The Philippine Utilities sector outperformed the PSEi by 6% in the last 6 months, but is still a laggard in the last three years (-10%). We think 2021 presents another year of potential outperformance with the improving regulatory environment, market-leading profit recovery and attractive value proposition (~1SDs below LT mean P/Es). Utilities stocks outperformed the index in the period leading up to the last four Presidential elections, which could be due to stable regulatory regime (agencies being co-terminus with the president) and catch-up in public infra plans near a shift in leadership. Defensive volumes in power, water and toll road traffic will drive the sector leading in profit recovery with 2021E at 96% of 2019A vs.

our broad PH universe (62%). Our top pick is MPI. Delivery on its asset monetization plan fortified its B/S, tempering liquidity and equity risks. It is our preferred infra play with multiple toll road projects slated for completion over the next two years. Stay OW on Meralco as the GBPC consolidation accelerated its generation rollout and with a 5.1% 2021E dividend yield support. Stay OW on MWC on promising progress in the concession review.

 Regulatory noise had dissipated. The improved regulatory backdrop in 2020 drove the outperformance of utilities stocks (+30% relative to PSEi). We are encouraged by the Justice Department’s guidance to start negotiations for the water contract review (here) and the acceptable indicative changes so far (here).

We view Mr. Razon’s investment into MWC positively given capital injection support and potential synergies of related assets (e.g. offtake from Wawa Dam).

The impending elections in May 2022 also present a tactical window to be OW in the sector. A 12M holding period for PH Utilities stocks before a national election historically yielded relative outperformance on average in the last four Presidential elections (Fig. 1-2). We attribute this to the lack of meaningful changes introduced by regulatory agencies, which are co-terminus/appointed by the President, and the usual pick-up in public infra biddings.

 Defensive demand to drive leading profit recovery. Demand for water, power and tollroads proved to be relatively more sticky and resilient, recovering to 77%-102% of 2019A level in 3Q20 compared to a mere 50%-60% upturn for discretionary items (auto, housing, specialty retail). The defensive demand will drive a relatively earlier reversion to 2019 profitability, besting competitive and cyclical sectors, in our view. We forecast a 30%/18%/18% y/y net income growth for MPI/MER/MWC this year led by a 3%-40% y/y growth in volumes.

This translates to a respective 2021E net income of 87%/103%/122% of 2019A, better than the 62% reversion for our PH coverage universe.

 Stay OW on PH Utilities, with MPI as our top pick. We like MPI due to: (1) tempered liquidity and equity risks with the successful delivery on its asset monetization plan, (2) it stands to benefit from heightened infra activity near elections, and (3) cheap valuations (1SD below mean P/E and NAV disc.). Stay OW on Meralco as the GBPC deal accelerated its generation rollout, plus a 5.1% 2021E dividend yield support. Keep MWC at OW on promising progress in the concession review with indications of a clock reset on the contract term.