T HU 02 FEB 2017
MEGAWORLD CORPORATION:
Tempering growth outlook this year,
maintain BUY rating due to valuations
Residential segment outlook deteriorating. MEG’s residential segment showed weakness last SHARE DATA
year with consolidated take-up sales dropping 12.2% y/y as of 9M16. The Megaworld brand led the
decline with take-up sales dropping 14.5% y/y to Php14.1 Bil. The weakness in reservation sales Rating BUY
also led to softness in real estate revenues. For the first nine months of 2016, real estate sales were Ticker MEG
up by just 1.1%. This is a significant slowdown from the 10.8% growth registered in 2015 and weaker Fair Value (Php) 5.08
than our forecast of a 10.5% growth y/y. We are lowering our real estate revenue and gross profit
forecast for 2016 and 2017 given the expected softness in take-up sales. Our new real estate sales Current Price 3.65
forecast implies a 2.1% growth for 2016 and a 1.9% contraction for 2017, down from the original Upside (%) 39.18
forecast of a 10.5% growth in 2016 and 9.1% growth for 2017.
Reducing 2017 net income forecast. Aside from changes to our real estate revenue forecast, we SHARE PRICE MOVEMENT
also raised hotel revenue estimates and lowered operating expenses. The net impact on our net
income forecast is a 1.4% improvement for 2016 and a 1.9% reduction for 2017. The improvement 110
in net income forecast for 2016 was brought about by the increase in hotel revenues and reduction
in operating expense, which offset the lower real estate sales forecast. On the other hand, our 2017
net income forecast dropped slightly as the lower real estate sales offset the positive impact of higher 100
hotel revenues and lower operating expenses.
BUY rating and FV estimate of Php5.08 maintained. We are maintaining our fair value estimate 90
of Php5.08 on MEG. Our fair value estimate is based on a 30% discount to our NAV estimate of
Php7.26. Recall that we previously increased our target discount to NAV from 25% to 30% following
MEG’s 3Q16 results to factor in downside risk from the residential segment. We are also maintaining
80
our BUY rating. We believe that at MEG’s current price of Php3.67, the downside risk on its residential 2-Nov-16 2-Dec-16 2-Jan-17 2-Feb-17
business is already priced in. Note that if we exclude the value of MEG’s residential properties from MEG PSEi
our NAV estimate, MEG’s NAV will still be Php5.84/sh. This implies that the MEG’s current price is
still 37.15% below its NAV even without the residential properties. Furthermore, at Php3.67, MEG is
trading at only 9.63X FY17E P/E. We don’t think that the significant discount to NAV and depressed
P/E multiple are warranted given that 44% of MEG’s operating income is derived from its investment ABSOLUTE PERFORMANCE
properties, making it the third largest landlord (in terms of income contribution) next to SMPH and
RLC. 1M 3M YTD
MEG 2.24 -6.41 2.24
PSEi 6.12 0.10 6.12
FORECAST SUMMARY:
Year to December 31 (Php Mil) 2013 2014 2015 2016F 2017F
Real Estate Revenues 29,277 34,072 38,466 40,804 42,555
% change y/y 17.31 16.38 12.90 6.08 4.29 MARKET DATA
Operating income 9,896 11,284 14,718 15,513 16,931
% change y/y 33.82 14.03 30.44 5.39 9.14 Market Cap 117,673.98Mil
EBIT Margin (%) 33.80 33.12 38.26 38.02 39.79
Net Profit 8,971 21,220 10,215 11,435 12,343 Outstanding Shares 32,239.45Mil
% change y/y 22.90 136.54 -51.86 11.94 7.94 52 Wk Range 3.21 - 5.51
Net Profit Margin (%) 30.64 62.28 26.56 28.02 29.00
Core Net Profit 8,550 8,404 11,179 11,435 12,343 3Mo Ave Daily T/O 141.89Mil
% change y/y 16.29 -1.70 33.01 2.29 7.94
Net Profit Margin (%) 29.20 24.67 29.06 28.02 29.00
Core EPS (in Php) 0.297 0.264 0.345 0.353 0.381
% change y/y 7.09 -10.95 30.72 2.29 7.94
RELATIVE VALUE Richard Lañeda, CFA
P/E(X) 12.20 13.70 10.48 10.25 9.49 Senior Research Manager
ROE(%) 10.46 8.29 9.83 9.39 9.32
[email protected] Dividend Yield (%) 0.99 1.08 1.05 1.08 1.10
*So urce: M egawo rld, COL estimates
Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
C o m p an y U p d at e I M eg awor l d C or por ati on
TH U 02 F EB 2017
Residential segment outlook deteriorating
MEG’s residential segment showed weakness last year with consolidated take-up sales dropping
12.2% y/y as of 9M16. The Megaworld brand led the decline with take-up sales dropping 14.5% y/y
to Php14.1 Bil. The weakness in reservation sales also led to softness in real estate revenues. For
the first nine months of 2016, real estate sales were up by just 1.1%. This is a significant slowdown
from the 10.8% growth registered in 2015 and weaker than our forecast of a 10.5% growth y/y.
