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STOCK REPORT

August 3, 2015
Member: Philippine Stock Exchange

Company Information
Cosco Capital, Inc. (COSCO) is the holding company of tycoon Lucio L.
Co, and consolidates his interests in the following industries:
Retail

Puregold Price Club, Inc and subsidiaries

Real Estate
and Property
Leasing

Ellimac Prime Holdings, Inc.


Fertuna Holdings Corporation
Patagonia Holdings Corporation
Nation Realty, Inc.
118 Holdings, Inc.
NE Pacific Shopping Centers Corporation

Liquor
Distribution

Montosco, Inc.
Meritus Prime Distributions, Inc
Premier Wine & Spirits

Specialty
Retail

Office Warehouse, Inc.


Liquigaz Philippine Corporation

Oil & Mining

HOLD

Consumer spending to get boost from


election-spending
Trading at a discount to NAV; close to
book value
Low debt levels

Currently too dependent on PGOLD


Better stock price action in PGOLD
Weaker gas prices could weigh on
Liquigazs revenues
Weaker peso could eat up PGOLDs
margins

Alcorn Petroleum and Minerals Corporation

It completed its reorganization and subsequent name change in April


2013.
Stock Information
Last Price

7.40

Performance (YTD)

-14.45%

52-week range

Updates, Disclosures & News

Q2 earnings due on or before Aug. 14

P7.39 - P9.78

Beta
Outstanding Shares
(in millions)
Market Capitalization
(in PhP billions)
Free Float Level

0.96
7,395
P54.72
27.00%

Par Value

Puregold and Ayala Land opened its first supermarket


Merkado, under their 50-50 JV Ayagold, Inc. last week.
The initial branch of Merkado is located at the UP Town Center
in Katipunan Ave.; it plans to build 8 to 10 supermarkets over
the next 5 years.
Merkado (average store size: 2,000-2,500 sq m) will target the
broader middle income demographic and will be located within
ALIs malls or mixed-used community developments.

DOE approved the assignment of COSCOs interests in its


various petroleum service contracts (SC 6A, 6B, 14B1, 14C2,
14D and SC 51) to subsidiary Alcorn Petroleum and Minerals
Corporation.

Profits grew 18% yoy to P965-m due to the strong performance


of Puregold and S&R.
Consolidated revenues jumped 33% to P25.63-b.

Sector

Holding Firms

Subsector
Major stakeholders

Holding Firms
Lucio & Susan Co

Fiscal Year

55.40%
Dec. 31

Previous Rating

n/a

Board of Directors
Chairman

Lucio L. Co

President

Leonardo B. Dayao
Susan P. Co

Directors

Eduardo F. Hernandez
Levi B. Labra

Independent Directors

st

PGOLD opened its 1 Lawson convenience store last March. It


plans to open 50 stores this year and reach 500 stores by
2020.

P1.00

Robert Y. Cokeng
Oscar S. Reyes

RCDC Research
Jason Bibit
Email: jobibit@reginacapital.com

Page 1 of 7

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ANALYSIS AND RECOMMENDATION

Ownership
(%)
51.0%

Listed Firms
Puregold Price Club, Inc.

Ownership
(%)
100%
100%
90%
100%

Non-Listed Firms
Real Estate
Liquor Distribution
Specialty Retail
Parent, Oil & Mining

Ownership
(%)
100%
100%
90%
100%

Non-Listed Firms
Real Estate
Liquor Distribution
Specialty Retail
Parent, Oil & Mining
Gross NAV
Short-term debt
Long term debt
Cash & Equivalents
AFS Financial Assets (current & non-current)
Net Debt
NAV
outstanding shares (in millions)
NAV/sh
market discount

NAV/sh

Outstanding Shares
(in millions)
2,766

Closing
Price
37.00

Market Cap
(P millions)
102,341

Attributable value
(P millions)
52,194

Segment
Liabilities
6,711
1,880
1,200
8,560

Book
Value/NAV
13,277
2,242
2,535
87,566

Attributable value
(P millions)
13,277
2,242
2,281
87,566

915
490
554
(201)

Industry
P/E
48.8
22.8
27.4
5.16

Market Cap
(P millions)
44,606
11,181
15,171
(1,039)

Attributable value
(P millions)
44,606
11,181
13,654
(1,039)

Book Value
157,560
2,311
9,923
8,734
455
3,045
154,515
7,394.58
20.90
30%

P/E
121,634
2,311
9,923
8,734
455
3,045
118,589
7,394.58
16.04
30%

14.63

11.23

Segment Assets
19,988
4,122
3,734
96,126
Net Income
(annualized)

Segment analysis

EPS vs cash dividend per share

100%

4%

4%
9%

4%
14%

Parent, Oil & Mining

80%
Real Estate

Cash dividends per share (PhP)

Revenue Breakdown

0.60

8.0
0.30
7.5

0.20

95%

6.5

86%

Market Price

79%

20%
Retail
0%
2013

2014

2015 Q1

Despite the lower share in overall sales, PGOLDs share in


the conglomerates bottom line increased to 71% in Q1.

