LandBank chief eyes PDS takeover

STATE-RUN Land Bank of the Philippines (LBP) wants to buy over 60 percent of Philippine Dealing System (PDS), documents obtained by reporters showed.

“The undersigned recommends to the board the acquisition by Land Bank of the Philippines of a majority stake or at least 66.67 percent of the Philippine Dealing System Holdings Corporation (“PDS”),” LandBank President and CEO Alex Buenaventura said in a January 16 letter addressed to the bank’s board of directors.

LandBank currently owns 1.56 percent of PDS through the Bankers Association of the Philippines (BAP).

The state- owned bank’s plan puts it in a collision course with the Philippine Stock Exchange (PSE), which is in the process of consolidating control over PDS via the acquisition of stakes from various institutions including the BAP.

In June last year, the BAP signed a share purchase agreement allowing the PSE to purchase 1,488,902 common shares equivalent to 23.8 percent of the total outstanding stock of PDS for P476,448,640 or at P320 per share.

This implies a valuation of P2 billion for PDS and a price-earnings (PE) ratio of 8.10 times based on 2016 PDS earnings.

Buenaventura said research on - ket infrastructure enterprises in the region and globally show that such businesses trade at an average last 12 months PE ratio of 34.1 times and 35.8 times, respectively

He stressed that this indicates that at a price of P320 per share, PDS is undervalued and purchas - able investment for state-owned bank.

Moreover, Buenaventura said LandBank would benefit from stable recurring cash flow from the various fees PDS charges to market players as the country’s central securities depository and

Over 70 percent of the income of PDS is from the 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 continued.

Buenventura also highlighted that PDS had an asset- light business model and was consistently registering healthy EBITDA or earnings before interest, taxes, depreciation, and amortization margins above 45 percent and wide net profit margins above 25 percent.

PDS reported a return on equity of 14.4 percent and 15.1 percent in 2015 and 2016, respectively, described as depressed due to significant excess cash and liquid assets.

“From 2014 to 2016, PDS also 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,” Buenaventura said.

He said the maturation of the domestic fixed income market, 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,” Buenaventura said.

“In order to facilitate the acquisition, the undersigned likewise requests from the Board, an authority to formally engage the Development Bank of the Philippines as the financial advisor for the transaction, pursuant to RA [ Republic Act] 9184,” he continued.

The PSE’s planned takeover of PDS has already been cleared by antitrust regulators but not the Securities and Exchange Commission, which the bourse is asking to issue an exemption from a 20-percent ownership cap.

A possible hitch was raised after Finance Secretary Carlos Dominguez 3rd, in a social media post, claimed that the development of the capital market was being slowed down by the PSE’s inability to be compliant with the law.

“Around September of 2016, I told PSE to be compliant with the law with regards to the allocation of their share to groups of shareholders as a condition to SEC’s approval of their plan to acquire PDX. As of now, 16 months later, they are not compliant...,” he said.

Dominguez stressed that the Duterte administration would not tolerate private institutions who thwart the goal of achieving a robust and inclusive financial system.