APS Daily Market Insights July 26

TOP NEWS HEADLINES

 Stocks Climb on Earnings, Bonds Drop as Fed Meets. S&P 500 surged to fresh records propelled by robust corporate earnings. It is already trading at 19.0x, above its 5-year PER average of 17.9x. Although expensive, investors are pricing in less risks in the US stock market with VIX, which is the ‘fear gauge’, plunging to its 23-year low. US investors’ optimism is mainly due to generally upbeat macroeconomic backdrop and lack of any big, risky events that could potentially fuel volatility. Likewise, investors expect a hawkish tone from Fed after their 2-day meeting tonight with marketimplied probability that Fed will raise rates by year-end is down to 45%. On the local front, rosy growth outlook in the international scene could limit capital inflow to the Philippine equity market. In addition, we expect muted corporate earnings in 2Q2017. Hence, the local market is seen to move sideways amid lack of catalysts.

 DoF Hopes For The Swift Approval Of The Tax Reform Package. On the 2nd State of the Nation Address of President Duterte, the president urged the senators for the immediate passing of the tax reform package. The revenue generating provisions expected to be further watered down in the Senate as some senators have openly opposed some of the measures. Given this scenario, the government may be forced to lower their infra spending target or increase borrowing. We believe the government is moving towards the latter, which may further weaken the country’s fiscal position and pose a risk to the investment grade credit rating of the Philippines.

 Gov’t Told to Pay Maynilad For Losses. The government will reimburse at least P 3.4 Bn to Maynilad for delayed tariff hikes. In our previous note, we estimated that overdue tariff adjustments have ballooned to over P 10.0 Bn as of 1Q17, as MPI (BUY, P 8.00) previously said that it loses around P 200.0 Mn a month for every additional delay of the arbitration which started last January 2013. We believe Maynilad can still appeal to recover the remaining balance due to the favorable decision. This should be positive for both MPI and DMC which currently owns 52.8% and 25.2% of Maynilad.

 RFM Aims to Post P 1.0 Bn Profit This Year. RFM (BUY, P 5.30*) expects growth to be flat this year due to rising raw material prices and softer demand from its pasta (Fiesta and Royal Spaghetti) and flour businesses. This means RFM will be trading at 15.9x its 2017 earnings, still at a discount to the 2017 ave. P/E of consumer F&B (excl. JFC and URC) at 18.3x.

 Reminder: CHP 1H2017 results will be released tomorrow.