Revisiting MacroAsia (MAC) and Its Catalysts

Largest Assets are Current

MAC’s three largest assets are Investment in Associates, Cash and Accounts Receivable. These three assets comprised 59% of the Total Assets of the Company as of September 30, 2012. Investments in Associates is 27% of the Total Assets, Cash is 21%, while AR is 11%. Not bad for a stock whose market cap is around P3.4B.

In Thousand Pesos

Asset	9M2012	Y2011	% Inc (Dec)
Investment in Associates	973,472	1,178,763	(17%)
Cash	756,311	1,129,243	(33%)
Accounts Receivable	390,693	382,237	2%
Total 3 Assets	2,120,476	2,690,243	(21%)
Total Assets	3,622,222	3,854,842	(6%)

Investments in associates of P973 million as of the current reporting period is lower by P205million as compared to the P1.18 billion year‐end balance in 2011. The 17% decrease is due primarily to the net effect of the Company’s incremental equity share in the net income/loss of associated companies, cash dividend declaration and net foreign currency translation adjustments. This asset basically pertains to the company’s share with Lufthansa Technik Philippines (LTP). LTP’s loss is dragging MAC’s bottom line momentarily.

Cash and cash equivalents went down to P756 million levels due to investment in bonds and in mine exploration. Receivables went up by 2% from P382million to P391 million due to the increase in revenues for the nine months of the year.

As anticipated, the company is using its cash to explore the mining tenement of the Infanta Nickel Project.

Manageable Liabilities

MAC’s two largest liabilities are Accounts payable and accrued liabilities and Accrued rental payable (Long-term). These two liabilities comprised 90% of the Total Liabilities of the Company as of September 30, 2012 Accounts payable and accrued liabilities is 65% of the Total Liabilities, Accrued rental payable (Long-term) is 25%. The cash alone which currently stand at P756M is enough to pay these two liabilities with still spare for mining exploration costs and airport projects.

With its current income, it can easily pay its obligations. Not a big deal here.

In thousand Pesos

Liabilities	9M2012	Y2011	% Inc (Dec)
Accounts payable and accrued liabilities	306,990	289,810	6%
Accrued rental payable (Long-term)	117,173	116,887	0%
Total 2 Liabilities	424,163	406,697	4%
Total Liabilities	471,716	574,541	18%

Improving Earnings and its P/E Ratio

The average P/E for the last two years is around 10X and is just right. It’s neither cheap nor expensive.Y2012 might produce a negative P/E because of the investment being made to accommodate A380 plane in Lufthansa’s maintenance area. Y2013 might be a different story and this is where the investments in Y2012 will come into picture to reap the rewards in Y2013, hopefully. Again, I am only pointing on the core business of the company, airport projects and mining are excluded.

Particulars	2013F	9M2012	Y2011	Y2010
Price	4.87	2.75	3.00	3.00
EPS	0.486	(0.035)	0.242	0.320
P/E Ratio	10X	(79)X	12X	9X

This year the company’s bottom line might be in red because of the investments made in A380 hangar. I believe that this year is the best time to accumulate shares of this stock as investors might sell their holdings upon seeing the company in red. Besides, this stock is thinly traded that nobody seems to want to touch it. My take is that anything below 2.80 is a buy for me. I share the same thinking of the management that price of this stock is below its intrinsic value.

Majority of the profit of MAC is coming from its affiliates, Lufthansa Technik Philippines, Inc. In fact, among the companies, LTP is the bread and butter of MAC as far as income contribution is concern. Thus, it is no surprised that when LTP incurred a net loss for 1H12, it spilled over unto MAC. The current loss is temporary because of the increased costs associated with starting up the A380 hangar for operations. Once this is over, revenues will go up and consequently its net income.

A 600,000 net income is achievable at least in 2013 I think because of the expanded hangar operations of LTP and improving revenues. With that in mind, a P/E of 10 would result in a target price of 4.87 which is very conservative because the computations merely rely on the current businesses, mining and PPP projects excluded.

Passenger loads and flight frequencies of airlines are the two most important factors that affect the revenue levels of the Group’s operating units. With the improving economic outlook of the Philippines, air travel is seen to rise in the foreseeable future.

