Philippines Strategy:Injecting more yield to our picks

Event

We make slight changes to our preferred picks in the Philippines, with KarisaMagpayo’s initiation on Meralco (MER). Making it to our top picks list, MERreplaces BDO Unibank (BDO PM, P104.70, Outperform, TP: P113.50), whichnow offers limited upside potential after the past month’s gains.

Impact

Answering the clamour for a dose of defensiveness. MER has beenadded against the backdrop of growing clamour of investors for a dose ofdefensiveness. Note that a key investor criticism on our top picks list set a fewweeks earlier was a relative lack of defensive stocks. As a utility companywith a low risk profile, MER fits the bill quite well.

Attractive yield the best valuation attribute. We consider MER’s bestvaluation attribute is its attractive dividend yield, which is among the highest inthe Philippine market at 5% in 2016E. This compensates for its relatively highPER multiple. Also worth flagging is MER’s size, which at US$7.8bn, places itin the Philippines’ top 10 market capitalisations.

Recent underperformance provides an entry point. An underperformersince the start of the year, MER has still been one of the biggest laggardsover the past month. Among the large cap companies, MER has lagged themost in the last month with 9% underperformance vs the PhilippineComposite Index (PCOMP). We thus think this provides a good entryopportunity.

Increasing our weighting on utilities and telecoms, but decreasing onconglomerates and banking. With the inclusion of MER, we have thusincreased our weighting on the utilities sector, which is also our mostsignificant upward revision. The other key increase was for the telecomssector, for which we have reduced our degree of underweight on the back ofKervin Sisayan’s marginally less bearish view. Accordingly, we reduce ourweightings on the conglomerates and banking sectors. As a result, we nowhave a neutral weighting on the utilities sector, from the previous slightunderweight. Meanwhile, these changes downgrade conglomerates fromneutral to underweight. Banks as a sector would now be a slight overweight.

Our most favoured sectors, in order of preference, are property, consumer,banks, utilities, conglomerates and telecoms.

Outlook

Our view on the Philippines remains optimistic, and thus we maintain ouroverweight rating on the country from a regional strategy perspective. MERranks the fourth in our list of top picks. We like MEG, RRHI, PGOLD, MER,MBT, SMPH, MPI, and AC, in that order, in the Philippines.