13%
10%
10%

9%
14%
8%
6%

15%
8%
9%

67%

63%

71%

Parent, Oil &


Mining
Real Estate
Liquor Distribution

20%

Specialty Retail

0%

-3%
2013

Q1 2015

2014

Cash dividends

EPS

Pre-election spending should boost consumer spending


especially once candidates officially announce their
candidacy in October.
Dividends, however, have been on the rise in the last 2
years. It declared a P0.30/sh cash dividend last Feb.

CONCLUSION

Profit Breakdown

60%

2014

Liquor Distribution

Specialty Retail

40%

7.0

0.10

2013

40%

80%

8.5

0.40

60%

100%

9.0

0.50

Stock price (end of period, in PhP)

PGOLD accounts for most of COSCOs revenues, but its


share has been declining as COSCO consolidated more
operating businesses into its portfolio.

Retail

2015 Q1

-20%

Flat earnings
EPS has been generally flat since COSCO finalized its
reorganization.

Our SOTP valuation yielded the following valuations


P14.63/sh using the book value method and P11.23/sh
using the P/E method, both with factoring in a market
discount of 30%. Obviously, the market was disappointed
with the stocks price action after Mr. Co sold shares at a
huge discount 2 years ago and the overhang from that
transaction still weighs on prices.
The infusion of PBCOM into the firm could boost its
valuation, but we do not want to get ahead of ourselves.
We understand there are concerns surrounding COSCO and
that direct ownership in PGOLD may be the better way to
go, but traders could look at the stock for trading
opportunities. Wait for a bounce first before buying.

It may be too early to judge COSCOs earnings pace since


PGOLD, its largest contributor, has its peak season in Q4.

Page 2 of 7

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KEY RATIOS AND LIMLINGAN FINANCIAL MODEL

Key Financial Data


Ratios
Return on Equity
Earnings per Share
Profit Margin
Asset Turnover
Return on Assets

774

2013

Q1 2015

2015E

2016E

6.2%

9.4%

8.9%

10.4%

10.7%

0.53

0.54

0.54

0.63

0.71

7.6%

6.3%

5.8%

3.7%

3.7%

0.65

1.10

1.18

1.4

1.51

5.0%

7.0%

6.9%

5.3%

5.5%

Ave Total Assets

82,410.4

Ave Total Debt

25,155.6

Ave Total Equity

57,254.8

Net Income After Tax*

6,235.5
286.04
6,521.5

Assets to Equity

1.4

1.5

1.4

2.0

1.4

Altman's Z-Score

2.1

6.4

7.2

n/a

n/a

Asset Income

Price to Earnings

16.7

15.9

13.7

12.3

10.9

Debt/Equity

1.0

1.5

1.2

1.2

1.2

Cost of Debt

Graham Multiplier

17.3

23.9

16.6

14.8

12.6

Net Book Value per share

5.39

5.77

5.90

6.37

6.98

1.6%

4.1%

1.2%

1.4%

Dividend Yield

2015 Q1 ratios were annualized based on Q1 figures

1.14%

*Does not include Comprehensive Income


**Asset Income = NIAT+ Interest Expense

ROE = ROA + D/E * (ROA - Cost of Debt)

COSCO is not highly leveraged, unlike most holding firms, since it does not have
a banking unit.
It said it plans to consolidate Philippine Bank of Communications into its portfolio
in the future, but for now it will be under Union Equities, Inc., Mr. Cos private
holding firm.
Low price multiples suggest that the stock is a bargain, but this may be due to the
markets perception of its owners than its fundamentals.
Despite the bearishness surrounding the stock, Altmans Z-scores are way above
the minimum range.
COSCO started to give out cash dividends last year. 2015 cash dividend as of last
week is a very enticing 4.1%. It remains to be seen if this will be the case moving
forward.

