Philippine Estates Corp (PHES) is a real estate company
listed in the PSE. If you checked its financials from 2007 until date, you will
conclude that PHES is on a decline and doesn’t have any meaningful income. In
fact its 2011 revenue is only 34.1M, a far cry from the 172.4M revenue it
incurred way back in 2007.
Now the question is how can PHES establish itself again and
regain the composure it had in 2007? The 172.4M revenue in 2007 is way small in
comparison to other real estate players.
The first step is a JV with Ayala Land, the premier real estate
developer in the country. This JV is for the more than 30 hectares that PHES
had in Valenzuela. This JV will provide
cash to PHES which in turn can be used for other projects in the pipeline.
According to the disclosure made to the exchange, PHES is planning to develop a
middle class residential community in Imus and Gen Trias Cavite. Also, A JV is
being considered also for the Bulacan property during the Q&A portion of
the ASM held last Sep 24, 2012.
Philippines real estate is performing very well at the
moment. Buyers are snapping properties everywhere. Unlike in other countries,
most of the buyers in the Philippines are end users which minimize the risk of
trading and speculating the properties. End buyers tend to commit themselves to
pay the properties over the mortgage life, hence they are real buyers. Interest
rates are currently at the lower levels and many economists expect the rates to
stay at this level or even lower, thus borrowing becomes attractive to the
buyers2.
Philippine population is very young with more than half of
its below 23 years of age3. That’s
almost 50 million people not yet fully submerged in the economic and industrial
workforce of the country. Once this young population enters the productive
stage, Philippines is expected to grow bigger and people will have more buying
power compared to t he previous generations.
The 10M strong OFW continues to provide ample dollar
resources for our country. The remittances being sent back home are generating
surpluses among the recipients and this surpluses can be used by the first time
buyers to buy their dream homes.
In summary, I expect the Philippine real estate industry to
be resilient in the next few years and at least for this decade. There is a
shift in the spending habits of the population as the new generation tends to
favor consumer spending gobbling up techies, gadgets and ultimately houses.
Valuations
The average P/E of the real estate companies listed in the
exchange is 9.92 (excluding ALI) 1. With that in mind, PHES will only need to earn
P100M per year to have a 10X P/E at its current price. I valued PHES with an assumption of 10% income from
the sales it will generate.
PHES has a tendency to issue in-house financing as evidenced
in its 2011 annual FS. If that is the case, then PHES revenues will be spread
over the life of the mortgage which is at least 10 years.
The land is being valued at cost or NRC whichever is lower
in the accounting books. Since land is always appreciating, it must be noted
that today, the land portfolio of PHES may not reflect in the books. There are
other companies who disclose the fair value of their properties which is good
for the investors because they can assess the liquidation value of the company
in case of dissolution.
PHES should have a recurring income from its
portfolio if it wants to sustain its profitability in the future. Malls,
offices and hotels should be part of their strategy. The real estate industry
is hot right now but it may slow down in the future. When demand is less, a
defensive posture from the cyclical nature of real estate industry should help
PHES to withstand the onslaught of slowdown.
Nevertheless, PHES should be a good buy right now
with the JV with ALI in sight. I bought at .74 average cost and is currently
having a paper loss of 4%. It doesn’t bother me at all because I’m here for the
long haul as long as the prospects for PHES are still bright.
We will wait for the numbers to be revealed once the
JV is signed. Only at that point that we can determine if PHES will have
recurring income. Also, we can gauge how much will be the income of PHES from
this JV.
Right now PHES is still a book value play with a
target price of 2.704.
SNAPSHOT
|
#
of shares outstanding:
|
1,445,549,830
|
|
Current
Price:
|
0.71
|
|
Stockholders’
Equity
|
1,004,109,830
|
|
Price
to Book Value Ratio
|
1.02
|
SALES ASSUMPTIONS
YEARLY
|
Sales
|
5B
|
2B
|
1B
|
|
Net Income
|
500M
|
200M
|
100M
|
|
Price Target
|
3.5
|
1.4
|
0.71
|
|
P/E
|
10.1
|
10.1
|
10.3
|
1COL data
Note: This is not a solicitation to buy. Buy at
your own risk.
“Everything is green” Randy Ayson
Hello sir,
ReplyDelete"This JV is for the more than 30 hectares that PHES had in Valenzuela. This JV will provide cash to PHES which in turn can be used for other projects in the pipeline. "
Where did you get the terms of the JV?
Thanks,
Renzie
Sir,
ReplyDeleteIn my humble opinion, valuing PHES using a Pe ratio of 10 will be erroneous. Based on your post here: http://goo.gl/A6F1L, PHES' share in possible future revenue is P3.9 billion. Therefore at a projected sales of 1 Billion per year it would only take 4 years to sell all the Valenzuela property.
I understand that PHES has other properties and it might contribute to PHES's earnings but based only on the catalyst that you mentioned, it would probably be wrong to use a PE ratio of 10.
Respectfully,
Renzie