Today, we’ll look at another business that we think has the potential to substantially outperform the market over time. It is also one of the equities that should gain the most if the domestic economy reopens. We’re talking about AllHome.

The PSEi gained 800 points (+13 percent) in the 15 trading days ending June 15, and all 30 participants were in green. Leading the group were names that seem to be strong on the surface when economy recovers. On the other side, lockdown favorites (such as telecoms) were at or near the bottom of the list. In summary, the market is obviously preparing for the end of the pandemic. However, we think that some of the leaders have been bought in an indiscriminate manner (see Random Thought #1 below for an example). Market participants seem to be more concerned about losing out on the rally and do not appear to have a clear game plan. Investors, in our opinion, should avoid the temptation to follow increasing prices and instead comb through companies carefully to identify those that will profit the most when vaccination rates hit a crucial level. Simply stated, not all stocks are made equal. Some have much more promise than others.

We have stated that there is evidence to support the notion that the recovery is K-shaped. This happens after a recession when certain sectors of the economy restart growth while others lag. Some banks, for example, claim that credit card volumes have already returned to pre-pandemic levels, although total spending remains far behind. Property firms, on the other hand, claim that higher to high end residential sales are doing much better than the rest of the sector. Meanwhile, Jollibee said that its more costly brands, Burger King and Panda Express, had performed better than its major brands. Those with higher incomes have, without a doubt, been less affected by the pandemic and are better likely to spend their money whenever they wish. However, there is another reason why the rebound is K-shaped and why the effect may be felt long after the economy reopens.

From January 2018 to May 2021, the total headline inflation rate was about 12%. Inflation has been much quicker for low-income households over this same period, at 13.1%. Against this backdrop, the last time minimum wage workers received a raise was in November 2018, and it was less than 5%. Furthermore, the peso value of foreign remittances in the past 12 months (Php1.48 trillion) for which data is available is down approximately 3% from the 2018 total of Php1.53 trillion. These should be considered in conjunction with the reality that millions of blue collar employees lost their jobs or were temporarily laid off for an extended length of time during last year’s lockdowns. Bottom line, real income growth has been negative for the last year or two, and the damage to spending power has been substantial, if not permanent.

This is because companies are unlikely to raise salaries much in the foreseeable future, and the wage board may be reluctant to approve big increases to the minimum wage for fear of fueling inflation further.

This brings us to one of our favorite securities post-pandemic. We anticipate that discretionary expenditure growth would be fastest among higher income groups, as stated above at P18.30, +0.99 percent. Indeed, after a significant proportion of the population has been immunized, there will be a great deal of untapped spending potential at HOME. We believe that HOME has a lot of potential for development over the next 5 years or so. We’ll utilize this head-to-head comparison with Wilcon to demonstrate why.

First and foremost, HOME gets a far higher proportion of its sales from soft categories (e.g., furniture and appliances) than than hard categories (e.g. hardware, tiles). As a result, increased discretionary expenditure, particularly among those with higher incomes, will benefit the business more than its competitor. Second, although WLCON has a greater gross profit margin, HOME has a better operational and net profit margin. This is most likely due to its shops having a 33 percent smaller footprint on average. Furthermore, given the fact that AllHome is a relatively new in business, it is possible that the difference in sales per square meter may ultimately be closed when its recently established branches (2 years old or fewer) reach full maturity. This will increase operational margins and boost the bottom line quicker than Wilcon.

Indeed, consensus forecasts indicate that HOME will record a 34 percent EPS CAGR over the next two years (202Ito IN FOCUS 2023), compared to WLCON’s +21 percent (although the former has substantially less analyst coverage than the latter).

Finally, the chart above demonstrates that AllHome is much more valuable than Wilcon on a variety of measures, despite predictions that AllHome’s profits would rise significantly faster than Wilcon’s until 2023. HOME is also trading at a more than 40% discount to the 27.6x average P/E of its home renovation rivals in the area for 2022. As a result, we maintain our Buy recommendation on HOME and raise our target price to Phpll.40 (42 percent upside), which is 22 times next year’s earnings. This will still be a 20% discount compared to regional peers and a 16% discount compared to its sole local competitor.

Material in this article is obtained from sources we believe to be reliable, but its reliability or precision cannot be guaranteed. This is for the sole purpose of providing details and does not provide an offer from us to buy or sell securities mentioned in this document.


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