Bullish On The Ma Bell of the Philippines

The front page of the Wall Street Journal on Friday featured a generally favorable article detailing the economic revival of The Philippines. The nation that has been characterized as the "perpetual sick man" of Asia is poised to post its best economic growth since the early 1990s. Foreign investment is returning to the nation attracted by its young population and the fact that people there speak English. The article suggests that the call-center business is doing very well, perhaps taking some share away from India.

All this good news is music to my ears due to my investment in the Philippine Long Distance Telephone Company (PHI), the "Ma Bell" of the Philippines. I bought the stock back in March of this year on a day when the Asian markets dipped on some kind of worry out of China. I knew then, as I know now, that the Philippines does not have the same risk profile as its more volatile Southeast Asian neighbors and its exposure to China is limited.

In the middle of August we saw PHI fall about 6% one day following the big break in the US market, only to recoup all of the losses the next day. The fundamentals of this company have very little to do with the US economy or subprime loans. Barring a major global recession, I think the stock could do well driven by the company's fundamentals and not sentiment about the US market.

The company provides long-distance (domestic and international) and cellular telephone service throughout the Philippines. The company is a strong free cash generator and most analysts expect the company to increase its dividend payout from around 70% now to 80% within a few years. The company is also investing in new technologies (3G, etc.) to upgrade its network which could, over time, increase operating efficiency. This could positively impact valuations as well. The internet penetration in the Philippines is only 16% versus much higher rates for more developed nations -- Japan (67%), South Korea (67%), Malaysia (44%), Singapore (66%) and PHI is also a key player in this market as well.

Most analysts use a discounted cash flow model to value the company, applying different measurement to the fixed line and wireless businesses. The consensus valuation targets hover around the low $70 range. I would not be tempted to do anything with my holdings until that level. I would be interested to add to my position in the low $50s. The current dividend yield is 5%.

Key reasons to own:

1) Rising cash flows and dividend payout
2) International diversification
3) Attractive economic trends in the Philippines
4) Compelling value.

Disclosure: As of this writing (8/31/07), PHI represents 5.0% of my portfolio.