Overpriced But Justifiable: The Philippine Stock Exchange


At nearly six times its book value, PSE’s exclusive moat as a securities exchange operator is justified

At ₱245/share (at the time of writing; 1/28/2017), the operator of the Philippines’ securities market-the Philippine Stock Exchange (PSE)-traded at a rich price-book value multiple of 5.6x (vs. 4.73x in its industry).

The exchange company also has a 2.14% dividend yield.

Interestingly, cash dividend payouts have grown steadily in the past fifteen years. PSE started paying out dividends in December 2003 with ₱2/share, and recently on February 2017 with ₱7/share (~8.71%, compound annual growth rate).

Meanwhile, PSE delivered a strong 8.8% revenue growth and a more impressive 46% profit rise in its recent months of operations as of September 2017.

PSE mainly generates money from its listing-related and service fees (~70.5% of revenue).

Nine months into 2017, PSE grew its listing fees alone (fees for initial public offering) by 42% (~₱65 million). The company facilitated the listing of four companies from January to August and these companies were Wilcon Depot, Eagle Cement, Cebu Landmasters, and Chelsea Logistics.

In contrast, service fees, ~28% of PSE’s revenue, fell 0.3% to ₱268 million having cited a slight decline in average daily trading volume.

Investors may have to slightly wait for the full year results since the slight decline captured only the months from January to September 2017. In that period, PSE also had no debt with a book value of ₱3.2 billion.

In the year 2017, the Philippine stock market reached a market capitalization all-time high of ₱17.58 trillion, and net foreign buying for the year was at ₱56.21 billion compared with ₱2.80 billion in 2016 (PSE).

“The stock market recorded a stellar growth in 2017 making our market one of the top performers in the region. With the passage of the first phase of the government’s tax reform package and the government’s projected infrastructure spending providing positive support for the market, its prospects for the year remain upbeat and bright.”

PSE President and CEO Ramon S. Monzon

In the past three years, PSE generated ₱1.5 billion in free cash flow while handing out ₱1.8 billion in dividends to shareholders.

Applying serious premium to its book value along with estimated growth led to a ₱236/share figure (vs. ₱245 at the time of writing).

Disclosure: I do not have shares in any of the companies mentioned.


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