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Thursday, May 27, 2010

Meralco: 4 Headlines, 1 Day

IN THE NEWS

Yesterday, local papers and cyberspace was littered with news about the country’s biggest and most widely known utility firm. So what’s going on at Meralco, and what does it all mean for investors like you and me?


1. Pangilinan is new president/CEO of Meralco from Inquirer.net

Ending 24 continuous years of Lopez rule, Manila Electric Co. (Meralco) named businessman Manuel V. Pangilinan as its new president and chief executive officer. He is taking over the CEO post from Manuel Lopez, who will remain as a non-executive chair, starting July 1. MVP is expected to usher in a new era of higher cost-efficiency and cash dividend payout for the country’s biggest power retailer.

Pangilinan said he would adhere to two basic principles upon assuming leadership in Meralco. “One is that I want to [preserve] what’s best of Meralco and [second is to] continue those things that are good for Meralco to move forward. With respect to the new Meralco, I don’t see any major change moving forward,” he said.

2. Tanco pledges 4% Meralco stake to MVP from Inquirer.net

Businessman Eusebio H. Tanco has sold his group’s 4-percent stake in Meralco to the group of Manuel V. Pangilinan, giving the power firm’s incoming CEO a more solid foothold in the country’s largest power distributor.

In an interview, Tanco, who among other businesses owns the STI group of schools, said the group had agreed to sell its stake in the power firm to Pangilinan for a “fairly healthy profit.”

3. Power utility expects P11B in net earnings from Inquirer.net

Meralco expects to post P11 billion in core net earnings in 2010, up from last year’s P7 billion, according to incoming president and CEO Manuel V. Pangilinan.

In a briefing following the company’s stockholders’ meeting, Pangilinan said the company was unlikely to match its 2009 performance, when core net earnings more than doubled from that of the previous year. This was partly due to the delay in implementing an increase in the company’s distribution, supply and metering charges in January this year, he explained.

Still, the distribution utility can expect hefty earnings this year due to increased Meralco sales spurred by hot weather, said company chair Manuel M. Lopez. The hot summer months usually raise the consumption levels of Meralco customers due to increased usage of appliances.

“It’s not just the hot weather that has increased Meralco sales, but industry sales have also shot up. There is a lot of activity in the business and industry sectors,” Lopez added.

4. Lopez confirms Meralco PBA bid from The Philippine Star

Meralco confirmed yesterday it was mulling the idea of joining the Philippine Basketball Association as part of its advocacy program.

During the company’s annual stockholders meeting yesterday, Meralco chair and chief executive officer Manolo Lopez said the power utility firm, which used to run a team in the now-defunct MICAA, is in discussion with different groups for the possible acquisition of a PBA franchise.

Sources said Sta. Lucia is one of those ballclubs that the group is negotiating with.

“There’s interest to once again form a basketball team. This is still in its raw stage but definitely there is interest,” Lopez said.

Lopez said it would be Meralco’s shareholders that would shoulder the costs of the company’s participation in the pro-league. “We will not pass on the costs to our consumers that’s for sure. This is more like an advocacy thing for us. The approach taken by management is that part of the income or proceeds would go to a designated charitable institution,” he said.

“Any fears that having a PBA team will mean higher cost of power must be debunked at this stage. It will be absorbed by the shareholders,” Lopez said.

Most teams book the costs as advertising expense since they find the PBA as one of the best marketing avenues for their products.

Investor Implications

Whether you like MVP or not will not seem to matter much because he will just be some sort of an interim president and CEO, at least according to reports; a search committee is being formed to evaluate potential candidates for a permanent president and CEO.

The Tanco share offer to the MVP group will bolster Metro Pacific’s ownership position in the company. Will that be good for Meralco investors? It depends on your opinion of Metro Pacific’s management savvy. How do you evaluate the performance of Maynilad, North Luzon Expressway, and Makati Medical Center, which are some of the more high profile investments of the conglomerate? Maybe your opinion of MVP’s influence and leadership skills will play a more prominent role in this regard.

The 36% increase in profits, from 7 billion to 11 billion pesos this year, should be taken with a grain of salt. While this may lead to a significant one-time boon for investors in the form of higher cash dividends this year, the income increase should play a minimal role in the long run. For a longer-term increase in returns, look for sustainable, systematic improvements in the firm’s operations, as promised by MVP.

Should talks of the firm’s re-entry into the local professional basketball scene be cause for joy or alarm for investors? You heard it from the horse’s mouth: shareholders would shoulder the costs of the company’s participation in the pro-league. How could paying overpriced imports and bratty basketball players be corporate social responsibility? And why the hell would Meralco, a virtual-monopoly in its industry, need to advertise? Yes, I am as dumbfounded and astonished as you are.

Let us let numbers speak for themselves. Exactly one day after these stories were run (today), Meralco loses 3.4% of its stock price, closing at 170 pesos per share at the end of the day’s trading, from 176 pesos yesterday. I’m no oracle, but I portend darker days ahead for Meralco.