Retailers seen to benefit from more disposable income with tax reform

Mau Dizon, a marketing officer in one of the largest Philippine banks, is among millions of Filipino taxpayers who stand to benefit from President Rodrigo Duterte’s tax reform plan that aims to return to consumers R860 billion ($17 billion) over five years.

Dizon will pay lower taxes under the proposed reform and is likely to spend most of the savings on staples, which account for about a third of her family’s monthly budget.

“The additional income will matter since we have one of the highest taxes and prices are rising,” she said.

Not surprisingly, Philippine retailers have beaten the 23 percent advance in the benchmark stock index, Southeast Asia’s best performer this year. Metropolitan Bank & Trust Co., the nation’s third-largest money manager, says the rally still has steam because the favorable impact of the tax cuts on disposable incomes won’t be short-lived.

“The story for retailers is far from over as the tax cuts will have a multiyear income effect,” said John Padilla, head of equities investment at Metropolitan Bank, which manages 440 billion pesos in assets. “Consumer companies will gain, particularly those that provide the basics, but retailers are the clear winners from the tax plan.”

Puregold Price Club, Inc., a grocery operator, and Robinsons Retail Holdings, Inc., which runs supermarkets and drugstores, have risen 39 percent each this year, while Philippine Seven Corp., the largest convenience store operator, is up 24 percent. SSI Group ,Inc., a retailer of high-end brands such as Prada and Gucci, has surged 62 percent.

Depending on what lawmakers approve, taxpayers may get between 860 billion pesos to 945 billion pesos from 2018 through 2022, according to Finance Department estimates in August. Not all consumer stocks will gain from the plan, which is expected to be passed by year-end.

Food and beverages makers are less appealing than pure retailers to investors including ATR Asset Management. The reason: their margins are under threat from a weak peso and rising oil prices. Pepsi-Cola Products Philippines, Inc. and Universal Robina Corp., a bottler of iced tea and snacksfood manufacturer, have seen shares drop more than 7 percent this year amid a plan to tax sugary drinks.

“The preferred play is more retail than consumer manufacturing companies, which potentially face higher input costs and a very competitive landscape,” said Julian Tarrobago, head of equities at ATR Asset, which manages R104 billion of assets.

Restaurant operators such as Jollibee Foods Corp., Max’s Group, Inc., and Shakey’s Pizza Asia Ventures, Inc. are better bets than food and drinks companies, according to April Lee-Tan, head of research at COL Financial Group, Inc. After all, eating-out was the third-largest expense for the average Philippine family in 2015, while food, clothing, medicine and spending on consumer durables cornered 40 percent of the budget, government data show.

Still, not all investors are betting on oneway gain in retailers’ shares, given their elevated valuations. Puregold, Robinsons and SSI trade at 22 times to 25 times 12month forward estimated earnings, versus a multiple of 19 for the benchmark index.

“Investors who don’t have a position might want to wait for a correction as valuations of these stocks aren’t cheap,” said Jonathan Ravelas, chief market strategist at BDO Unibank, Inc. The market has “already tucked in the potential benefit of the tax cuts.”

Metropolitan’s Padilla is happy holding on to shares of Puregold and Robinsons he’s been buying over the past year.

“We haven’t seen the last of the rally,” he said. “We want to enjoy the ride.”