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Which of
these is correct?
Is it:
“The drop in share prices on the Philippine Stock
Exchange [PSE] last week was an appropriate reaction to
the threat of a slow down in the US economy, reducing
earnings of locally listed firms”; or “The drop in share
prices on the [PSE] last week was driven by investor
mentality that the Philippines is a financial colony of
the US”?
Answer?
Both.
PLDT
dropping P35, property firms Megaworld and Vista
shedding 5 percent, along with Metrobank (-5 percent)
and BPI (-4 percent) could be reasonable as these firms
generate profits connected to the US economy.
But
Manila Water (-4 percent), Geograce Resources (-5
percent), Aboitiz (-4 percent) and Atlas Mining (-6
percent) share virtually nothing with American consumer
spending and US economic trends.
Granted
that a significant amount of investment in local stocks
is held by foreigners who do worry about the
US,
there is a larger reason for this perhaps unjustifiable
selloff.
Believe
it or not, the
Philippines
is an Asian country, economically tied to Asia. More
than 70 percent of our bilateral trade and direct
investment comes from Asia, not the West.
Yet
looking at stock prices on Friday, you would have
thought that the Philippines is still a US colony. Of
all the Asian exchanges, only
South Korea
and Taiwan (both -4.2 percent) did worse than the
Philippines
(-3.85 percent).
Last
week’s price drop also highlights another major problem
for the PSE investors. There are many very good
companies listed on the exchange that most investors are
not aware of and stock prices suffer because local
investors ignore their profitability and potential
stock-price appreciation.
From
time to time, I will highlight some of these companies.
I have no direct or indirect beneficial ownership in
these firms nor will I benefit if prices appreciate;
unless you make a profit and decide to send me a
Christmas basket.
One
company I have looked at over the years is Diversified
Financial Network Inc. (DFNN). In this case, the company
pleases me now on two fronts; a growing industry that is
Asian-based.
When
DFNN listed in 2000, I was not impressed. That is not
the company’s fault. It is mine, because I am not a
high-tech kind of person and DFNN is a high-tech
company. But I do understand business and DFNN spent
years building and positioning itself for profitable
growth.
DFNN
began as a pioneer in Internet-based stock-market
trading systems, which, of course, I did not believe
would ever be important in the Philippines. They were
right; I was wrong.
In fact,
if you trade PSE stocks on-line, you are probably using
DFNN software to execute your order. If you trade by
calling your broker, you may soon be using a DFNN
system.
Last
week the company disclosed to the exchange its entering
into an agreement with PLDT and with Diversified
Technology Solutions in a joint effort to bid a contract
for a new trading system for the PSE. In light of last
Friday’s “trading glitch” delay, let us hope the PSE
approves a contract soon.
There
are many other things DFNN has going for it. It provides
IT solutions to the banking as well as the cell-phone
industry, but there is one sector of its business that I
particularly like.
The
thrust of DFNN that impresses me most is its Asia-based
online gambling. The numbers for this industry are
staggering. Industry growth during the last five years
averaged a compounded 40-percent increase annually. This
industry is fairly new and the potential over the next
five years is remarkable.
DFNN
positioned itself to provide the IT solutions for
online-gaming companies. The company holds major
contracts with Japanese firms for software development.
In effect, it is becoming a type of outsourcing company
for Asian online-gaming companies, particularly from
Japan.
Over the
last few years, DFNN formed strategic partnerships
(read: investments) with both European and Japanese
online-gaming companies. It obtained both expertise and
customers because of the buy-ins.
DFNN is
a leading provider in this area but faces risks, since
over time more competitors will arise and income is
project-based, leading to swings in generated revenue.
However, the reputation the company built may overcome
this risk. So far, it has always been able to secure new
contracts once a project is completed.
It also
developed the software capability for a person to make a
wager on lotto through a cell phone, Internet and
basically any wireless device, and to have the charge
for the ticket taken from various payment systems, which
even includes a cell load.
From a
stock-market view, shares are trading at a price
earnings ratio (PER), based on 2006 earnings, of 12;
15-18 PER at the end of 2007 is more reasonable. The
current PER is low for a company with the growth
potential that this firm holds.
Earnings
for 2007 should reach at least P1 to P1.50 per share.
The low target price is P12 to P15 through the end of
the year. Closed Friday at P10.25.
Invest
at your own risk. However, remember this: There is more
to the PSE than the blue-chip companies and more to the
world than the US.
E-mail comments to mangun@email.com. |