Debt Service
2013

Interest Expense

0.44

Limlingan Financial Model(C)

Profitability ratios have been mostly flat given its current format.

in PhP millions, except for ratios


EBIT

2014

in PhP millions

Interest Expense

Price to Book Value

2014

2014

LFM Inputs
Return on Assets

2014
7.91%

Debt/Equity

0.44

Cost of Debt

1.14%

ROA - CD

6.78%

Return on Equity

10.89%

Case 1: Improve Efficiency 20%


Return on Assets

9.50%

Debt/Equity

0.44

Cost of Debt

1.14%

ROA - CD

8.36%

Return on Equity

13.17%

2015 Q12

5,111

8,975

8,863

29

286

445

Case 2: Increase Leverage 20%


Return on Assets

7.91%

Interest Coverage Ratio

179.0

31.4

19.9

EBITDA

5,804

10,435

10,433

Debt/Equity

0.53

Cost of Debt

1.14%

(a) Total Interest-Bearing Debt


3

(b) Present Value of Ordinary Annuity


(a/b) Implied Debt Amortization

(c) EBITDA less: Implied Debt Amortization

3,452

9,866

9,923

4.51505

4.51505

4.51505

764

2,185

2,198

5,039

8,249

8,235

ROA - CD

6.78%

Return on Equity

11.49%

EBIT, Interest Expense and EBITDA were annualized based on Q1 data


3
Based on the tenor and interest rate of largest long-term debt

Case 3: Lower Cost of Debt 20%


Return on Assets

7.91%

COSCOs cash flows remain sufficient to cover its debt obligations.

Debt/Equity

0.44

The company is not highly leveraged and could accommodate more debt if
necessary, to pursue further expansion.

Cost of Debt

0.91%

ROA - CD

7.00%

Return on Equity

10.99%

Highlighted items denote changed inputs


** In this model, ROA =

Page 3 of 7

Asset Income
Ave. Total Assets

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REGINA-NERI ISOQUANT MODEL

Leverage vs. Profitability

Financial Performance

COSCO is not highly leveraged, unlike most


holding firms, since it does not have a banking
unit (yet).
Its portfolio is similar to AGI, which also has
retail, property and liquor segments, minus real
estate development projects for office and
condominiums.
Gridlines represent the 3-year Asset to Equity
and ROE averages of Holding Firms.

20%

Return on Equity

IV

15%

10%

2014

1Q15

5%

II

2013

Legend:

III

0%
-

1.0

2.0

3.0

4.0

5.0

I - Higher Returns,
Lower Financial Risk

IV - Higher Returns,
Higher Financial Risk

II - Lower Returns,
Lower Financial Risk

III - Lower Returns,


Higher Financial Risk

Asset to Equity

1
Perception vs. Profitability

Valuation Isoquants
20%

Return on Equity

IV

I
COSCO

COSCO is trading just above its book value of


P5.90, but is fairly valued relative to the PSEi.
ROE and earnings multiples are lower than the
industry average.

Holding Firms

15%

Isoquant lines (1, 2, and 3) represent Price to

2012
2013

2014

10%

2014
2015E

1Q15
5%

2013

II

Book values, while gridlines represent the


average P/E and ROE of companies in the PSEi
in the last 3 years.
Legend:
I Undervalued

IV Fairly valued

II Fairly valued

III Overpriced

III

0%
10

15

20

25

Price to Earnings

Efficiency vs. Profitability

Operating Isoquants

COSCO has a higher asset turnover ratio than


most conglomerates since most of its revenues
come from PGOLD.
While margins are also similar to PGOLD,
COSCO actually has a higher ROA than the
industry average.
Isoquant lines (5% to 7%) represent Return on
Assets.

15%
COSCO

2012

Holding Firms

Prof it Margin

2013
10%
2014

2012

5%

2014

1Q15
7%
6%
5%

0%
0.2

Page 4 of 7

0.4

0.6

0.8
1.0
1.2
Asset Turnover

1.4

1.6

1.8

Your Private Broker.

TECHNICAL ANALYSIS

Daily chart as of July 31, 2015


COSCO has underperformed by the PSEi in the last 12
months.
It has been moving sideways since June 2013, a
month after the owners sold a block to long-term
investors at a big discount to market price.
Price and moving averages are in bearish order and
RSI is near oversold levels.
MACD lines are below the zero line but are showing a
little bullish divergence, but this is generally sideways.
COSCO had a nice bounce the last 2 times it was
around this level (Feb and Oct 2014); P7.40 appears to
be the stocks bottom, at least under its current setup.
Resistance levels are at P7.72 (50-d MA) and P8.32
(200-d MA).
Trade the range.

Page 5 of 7

COSCO vs PSEi
Source: www.bloomberg.com

Your Private Broker.

GLOSSARY

Expected Performance

Recommendation Guide

within 1 year

BUY

The stock is a bargain relative to the PSEi or its peers; the stock has significant
long-term upside

Projected Gain > 10%

HOLD

Neutral; the companys fundamentals are good, but interested buyers should
wait and consider buying other stocks with better upside.

+/- 10%

SELL

Take profits or cut losses; the stock does not have much upside so investors
should close their position and look for bargains.

Projected Loss > 10%

Financial Ratios
Return on Equity

Shows how much profit a company generates with the money its shareholders have invested.

