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Politics forces Manny Pangilinan to divert to 'less risky' businesses

MANILA, Philippines – Amid political and regulatory risks under the Duterte administration, Manny Pangilinan is forced to invest in other businesses deemed to be less risky.

Companies under Pangilinan's Metro Pacific Investments Corporation (MPIC) involve power, toll roads, water, railways, infrastructure, hospitals, and logistics – industries that are heavily exposed to public and government scrutiny.

Maynilad Water Services, which supplies the West Zone of Metro Manila, faces a contract review by the government after the company won a P3.4-billion arbitration case. Speculations spread that the Pangilinan group was pressured to sell part of the company to a businessman with good ties to President Rodrigo Duterte, but the 73-year-old tycoon held his ground. (READ: Risky business: Why gov't made sure Manila Water, Maynilad would earn)

MPIC president Jose Maria Lim said on Wednesday, February 26, that Maynilad's experience has forced MPIC to "recast its investment program" due to lower inbound cash flow, higher regulatory risk, and the "self-evident lack of investor enthusiasm." 

"Ironically, even though there is huge demand for the services we provide, our discretionary investment spending beyond committed infrastructure projects will divert to less risky businesses like warehousing, real estate, and tourism," Lim said.

Despite the regulatory risks, Lim said the conglomerate is committed to expanding its services. He noted, however, that their attempts to negotiate tariffs has caused friction.

"The continued expansion in our overall service coverage and attempted constructive engagement on tariffs has not endeared us to the government, which now deems various long-established and operationalized contracts as having onerous provisions," Lim said.

"Meanwhile, the fall in our share price, along with the prices of other listed companies with government concessions, shows that despite our growth, investors now attach sharply higher risk premiums for government adherence to contract."

Earnings vs share price

MPIC managed to sustain its growth streak in 2019, but its shares have not been performing as well as the company had hoped.

MPIC's consolidated reported net income soared by 69% to P23.9 billion, according to its latest disclosure to the Philippine Stock Exchange. System-wide revenues were also up by 5% to P424.1 billion.

Excluding one-offs, its core net income or earnings from its main businesses rose by 4% to P15.6 billion in 2019 from the P15.1 billion recorded in 2018. The company has shown consistent earnings growth in the last 5 years, even clocking in an almost 20% growth in core net income in 2015.

As of Wednesday, MPIC shares were down to the P2 level, well below the almost P7 level two years ago and the P5 level last year.

So what's keeping investors from buying? Pangilinan pointed to "political developments."

"Our record of consistent growth in earnings and book value per share – the latter at P6.05 [on December 31, 2019] – is not translating to share price performance. While we might attribute some of this to market factors and some to conglomerate discount, the discount – so we are advised – reflects concern on political developments," said Pangilinan.

Given all considerations, the MPIC board of directors approved the implementation of a share buyback program amounting to P5 billion, which will run for 3 months.

A company buys back its stocks if it is deemed to be substantially undervalued or there is high volatility in the market.

Pangilinan went on to comment on how the government's actions have affected investor confidence.

"In these circumstances, questions have been raised regarding investment in Philippine regulated infrastructure and the sources of capital to support this. There are no quick or easy answers to these questions, but the current model of a listed infrastructure business with a wide pool of dedicated Philippine and foreign shareholders putting their faith in these long-term contracts needs serious review," he said.

"Meanwhile, as Joey [Lim] said, we are committed to completing our current projects while directing discretionary investment to warehousing, real estate, and tourism," added Pangilinan.

Here is a summary of the reported earnings of companies under MPIC: 

Core net income of Light Rail Manila Corporation was not available in MPIC's press release. However, it noted that the Light Rail Transit Line 1 operator contributed P319 million to MPIC's core net income in 2019, with all of its earnings fully reinvested in improving train operations and passenger service.

Metropac Movers, its logistics company, is not yet contributing positively to MPIC's core net income.

For 2020, Pangilinan said they aim to match MPIC's 2019 core income earnings amid the challenges. – Rappler.com

Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.

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