Ayala Land wins FTI and its effect with PHES

ALI bagging the FTI deal raises doubts on the probability of the PHES JV deal. PHES is down today with 17M pesos transactions. Volume is considerably higher than the previous two days.

For the past 3 months PHES traded sideways with major support of .63 holding very well. Mr. Market tried to break the sideways trend but failed. Let’s see if the FTI deal will break .63. The FTI deal really drags down PHES but it will be worth watching the next few days whether PHES will go below .63. If .63 holds after a week of selling with volume, then I'll take the stride and hold knowing that the market could have discounted the FTI news. ALI's desire to beef its landbank to capitalize on strong demand for real estate is the cause of the JV with PHES. Now that the FTI bid is in the bag, where will the ALI/PHES JV go?

http://www.flickr.com/photos/21496790@N06/5065834411

ALI surprises everyone in the Ortigas deal and perhaps the FTI's deal also. It looks like ALI is good in surprises. I, on the other hand won’t be surprised if the JV is consummated notwithstanding the fact that the FTI and Ortigas deal devours most of the allocated budget of ALI. ALI is the premier developer and favorite of foreigners for nothing.

FTI is one of the last parcels of land of this size close to Manila’s CBDs.¹The other one I believe is the Plastic City.

PHES has been in the .60s level without the FTI deal and should go down today considerably (+10%) but it did not. The market has factored the JV speculation already at these price ranges. However if the JV will not materialize that is a different story and the price can go south dramatically and eventually will break the .63 barrier.

House 111 sold most of the shares it bought above .7 when PHES rose recently but House 219 and 106 bought it shares.

http://www.flickr.com/photos/91545223@N00/2772190827

The Play

The play at .63 to .67 is still intact as I wrote three days ago. If the JV with ALI will not materialize or .63 is broken, then it’s time to sell because the price may go back to where it started before at .20 ranges. Go back again in PHES if it goes to .2 ranges and then wait for another JV story.

¹ http://bworldonline.com/content.php?section=TopStory&title=Ayala-wins-FTI-auction&id=56817

The PHES Strategy

Philippine Estates Corporation is engaged in the real estate business and is owned by Gatchalian family.

                               

                              

SNAPSHOT                                                              

# of shares outstanding:	1,445,549,830
Current Price:	.72
Stockholders’ Equity	1,004,109,830
Price to Book Value Ratio	1.03

FINANCIAL RESULTS

	2011	2010	2009	2008	2007
Real Estate Sales	34.1M	30.8M	74.9M	97M	172.4M
COGS	20.3M	18.5M	34.7M	63.2M
Gross Profit %	40%	40%	54%	35%
Realized Gross Profit	8.7M	9.7M	38.6M	47.5M
Operating Expenses	30.4M	37.2M	42.2M	43.5M
Net Income/(Loss)	(3.8 M)	(8.7M)	(40.3M)	(1.7M)	450K
EPS	(.0026)	(.006)	(.0279)	(.0012)	.0003
Book Value	1,015M	1,019M	1,027.5M	1,068M	1,069.5M
Book Value Per Share	.70	.70	.71	.74	.74
P/E Ratio	(88.54)	(12.58)	(3.77)	(130.01)	(994.21)
Stock Price	.233	.076	.105	.15	.31
Price to Book Value Ratio	.33	.1078	.1477	.2031	.42

The Bad

In year 2009, the company recognized an impairment loss of 52.1M for its related party transactions.

http://www.flickr.com/photos/24844796@N02/2768306386

Sales have been declining for the past five years. Obviously PHES needs a catalyst to save its deteriorating financial condition. The financial results for the past years never looked good.

A fledgling company with almost no material revenue to speak of cannot be measured using the P/E ratio determine the value of this company. P/E ratio must only be used when the JV with Ayala has materialized and operations start to move. Until then, we will use the Price to Book Value of this company to establish the target price which is very useful for an asset heavy company like PHES.

The Trade and Other Receivables have a past due of over 121 days worth 152 million pesos. That’s a lot of money and is a worrying sign of the capability of the company to collect its receivables effectively and efficiently.

The Good

The good thing about real estate companies is that they have high gross margin percentage. PHES gross margin is 40% which is good enough compared to other real estate companies.

http://www.flickr.com/photos/8414198@N04/3776284108

If the JV with Ayala will be signed and push through, it could be the start of something good for the Company.   

Price to Book Value Ratio is almost the same at 1.03 times. Ideal ratio is 1 or less so that we can maximize on the potential of its land inventories which are carried in the books on cost or NRV (whichever is lower) a conservative approach.

The land inventories and advances to related parties carry potential upside for the company. Any JV with the premier developers can unlock its potential and move from being a penny stock to a midcap stock. Its large tracts of land are positioned in primed areas of various locations, thus big developers who wants to penetrate that particular location may want to form a business with PHES.