Expanding presence abroad

MacroAsia, whose management is led by chairman Washington Sycip, derives the bulk of revenues from aircraft maintenance and repair as well as in-flight services like catering. It is also expanding its presence abroad and recently signed a joint venture in Qatar to go into industrial catering, with an initial P12 million investment, Chua said.

He said MacroAsia will gain 44-percent equity in the partnership but will maintain management and board control. Lucio Tan Jr., MacroAsia director, said the company is also in talks to form similar joint venture deals with companies in Europe and Asia but he declined to elaborate.PSE

Buyback Program

MAC has a buyback program of P50 million because the management believes that the company is trading below its inherent value. This buyback program is what keep MAC’s price from decreasing further. It serves as a support to its price.

As of June 30, 2012 it spent P42M already for 14,119,000 and is still counting. As of November 8, 2012, Treasury shares are 16,591,000, an increase of 2,472,000 shares from July 1, 2012 to November 8, 2012. At an average price of P3.00, this will translate to P7.4M.

Thus, I think that P50M allotted for buyback program is fully exhausted. Starting Nov 9, 2012, trading activity will only involve the public participants unless an insider bought some shares.

Great Management

MAC’s management is star studded. The Chairman of the Board is none other than Washington Z. SyCip the founder of Asian Institute Management (AIM) and SGV & Company. The President and COO is Mr. Joseph T. Chua, who serves as a Director of PAL (August 2003‐Present). Ramon N. Santos, its VP- Mining, has worked with the Philippine Mines and Geosciences Bureau and the Natural Resources Development Corporation from 1980 to1997 and member of Environmental Impacts Assessment Review Committee of the DENR‐EMB from 1993‐1999.  

Directors and Executive Officers are seasoned decision makers and planners of their respective businesses. I encouraged you to check page 32 of the 2011 Annual Report for a detailed list of the directors and executive officers and their credentials. The management doesn’t get better than this.PSE

Airport Projects, Hopefully

The Lucio Tan group of companies is keen on investing in airport projects to be bid out under the government’s Public-Private Partnership (PPP) program, including the Ninoy Aquino International Airport (Naia) as well as airports in Cebu and in Clark, Pampanga.

MacroAsia Corp., a listed aviation services firm, will be used as Tan’s vehicle to participate in these airport and related cargo terminal projects, company president and chief executive officer Joseph Chua said during the company’s stockholders’ meeting on Friday.PSE

The competitors in airport projects are heavyweights which includes SMC, Korean contractors, Ayala Corp, Aboitiz Equity, Metro Pacific, DMCI and JGS among others. I just hope that MAC will win a project or two in the airport projects or it can also form a partnership with the companies I have mentioned above.

Mining Operations, a Major Catalyst

The Company’s mining project, which is basically a reactivation of the Infanta Nickel Mine that was operational in the 1970’s, is expected to generate revenues as soon as all the mining permits for operations are secured. The mining project has already been endorsed for operations by the local government units and the Palawan Council for Sustainable Development (PCSD), and has been granted the Environmental Compliance Certificate (ECC) for operations on September 09, 2010. The Company is in the final stage of securing its Certificate of Precondition (CP) from the National Commission on Indigenous People (NCIP). This document signifies the formal granting of Free and Prior Informed Consent by the indigenous peoples within the host barangays as attested by the NCIP. PSE

Considering the existence of an ore stockpile and roads within the mining tenement, it is possible to start ore shipment less than a year after all permits are completed.PSE

Beneficiary of Gov’t Focus on Tourism

I think everybody knows already that the current admin is hellbent in promoting tourism among the locals as well as abroad. The government knows that tourism creates a ripple effect on the local economy of every tourist spot. Hence, major transportation routes are being upgraded and constructed. Not to be left of course is the aviation where foreigners used in their travel.

As such, I believe that once the number of passengers and frequency of flights increased due to the government’s focus on tourism, I expect MAC to be a beneficiary from it, albeit indirectly.

Consistent Dividends

MAC has been consistent in declaring dividends every year. Aside from that, the dividends/share declared never went down, it is constantly going up. With the buyback program, I expect the dividends in Y2013 to be more than .065.

