Top Philippine Small Cap Soars on Pivot From Property

As published on Bloomberg

After struggling with real estate and mining, a small Philippine company is trying its hand at solar power. Investors approve.

Shares in MRC Allied Inc. have almost tripled this year, rising the most among Philippine stocks worth less than $100 million. Bets on the new venture also spurred a 57 percent gain in 2016. The stock rose as much as 4.1 percent earlier today in Philippine trading.

MRC’s need for a reliable business can’t be overstated -- the 27-year-old company has lost money every year save one in the last two decades. Starting as a processor and exporter of rubber, a business it shut in 2000, MRC has made largely unsuccessful forays into property development and mining for copper and gold. Now, it plans to raise 2 billion pesos ($40 million) from a preferred share sale to fund solar plants.

“Until the company presents a clear operational and financial plan to investors on how these projects will be undertaken, everything is speculative,” said James Lago, an analyst at PCCI Securities Corp.

Leading the effort at Makati City-based MRC is President Gladys Nalda, who was hired from state-owned PNOC Renewables Corp. in January. Nalda, 38, is targeting capacity of 1,000 megawatts by 2022, enough to power more than 700,000 typical U.S. homes.

“MRC would need to raise cash to pursue these projects and this will be easier to do if it’s able to show a track record that it can get things done,” said Justino Calaycay, an analyst at Philstocks Financial Inc. “There also other risks along the way like the cost efficiency of renewables and possible changes in taxes that could remove or reduce incentives for the sector.”

MRC has held talks with two potential investors and construction of the first two plants is slated to start in the third quarter, Nalda said. The work should finish within 12 months, she said.

The Philippine government is offering tax breaks to encourage investments in hydro, solar, wind and geothermal plants to triple renewable energy capacity between 2010 and 2030. Coal accounted for 48 percent of the country’s power supply in 2016 while renewables represented 24 percent.

“Hopefully, this time around we will be more successful than the previous two portfolios that the company has chosen,” Nalda said.

MRC has already secured contracts to sell power from the 100-megawatt facility it plans to build near a former U.S. airbase north of Manila. It is seeking customers for a proposed 60-megawatt plant in the Cebu province.

MRC first laid out its energy ambitions in 2015, when it announced the Cebu location. The pivot followed a string of failures: the rubber business was hit by the government’s land reform program and in 1993 MRC sought to diversify into property development, which suffered from lack of demand and capital. It dropped the Makilala Rubber Corp. moniker soon after.

Then in 2010, the company bought mining assets only to run into a ban on exploration by local governments. By then, MRC had stopped its rubber operations. It last posted an annual profit in 2013, aided by a debt-to-equity conversion. The company is controlled by Menlo Capital Corp., which owns about 52 percent of the shares outstanding. Menlo is majority owned by Benjamin Bitanga, Nalda’s predecessor.

As for the stock, it hasn’t traded for more than a peso apiece since 2010. It touched 6.70 pesos in 1995. Still, it is now trading at 3.04 times book value, more than twice as much as the three-year average.

“Based on the efforts we are putting and the direction we are taking, there is still enough room for the share price to improve,” Nalda said.