Operating expenses of 30 million per year can easily be covered by the current installment contract receivables and the marginal sales it generates from its projects and properties.

The computation

I just checked the market price of industrial lot in Valenzuela City and I found out that 10,000 pesos per sqm is the average. However, since the purpose of the JV with ALI is to develop residential and commercial units in Plastic City, the price per sqm should go up. Add to that that Ayala units commands a premium in the market compared to other developers.

Avida Land Towers in Paranaque sells from 61,000 pesos per sqm to 80,000 pesos per sqm. We are taking 30% off from the market price since Valenzuela is not at the heart of Metro Manila. Part of the 32.7 hectares will be used for roads, pavements, common areas, playgrounds, etc., thus we will remove 30% from the 32.7 hectares.

Valenzuela Market Price - 61,000x70% = 42,700 pesos

Fair Value - 32.7 hectares x 10,000 sqm x 70% x 42,700 = 9,774,030,000 pesos

Ayala Land@60% =5,864,418,000 pesos

PHES@40% = 3,909,612,000 pesos

Future Book Value - 3,909,612,000/1,445,549,830 = 2.70

The Strategy

 Target price for the 32.7 hectares Valenzuela property at 42,700 per sqm is 2.70 pesos conservatively. It is worth noting that this 2.70 shall be spread over the period from which the JV will run to. We shall review this target price once more details will come up in the future.

Other raw lands and projects are not yet included in the computation.

Technically, the support price of PHES is .63. The buying range is from .63 to .67 as long as the JV story is intact.

If the JV with ALI will not materialize, then it’s selling time because the price may go back to where it started before at .20 ranges. Go back again in PHES if it goes to .2 ranges and then wait for another JV story.

Warning: PHES is a small cap company and is not for the faint hearted. 

Trading Strategy: Average Down

Average Down is the process of buying additional shares of a stock if the price went down than when you originally purchased it. It lowers the average price of the stock you bought but it increases your exposure to the stock.


How it Works?
Le us take an example the PHES stock. On May 23, you bought 10,000 shares of PHES stock at a price of .74. After five days, the price went down to .64 and you bought 10,000 shares again. Below is the summary of your buying transactions.

Date	Price	# of shares	Amount
23-May	0.74	10,000	7,400.00
31-May	0.64	10,000	6,400.00
	Total	20,000	13,800.00

What did you noticed? The 10,000 shares you bought before at 7,400 pesos is worth 6,400 pesos now because the stock price went down. So you bought another 10,000 shares on May 31 so that you can lower your average price.


In order to compute the Average Price, just divide the total amount paid against the total # of shares you bought. In your case, the Average Price is .69.

Total Amount Paid	13,800.00
	÷
# of shares bought	20,000
Average Price	0.69

If the stock price went up to .69, you are break-even already . Whereas if you did not average down (meaning you did not purchase additional shares on May 31 at 10,000), you are still in red because you bought the stock at .74 per share.


Holding a Down Stock?

http://www.flickr.com/photos/51035655291@N01/2702744564

I know a few people who are doing average down. Their reason is that they are in a position to profit already if the price go back to their original price (.74) because their average price is now lower (.69) .  Or if they want to go out and sell the stock at break-even, they average down so that they can move out from the stock easily.


Personally though, average down works if you have identified a major support (see Support) in price and the fundamentals remain intact. If the PHES major support price is .63, you need to watch that price. If it holds and bounce back after a few trading days or weeks, then you can buy near that price, perhaps the stock is just under a correction mode. 


Fundamentals like growth prospects, sound business strategies, competent management, etc. shall form part of the reasons of why you must average down.


When Hoping is not Healthy

In stock market, you buy a stock because you saw something in that stock and you think that something will propel it to go higher whether it is based on technical or fundamental basis.


On a technical perspective, if you found that the major support (see Support) of PHES is .63, then you need to buy near that price. However, if the price go down to .62 in any single trading day, then it's time to sell even at a loss. Otherwise, you need to find another reason why you must keep the stock.

http://www.flickr.com/photos/27015396@N08/3512146240

Selling at a loss is the most difficult aspect in trading. Who wants to sell at a loss? Nobody, right? It sometimes ruins your entire day and affects your relationship with others. It is an unhealthy emotional stress because you are doing something against your natural desire to profit in the stock. It creates anxiety and loss of sleep. 


A lot of people average down to make up for a bad trading decision. The fundamentals became uncertain already and the technical looks bad and yet they still hang on to their stock. They are hoping that their battered stock will go up one day. Don't put good money after bad money. Losses after losses. Sometimes, you need to jump from a sinking ship and save your life. 


Friend, if there is no more reason to hold a stock, let it go. Charge it to experience. I know it is very difficult to sell a stock at a loss because I've been there before. I just rode the experience, let it go, inhaled deeply and move on. Lessons learned.