	2012	2011	2010	2009	2008
Dividends/share	.065	.065	.065	.06	.05
Dividend Yield	2.36%	2.17%	2.17%	2.00%	1.43%

Arriving with MacroAsia

MacroAsia Corporation (MAC), formerly known as Infanta Mineral and Industrial Corporation (IMIC), was incorporated on February 16, 1970 to primarily engage in the business of geological exploration and development. On January 26, 1994, the Securities and Exchange Commission (SEC) approved the change in the IMIC's original purpose to that of a holding company, and its corporate name to Cobertson Holdings Corporation. In November 1995, the SEC further approved the change in corporate name to its present name. MAC began commercial operations as a holding company under its amended charter in 1996.

MAC at present is engaged primarily in aviation-related support businesses. It provides aircraft maintenance, repairs and overhaul services, charter flight services, airport ground handling services and in-flight catering services and operates a special economic zone at the Ninoy Aquino International Airport (NAIA). All subsidiaries and associated companies of MAC render services directly to the airline customers/locators at NAIA, Manila Domestic Airport, Mactan-Cebu International Airport and Davao International Airport.

MAC operates mainly through its four subsidiaries and two affiliates, namely, Lufthansa Technik Philippines, Inc., MacroAsia Catering Services, Inc., Cebu Pacific Catering Services, Inc., MacroAsia Airport Services Corporation, MacroAsia Properties Development Corporation, and MacroAsia Air Taxi Services, Inc. 

Aside from airport businesses, MAC also has mining projects after receiving from the government a Mineral Production Sharing Agreement (MPSA) in 2006. The MPSA covers 1,114 hectares as renewal of its rights in the nickel-rich area in Brooke's Point, Palawan. In May 2007, MAC received its second MPSA covering 410 hectares in another nearby area in Brooke's Point, Palawan. Both areas are used to be held and mined by IMIC.

SNAPSHOT
# of shares outstanding:	1,234,312,000
Current Price:	2.75
Market Value	3,394,358,000
Stockholders’ Equity (As of 30-Jun-12)	3,212,941,000
Price to Book Value Ratio	1.06
Price to Book Value (Appraised) Ratio	-
P/E Ratio	194.24
ROE	0.54%
ROA	0.47%
Free Float	25%

FINANCIAL RESULTS In Thousand
	2012F	2011		2010
Revenues	1,728,188	1,361,874		1,171,611
Cost of Services	1,208,188	1,014,280		882,902
Gross Profit %	30%	26%		25%
G & A Expenses	346,478	346,304		361,830
Net Income/(Loss)	34,950	299,456		401,126
EPS	0.028	0.2416		0.32
Book Value	3,212,941	3,227,900		3,034,740
Stock Price	2.75	3.00		3.00
Book Value Per Share	2.60	2.60		2.43
P/E Ratio	97.12	12.42		9.33
Price to Book Value Ratio	1.06	1.15		1.23
Outstanding Shares	1,234,312	1,239,530		1,247,020
Total Assets	3,683,489	3,854,842		3,423,095
Stockholders’ Equity	3,212,941	3,227,903		3,034,741
ROA	0.95%	7.77%		11.72%
ROE	1.09%	9.28%		13.22%

·         Revenues are increasing for the In‐flight and other catering and ground handling and aviation

·         Direct cost increased by 26% while revenues increased by 33%. Cost efficient is in the works.The management has effectively reduced the cost of services provided. Moreover, the 14% increased in G&A expenses is minimal at 14% increase

·         Majority of the profit of MAC is coming from its affiliates, Lufthansa Technik Philippines, Inc. In fact, among the companies, LTP is the bread and butter of MAC as far as income contribution is concern. Thus, it is no surprised that when LTP incurred a net loss for 1H12, it spilled over unto MAC. The current loss is temporary because of the increased costs associated with starting up the A380 hangar for operations. Once this is over, revenues will go up and consequently its net income.

·         The dividend yield per year is 2.75% at its current price of 2.75.

