The Philippines equity market has shown faint stirrings of life with the successful completion of a $50 million secondary offering by Banco de Oro and preparations for a second $30 million to $60 million deal by DMCI subsidiary Semirara ahead of the year-end.
The sale of 135 million secondary shares by BDO was designed to increase the lender's freefloat and the liquidity of a stock, which only trades about $50,000 a day. Unsurprisingly the Macquarie-led transaction represents a mammoth 1,000 days trading volume in the stock and three days volume for the whole exchange.
Liquidity on the Philippines Stock Exchange has successively sunk in the years following the financial crisis to the extent that average daily trading volume amounts to only $15 million compared to $113 million in Indonesia, Asia's second most illiquid market.
Limited liquidity means the Philippines has fallen off most investors' radar screens and there have been virtually no deals of note since the crisis. Indeed, BDO's own $38 million IPO in 2002 ranked larger than all new listings from the Philippines since 1997 - combined.
Since the end of 2000 there have been only two sizeable deals and both have come from Globe Telecom, which has also been desperately trying to revive liquidity in its stock. In 2000, it completed a $100 million deal via Morgan Stanley, the majority of which is said to have gone to only one investor and in late 2003 a $104 million deal via Deutsche Bank.
Like Globe before it, BDO was hamstrung by a 40% foreign ownership limit, which had been almost entirely taken up by three strategic investors. Macquarie helped it to get around this rule by creating an intermediate holding company, which has been classified as a domestic investor despite the fact it includes one of the strategic foreign investors.
Pre re-structuring, about 12% of the group was in freefloat, with the Sy family holding 55%, Cambridge Pacific Venture Capital Fund (owned by UBS) a further 19% and DBS 13%. The IFC also holds a convertible equal to 6.5% of the group on a fully diluted basis.
A new intermediate holding company - Prime Bridge Holdings - amalgamates some of the Sy's holdings and those of Cambridge Pacific. Bankers estimate that it freed up about half of the foreign ownership limit including conversion of the IFC bond.
The new equity deal increases the freefloat from 12% to 27%. Half of the shares were sold by the Sy family, which see their combined stake drop from 55% to 47.5% and half by DBS, which sees its stake drop from 13% to about 5.5%. A further 4% to 5% remains available before the stock hits its foreign ceiling again.
Timing of the deal was good given that the Philippines has been the region's second best performer of the year, rising roughly 26% to Tuesday's close. BDO has also seen its share price appreciate markedly since news of a potential secondary deal became known. In the first nine months, for example, the stock range traded between Ps17 and Ps19 before climbing about 35% since then to close at Ps22.75 yesterday (Tuesday).
The new deal follows a one week roadshows and was completed after Monday's close at a 2.3% discount to the spot close of Ps21.50. Bankers say it could have been priced at no discount at all, but BDO management decided to leave something on the table as a goodwill gesture to their new international investors.
Yesterday, the stock went on to rise a further 5.8% slightly outperforming other bank stocks, which were also up sharply on news that the Central Bank has decided to postpone an interest rate hike.
Specialists say 25 investors participated in the deal, of which about four already held the stock. The order book closed about two times oversubscribed, with a geographical allocation split of 90% Asia and 10% Europe.
In terms of valuation, BDO was trading at 8.46 times 2005 earnings at Monday's close compared to a domestic sector average P/E ratio of 15 times. On a price to book basis, BDO was also valued at a lowly 1.15 times, some way behind sector leader Bank of the Philippines Islands (BPI) at two times and Equitable-PCI Bank at 1.3 times.
Analysts believe this valuation is extremely cheap on a fundamentals basis. BDO is one of only two major banks with an NPL ratio below 10% - BPI is the other. As of September 2004, it reported an NPL ratio of 6.8% compared to a sector average of 14%.
So too, it runs a net interest margin of 3% second only to BPI's 4.2% and a cost to income ratio of 57% compared to a 64% industry average.
BPI is much bigger than BDO, with a market cap of $1.95 billion compared to $350 million for BDO pre deal. However, some analysts believe the latter has a much more compelling growth story. Partly this is because the bank is growing from a smaller base and has been moving into retail banking.
But it has also shown itself to be extremely acquisitive. In 2000 it purchased Dao Heng's Philippine branches: in 2002 it purchased 1st e-bank and in 2003 Banco Santander Philippines. The latter acquisition makes it one of the few domestic banks with private banking capabilities.
Then in December 2003, it agreed to purchase a 25.8% stake in Equitable-PCI Bank from the government's Social Security System. In one move, the Philippines ninth largest bank by assets made clear its intention to the Republic's third largest. However, the process has since stalled after the SSS came under pressure to publicly auction the stake, which BDO contested. It recently won a status quo order from the Supreme Court.
As of June, BDO had consolidated assets of Ps159.4 billion ($2.83 billion).
Commenting on the deal, Stephen Cuunjieng, Macquarie's well-known Philippines investment head says, "Macquarie is extremely honoured to have been able to work with a client of BDO's calibre. A good investment bank is a function of its clients and BDO is a great client."
Indeed, the deal marks Macquarie's first sole books transaction since it took over ING's Asian brokerage operations earlier this year. ING, or rather Barings before it, had always been extremely strong in the Philippines and the franchise has propelled Macquarie into a second mandate for the Philippines largest coal miner Semirara.
Roadshows for a secondary share deal are expected within the next few weeks and according to its public filing the group will offer up to 20% in new shares and 10% in old shares. The deal has a filed range of Ps22 to Ps44 implying proceeds of $30 million to $60 million.
Semirara has said that it will use proceeds to build a new MW50 power station. The group, which accounts for 92% of the Philippines coal production is 94% owned by DMCI Holdings Inc.