Earnings per share

The portion of a companys profits allocated to each outstanding share of common stock.

Profit Margin

Measures how much earnings a company actually keeps after expenses.

Asset Turnover

The amount of sales generated for every peso of assets

Return on Assets

Reflects a companys efficiency at using its assets to generate earnings.

Asset to Equity

Shows the companys financial leverage. It is an indicator of the overall financial stability of a company.
An indicator of a firms financial stability; It calculates the odds that a company will become bankrupt.

Altmans Z-Score

If: Z > 3.0, Safe Zone;

1.80 < Z < 3.0, Grey Zone;

Z < 1.80, Distress Zone (high likelihood of bankruptcy)


Price to Earnings

Reflects how much investors are willing to pay per dollar of earnings.

Price to Book

Reflects how many times book value investors are willing to pay for a share of the company.

Graham Multiplier

P/E Ratio x P/B Ratio; Benjamin Graham prefers companies that have a Graham Multiplier below 22.5

Book Value per share

A per share estimation of the minimum value of a companys equity.

Dividend Yield

Shows how much a company pays out in dividends relative to its share price.

Technical Analysis Term/s


Fibonacci Retracement

Potential retracement of a securitys original move in price. It uses horizontal lines to indicate key areas
of support or resistance (23.6%, 38.2%, 50%, 61.8% and 100%).

Limlingan Model: ROE = ROA + D/E * (ROA CD)


Basic Assumptions:
ROE = Return on Equity
ROA = Return on Assets*
D/E = Debt to Equity
CD = Cost of Debt
If ROA > CD, then ROE > ROA
If ROA < CD, then ROE < ROA

*using Asset Income

Can be used to undertake the following financial


analyses:
Pinpoint areas of weak and strong financial
management
Answers what if in terms of the impact of the
ROE
Prepare financial plans which start with the
ROE targets and end with specific, financial
targets such as maintaining operating
expenses and leverage
Better assign areas of responsibilities to
financial officers
Create equity centers where general
managers have both asset and debt
management responsibilities

CEO
Maximize ROE for its shareholders

COO

CFO

Improve ROE
through operational
efficiency or ROA

Improve ROE by
maximizing debt
(reduce leverage or
cost of debt)

Disclaimer: The material contained in this publication is for information purposes only. It is not to be reproduced or copied or made available to
others. Under no circumstances it is to be considered as an offer to sell or a solicitation to buy any security. While the information herein is from
sources we believe reliable, we do not represent that it is accurate or complete and it should not be relied upon as such. In addition, we shall not be
responsible for amending, correcting or updating any information or opinions contained herein. Some of the views expressed in this report are not
necessarily opinions of Regina Capital Development Corporation.

Page 6 of 7

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CONTACT US

HEAD OFFICE
Suite 806, Tower I, PSE Plaza
Ayala Ave., Ayala Triangle,
Makati City, Metro Manila
Backroom(+63) 2 848 5482 to 84
Fax
(+63) 2 848 5482
Trading Floor (+63) 2 891 9413 to 17
Available from 9:30 am to 12:00 pm, and 1:30 to 3:30 pm only.
www.reginacapital.com
rcdc@reginacapital.com

LOCATIONS WITHIN METRO MANILA


ALABANG
PASIG

GREENHILLS

1102 Prime Land Ventures Building,


Market St., Madrigal Business Park,
Ayala Alabang, Muntinlupa City

Unit 1242 Megaplaza Building,


ADB Ave. cor. Garnet St.,
Ortigas Center, Pasig City

512-B Tower 2 Lee Gardens


Condominium, Lee St. cor. Shaw
Blvd., Mandaluyong City

(+63) 2 801 3160 and 808 1081

(+63) 2 584 0951

(+63) 2 584 0951 and 661 6508

John Benedict Aguzar, Branch Head


jbaguzar@reginacapital.com

Manuel Luis Zialcita, Branch Head


mzialcita@reginacapital.com

Giok Hon Gotua, Branch Head


ggotua@reginacapital.com

OUTSIDE METRO MANILA


ILOILO

CAGAYAN DE ORO

BAGUIO

2F B&C Square Bldg., Iznart St.,


Iloilo City

GF Wadhus Bldg., JR Borja St.,


Cagayan de Oro City

Unit 701 Jose De Leon Center,


Session Rd., Baguio City

(+63) 33 336 8140

(+63) 8822 721 617

(+63) 74 446 9338

Joseph Kuan Ken, Branch Head


Iloilo@reginacapital.com

Romero Geroy, Jr., Branch Head


cdo@reginacapital.com

Rowena Tabanda, Branch Head


baguio@reginacapital.com

Page 7 of 7

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