Philippine Estates Corporation (PHES) – Non Current Assets Analysis

Noncurrent Trade Receivables and Advances to Related Parties comprises the big bulk of the Noncurrent Assets at 86% of Total Non Current Assets of Philippine Estates Corporation (PHES) for the Y2011, thus we will focus on these two accounts.

Non Current Assets (in millions)	Y2011	Y2010	Diff	Horizontal  %
Noncurrent Trade Receivables	148.6	266.3	(117.70)	-44%
Advances to Related Parties	365.9	345.8	20.09	6%
Investment Property	1.1	1.1	-	0%
Property and Equipment	56.5	0.1	56.41	60950%
Deferred Tax Assets	15.5	15.3	0.18	1%
Other Assets	7.7	9.8	(2.13)	-22%
Non Current Assets	595.2	638.4	-43	-7%

Noncurrent Trade Receivables – is 25% of the total noncurrent assets. It decreased by 44% in Y2011. The decrease as discussed in the current ratio blog is that portion of the non current receivables in Y2010 became current and collectible in Y2011. (See Current Ratio) All installment contract receivables are secured by mortgage on the property purchased by the buyer with an 18% to 21% interest. I think PHES is offering buyers with In-house financing with the interest rates mentioned above. The past due over 121 days is 56% of the total trade receivables (current/noncurrent) which is very uncomfortable for an investor like me. This must be reduced significantly by improving collection systems and if possible, factor the receivables (selling of receivables to others). This is one aspect of the financial statements I must monitor on the next periods to see if the collections have been improving.

Advances to Related Parties- is 61% of the total noncurrent assets. It increased by 6% in Y2011. Its balance of 366 million pesos is the biggest noncurrent asset account. According to the Annual FS submitted to PSE, the recoverability of specific receivables and advances to related parties is evaluated based on the best available facts and circumstances, the length of the Group’s relationship with its debtors, the debtors’ payment behavior and know market factors. These specific reserves are reevaluated and adjusted as additional information received affects the amount estimated to be uncollectible.

PHES is loaning its affiliates with interest. In fact, in Y2011 the interest income it generated from its affiliates is 11.3 million which makes up for 60% of Other Income.

Advances to related parties (in millions)	Y2011	Impairment	Y2011 Net	%
Plastic City Corp	160.0	22.5	137.5	38%
Forum Holdings Corp	71.6	9.7	61.8	17%
International Polymer Corp.	61.9	6.7	55.3	15%
Orient Pacific Corp.	32.4	3.2	29.2	8%
Kennex Container Corp	27.0	3.6	23.4	6%
Heritage Pacific Corp.	20.4	2.8	17.7	5%
Noble Arch Realty and Construction	16.6	2.3	14.2	4%
Metro Alliance Holdings and Equity Corporation	16.6	2.4	14.2	4%
Pacific Rehouse Corp.	13.2	1.4	11.8	3%
Rexlon Industrial Corp	0.0	0.0	0.0	0%
Weltex Industries Corp.	0.1	0.0	0.1	0%
Waterfront Cebu City Hotel	0.0	0.0	-	0%
Bataan Polyethylene Corp.	0.2	0.2	0.0	0%
Ropeman International Corp.	0.6	0.0	0.6	0%
Advances to related parties (in millions)	420.5	54.7	365.9	100%

Though some of the Group’s advances to and installment contracts receivable have no significant movements during the year, management is confident that these are collectible in full.

Advances to related parties (in millions)	Remarks
Plastic City Corp	Payment is 21,475 sq.m. Plastic City property with value at P6,450/sq.m = 138.5 million
Forum Holdings Corp	secured by Pacific Rehouse Properties,fairvalue of 219 million
International Polymer Corp.	secured by Pacific Rehouse Properties
Orient Pacific Corp.	secured by Pacific Rehouse Properties
Kennex Container Corp	secured by Pacific Rehouse Properties
Heritage Pacific Corp.	secured by Pacific Rehouse Properties
Pacific Rehouse Corp.	secured by Pacific Rehouse Properties
Noble Arch Realty and Construction	16,000 square meter in Valenzuela

Most of the advances are secured by properties. These properties can be used by the Company for their real estate projects.

Summary:

Noncurrent Trade Receivables is 25% of the total noncurrent assets at 148.6 million pesos. It decreased by 44% in Y2011. The decrease as discussed in the current ratio blog is that portion of the non current receivables in Y2010 became current and collectible in Y2011. (See Current RratioThe past due over 121 days is 56% of the total trade receivables (current/noncurrent) which is very uncomfortable for an investor like me.

Advances to Related Parties are 61% of the total noncurrent assets. It increased by 6% in Y2011. Its balance of 366 million pesos is the biggest noncurrent asset account. Most of the advances are secured by properties. These properties can be used by the Company for their real estate projects.