBITDA (x) 12.4 10.6 9.1 7.7 Performance Over 1M 3M 12M P/B (x) 1.8 1.6 1.5 1.3 Absolute (%) -4.1 7.7 43.3 ROE (%) 8.5 9.6 10.0 11.2 Relative (%) 3.4 11.0 10.2 Net debt/equity (%) 44.4 33.1 27.3 20.4 Source: Company data, our estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 07 June 2013 Focus charts and tables Figure 1: We estimate that hospitals’ contribution to Figure 2: …as NJA healthcare valuations suggest Metro Pacific’s Gross NAV is substantial at 20%... premium PER for high earnings growth Hospitals 45 20% Water 30% 40 IHHH.KL 35 30 Metro Pacific's RAFG.SI 25 Toll roads BGH.BK 22% (x) PER 2014E 20 BH.BK KPJH.KL Power 15 28% 5 10 15 20 25 30 35 40 45 2014E EPS growth (%) Source: Credit Suisse estimates Source: Credit Suisse estimates Figure 3: Growth of hospitals biz to be driven by M&A in Figure 4: On solid ground as consolidated operating cash the short term flow and earnings have visibility and growth (P mn) 18% CAGR in # of 3,500 beds for 2013E to 20,000 12% CAGR for 2015E, mainly 3,000 13E to 15E 3,000 through M&A 16,000 2,600 2,500 2,200 12,000 2,000 1,812 1,806 1,599 8,000 1,500 969 987 4,000 1,000 Metro Pacific's MetroPacific's of# beds - 500 12/11A 12/12A 12/13E 12/14E 12/15E - Operating cash flow Net profit 2008 2009 2010 2011 2012 2013E 2014E 2015E Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates Figure 5: Abundant supply of catalysts Figure 6: Scope for re-rating as 2014E PER below 5-year avg (x) Event Business Date 40 Catalysts related to current businesses 35 30 Annoucement of acquisitions Hospitals Early 2H13 25 Rate rebasing implementation Water Early 2H13 20 Generation investments Power 2H13 15 Road network expansion Toll roads 2H13 10 Potential for new businesses 5 Project award notice Mactan airport Jul-13 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Project award notice LRT1 Sep-13 Fwd PER Ave-2SD Ave-1SD Average Ave+1SD Ave+2SD Source: Various, compiled by Credit Suisse Source: Credit Suisse estimates Metro Pacific Investments (MPI.PS / MPI PM) 2 07 June 2013 Hospital biz deserves a second look We initiate coverage on Metro Pacific with an OUTPERFORM rating and a P7.90 target We estimate that 20% of price, implying 35% potential upside. Our target price is SOTP based and translates to an Metro Pacific’s NAV is from implied 2014E PER of 20.6x and PBR of 2.0x (sector average of 18.0x and 2.2x, the hospitals business respectively). The company focuses on water, power, toll roads, and hospitals. We forecast that hospitals will contribute 11% to 2014E net profit but we estimate that its NAV contribution is more substantial at 20%. In our view, its hospitals business has multi-year growth potential and is an investment angle that deserves a second look. We forecast that utilities and toll roads will account for 89% of Metro Pacific’s 2014E consolidated net income and 80% of NAV. Multi-year growth potential for hospitals Metro Pacific manages and operates various privately held hospitals and we forecast its Short-term growth to come total beds will witness an 18% CAGR to 3,000 by 2015. This would be the main driver for from M&A; long-term growth the 47% CAGR in its net income contribution, in our view. This is higher than the 22% p.a. to be driven by potential for average of the two fastest growing healthcare stocks in NJA. We estimate that 20% of higher per capita healthcare Metro Pacific’s net profit growth in the next three years will come from hospitals. Over the spending and capacity long term, we believe growth will be driven by the potential for higher per capita healthcare investments spending and capacity investments, as these have a high positive correlation with improvements in GDP per capita. On solid ground We believe Metro Pacific’s investments in utilities and toll roads provide a combination of We forecast that its earnings visibility and growth. We forecast that its consolidated net profit and operating consolidated net profit and cash flow will see 23% and 12% CAGR, respectively, from 2013E to 2015E. The operating cash flow will see company’s water utilities business has a forward looking guaranteed return tariff structure 23% and 12% CAGR, to recover opex and capex, with automatic adjustments for inflation and forex. We expect respectively, from 2013E to average annual capex (in real terms) of P10.3 bn for 2013E to 2037E, or 56% higher than 2015E the past five-year average of P6.6 bn. Its power distribution business is the largest electricity distributor in the Philippines, has a net cash position, and is currently re- investing in the power generation business.
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