Philippines

The Philippine Stock Exchange (PSE PM)

Exchange monopoly at a reasonable price with a GGash kicker

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I came across a write-up on Value Investors Club discussing The Philippine Stock Exchange (PSE PM - US$231 million). You can find it here (members only).

After spending several days on the stock, I think the VIC author was spot on. The story is this: the Philippine Stock Exchange (“PSE”) is the monopoly stock exchange operator for the Philippines, a developing country with a young population of 114 million.

The industry is attractive because it’s capital-light with few fixed expenses, barriers to entry and significant network effects. For example, market participants are attracted to the largest trading venues with the greatest liquidity.

PSE’s business can almost be seen as a toll bridge, collecting “royalties” on the growth of the listed equity universe of the Philippines. The company makes money by taking a cut of capital raises, annual fees to maintain stock listings, membership fees for brokerage firms, transaction fees, data fees and so on.

The company has had a tough ten years as foreign investors have shunned Philippine equities. But what could help the PSE monetise its monopoly in the future is a greater number of companies listed, higher valuations and greater trading volumes:

The number of companies listed has stayed flat for most of the past ten years. But in 2020, the government finally repealed the country’s 1-4% IPO tax, paid by each issuer. The Philippines had been the only country in the ASEAN region to impose such a tax, and companies may have understandably avoided going public. And since 2020, we’ve seen more companies go public.
Valuation multiples for Philippine stocks have now come down to record low levels, with a forward P/E for the Philippine Composite of 12.5x compared to a ten-year average of 18.6x.
In mid-August 2023, financial super app GCash launched a service for single-stock trading called “GStocks PH”. Users can now buy any stock listed on the Philippine Stock Exchange through the app. There are currently 1.7 million brokerage accounts in the Philippines, with a penetration rate of just 1.5%. Given that GCash has 80 million users, it could move the needle. And expect users to sign up for trading once GCash itself goes ahead with its IPO, planned for year-end 2023.

The PSE currently has a market cap of US$231 million. But note that the company has US$85 million in net cash, excess securities and treasury shares on its balance sheet. Adjusted for these assets, the enterprise value is only US$146 million. That’s a tiny number when you consider Malaysia’s monopoly stock exchange trades at a US$1.2 billion market cap despite having only a +60% larger stock market.

While the trailing P/E of 17.6x may not look low, if you adjust for the cash and assume continued mid-teens growth in listing and service fee revenues, as well as 25% yearly growth in trading fees, you’ll end up with a P/E ratio of 8.4x and EV/EBIT of 4.7x by 2026.

The risks are mostly about the cycle. Interest rates have recently increased from 2% to 6.25% to combat the high inflation rate experienced in 2022. The longer monetary policy remains this tight, the greater the likelihood of a recession.

But in my personal view, interest rates will eventually come down, causing investors to experience a loss of income and look for alternatives to bonds and bank deposits by instead investing in stocks.

Catalysts to look out for include any impact on trading volumes from the launch of GCash’s trading feature, greater IPO activity after the 2020 removal of the IPO tax, a potential acquisition of the remaining 79% not currently owned in fixed income exchange and securities depository PDS and finally, any approval to raise listing fees and clearing fees.