Buenaventura wants Landbank to acquire majority stake in PDS

MANILA -- Land Bank of the Philippines’ (Landbank) wants to buy majority shares in the Philippine Dealing System (PDS) in order to provide additional profit for the bank.

Landbank President and Chief Executive Officer Alex V. Buenaventura proposed the acquisition of at least 66.67 percent share in PDS.

In a letter to the bank’s Board of Directors dated Jan. 16, 2018, Buenaventura said he “recommends” that Landbank buy a majority share in PDS, noting that the bank currently has a 1.56 percent stake in PDS through the Bankers Association of the Philippines (BAP).

He said BAP signed a Share Purchase Agreement on June 15, 2017 that allowed the Philippine Stock Exchange (PSE) to acquire 1,488,902 common shares, equivalent to 23.8 percent of PDS’s total outstanding stock for PHP476,448,640 or at PHP320 per share.

“This implies a valuation of PHP2 billion for PDS and a PE (price earnings) ratio of 8.10x based on 2016 PDS earnings,” he said.

PE ratio is the proportion of a company’s share price vis-à-vis its per-share earnings.

The Landbank official, however, cited that “research on the financials of comparable market infrastructure enterprises in the region and globally show that such businesses trade at an average LTM (last 12 months) PE ratio of 34.1x and 35.8x, respectively.”

“This indicates that at a price of PHP320 per share, PDS is undervalued and purchasing PDS shares could be a profitable investment for LBP,” he said.

The Landbank chief said the bank “will benefit from stable recurring cash flow from the various fees PDS charges to market players as the country’s central securities depository and fixed-income exchange.’

He said more than 70 percent of PDS’ income comes from “provision of services as a depository, registry, and financial intermediary and over 20 percent of revenues come from trading services, the latter an area of opportunity as the local bond market matures.”

He explained that PDS “has an asset-light business model and consistently registers healthy EBITDA (earnings before interest, taxes, depreciation and amortization) margins above 45 percent and wide net profit margins above 25 percent.”

He said PDS ended 2015 with a return on equity (ROE) of 14.4 percent and 15.1 percent in 2016, which he said are levels that are “depressed due to significant excess cash and liquid assets.”

“From ‎2014-2016, PDS exhibited a CAGR (compound annual growth rate) of 9.1 percent, with opportunities for improvement as the domestic fixed income market still lags behind some of its ASEAN neighbors in terms of market size and liquidity,” he said.

Buenaventura, thus, pointed out that “maturation of the domestic fixed income market, improved financial sophistication of local investors, ASEAN financial integration, and a high growth economy underpinned on infrastructure development make PDS an attractive business model.”

“We also foresee potential synergies with LBP’s treasury operating activities as a government securities eligible dealer,” he said.

The Landbank chief also requested the Board to issued “an authority to formally engage the Development Bank of the Philippines (DBP) as the financial advisor for the transaction, pursuant to RA 9184” noting that “the engagement of DBP is a vital preparatory act to initiate the acquisition process.’

He told PNA that the letter “will be submitted to the Landbank Board for approval on January 23.”

“The objectives are to increase Landbank profits and to accelerate development of capital markets in the country,” he said.

He declined to answer a question on the projected contribution of this investment to the bank’s income but stressed that he is “very confident” that the Board will approve his proposal. (PNA)