LBP approves of buying PDS

State-run Land Bank of the Philippines is going to buy a majority share of Philippine Dealing System to provide additional profit for the bank and strengthen the local capital market. President and chief executive Alex V. Buenaventura said, “the Land Bank board just approved in principle to acquire at least 66.67 percent common shares of PDS subject to compliance with all legal regulatory requirements." The bank holds 1.56% of PDS through the Bankers Association of the Philippines (BAP). "The objectives are to increase Land Bank profits and to accelerate development of capital markets in the country,” the bank official said in a text message. “Moreover, Land 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,” Buenaventura said. More than 70% of PDS' income comes from the provision of services as a depository, registry, and financial intermediary and over 20% of revenues come from trading services. “On June 15, 2017, BAP signed a share purchase agreement allowing the Philippine Stock Exchange (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 PE ratio of 8.10x based on 2016 PDS earnings. Research on the financials of comparable market infrastructure enterprises in the region and globally show that such businesses trade at an average LTM PE ratio of 34.1x and 35.8x, respectively. This indicates that at a price of P320 per share, PDS is undervalued and purchasing PDS shares could be a profitable investment for Land Bank,” Buenaventura explained. 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.

“PDS reported an ROE of 14.4 percent and 15.1 percent in 2015 and 2016, respectively, which is depressed due to significant excess cash and liquid assets. From 2014 to 2016, PDS exhibited a CAGR 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,” said Buenaventura.