·         MAC’s price has been descending since its peak in 2007 which is almost 6 pesos. At its current price of 2.75, it is already down by more than 50% and we still don’t know how low the price will go.

·         The average P/E and PBV for the past five years are 15 and 2 respectively. I think that is quite high considering that 2007 is the peak of the last bull cycle. A more conservative estimate should be P/E of 10 and PBV of 1.5.

·         A 600,000 net income is achievable at least in 2013 I think because of the expanded hangar operations of LTP and improving revenues. With that in mind, a P/E of 10 would result in a target price of 4.87 which is very conservative because the computation merely rely on the current businesses. Mining and PPP projects are excluded.

·         Passenger loads and flight frequencies of airlines are the two most important factors that affect the revenue levels of the Group’s operating units. With the improving economic outlook of the Philippines, air travel is seen to rise in the foreseeable future.

·         A very liquid company with more than 1 billion peso in cash at its disposal, it can partly fund the Mining and PPP airport projects which can provide an upside for MAC.

·         MAC has a buyback program of 50 million because the management believes that the company is trading below its inherent value. As of June 30, 2012 it spent P42M already and is still counting. An insider also bought 50K shares last month.

Mining Treasure

Bulawan Mining Corporation (BUMICO) assigned its rights, interests and obligations to MacroAsia under its Operating Agreement with PHILEX, involving 62 mining claims in Negros Occidental, of  which 6 are covered by a Mining Lease Contract and were subjected to mining operations by PHILEX from 1996-2002.

PNB Management and Development Corporation  (MADECOR), assigned its rights, interests and  obligations to MacroAsia under its Operating Agreement with PHILEX, involving 61 mining claims in Negros Occidental.

The assignment is limited to the Assignors’ rights, interests and obligations under their respective operating agreements with PHILEX.  

The Company’s mining project, which is basically a reactivation of the Infanta Nickel Mine that was operational in the 1970’s, is expected to generate revenues as soon as all the mining permits for operations are secured. The mining project has already been endorsed for operations by the local government units and the Palawan Council for Sustainable Development (PCSD), and has been granted the Environmental Compliance Certificate (ECC) for operations on September 09, 2010. The Company is in the final stage of securing its Certificate of Precondition (CP) from the National Commission on Indigenous People (NCIP). This document signifies the formal granting of Free and Prior Informed Consent by the indigenous peoples within the host barangays as attested by the NCIP.

In this Memorandum of Agreement, Jinchuan and MacroAsia recognize their common interest in nickel mining in Palawan and agree to cooperate with each other by jointly developing and operating if possible, their nickel laterite properties upon respective completion of all statutory requirements for mining operations.  The two companies also agreed to undertake a joint venture to construct a processing facility, subject to a mutually-acceptable feasibility study, with an end in view of adding value to their respective commercial operations.  Over the life of the project, the estimated value of the investments being targeted is about US$1 Billion.

Considering the existence of an ore stockpile and roads within the mining tenement, it is possible to start ore shipment less than a year after all permits are completed.

The diversification shall move MAC away from its core aviation related business. Mining is a different business and it requires a different approach to the core business of the group. We all know that mining eats up a lot of resources and this may drain the cash of MAC. MAC has more than a billion of cash at its disposal.  

I believe that this is a game changer for MAC if the operation is successful. MAC can take a cue from MARC, a listed nickel mining company.

Expanding presence abroad

MacroAsia, whose management is led by chairman Washington Sycip, derives the bulk of revenues from aircraft maintenance and repair as well as inflight services like catering. It is also expanding its presence abroad and recently signed a joint venture in Qatar to go into industrial catering, with an initial P12 million investment, Chua said. He said MacroAsia will gain 44-percent equity in the partnership but will maintain management and board control. Lucio Tan Jr., MacroAsia director, said the company is also in talks to form similar joint venture deals with companies in Europe and Asia but he declined to elaborate.

I think it is one way for MAC to increase its revenues in the future further.

MacroAsia looks at PPP airport projects

MacroAsia Corp., a listed aviation services firm, will be used as Tan’s vehicle to participate in these airport and related cargo terminal projects, company president and chief executive officer Joseph Chua said.

Source: Philippine Stock Exchange