Exhibit 1. Take-up sales and growth
30.0 50%
40%
25.0
30%
20.0
20%
15.0 10%
0%
10.0
-10%
5.0
-20%
0.0 -30%
MEG GERI ELI & SPI Total y/y growth
Source: MEG
Management’s outlook on the residential segment is not rosy as well. Competition and saturation
in the middle income market are some of the reasons they gave for the softness in sales. In re-
sponse, MEG has considerably slowed down project launches, especially of projects under the
Megaworld brand. Total launches under the Megaworld brand were down 74.9% y/y to Php4.4 Bil
for the first nine months of 2016.
MEG plans to diversify its sales mix in favor of projects outside Metro Manila. However, given the
lower sales value of projects outside Metro Manila, we may see some softness in consolidated
sales in the short term.
Exhibit 2. Project launches
in Php Bil 9M15 9M16 y/y growth
MEG 17.4 4.4 -74.9%
GERI 4.0 3.7 -6.8%
SLI and ELI 12.1 10.6 -12.6%
Total 33.5 18.7 -44.3%
Source: MEG
We are lowering our real estate revenue and gross profit forecast for 2016 and 2017 given the
expected softness in take-up sales. Our new real estate sales forecast implies a 2.1% growth for
2016 and a 1.9% contraction for 2017, down from the original forecast of a 10.5% growth in 2016
and 9.1% growth for 2017.
Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside 2
of the COL Financial website as these may be subject to tampering or unauthorized alterations.
C o m p an y U p d at e I M egawor l d C or por ati on
TH U 02 FEB 2017
Exhibit 3. Forecast changes
FY16E % FY17E
in Php Mil Old New change Old New change
Real estate sales 30,129 27,822 -7.7% 32,873 27,293 -17.0%
Gross profit 12,504 12,102 -3.2% 13,642 11,327 -17.0%
Realized gross profit from prior years 4,166 4,014 -3.6% 4,582 4,215 -8.0%
Source: COL estimates
Raising hotel revenue forecast
We are raising our hotel revenues forecast to factor in higher revenue contribution from Belmont
Hotel which opened in the latter part of 2015. The contribution of Belmont Hotel during the first nine
months of 2016 drove hotel revenues up 66% to Php878.5 Mil. Nine-month hotel revenues already
exceeded our original full-year estimate of Php836.1 Mil.
Our hotel revenue forecast for 2016 and 2017 increased by 31.8% to Php1.1 Bil and Php1.16 Bil
respectively. Our new forecast implies a growth of 38.4% in 2016 and 5% in 2017.
Operating expenses kept under control
Operating expenses during the first nine months were up by 4% y/y, significantly slower than our
full-year growth estimate of 13%. Looking at MEG’s historical performance, we can see that they
have had a good grip on expenses since 2015, wherein operating expenses grew by just 6.7%. We
believe that this slower-than-expected growth of operating expenses is sustainable and therefore
we reduced our estimate for operating expenses for 2016 and 2017 by 5.3% and 11.9% to Php8.55
Bil and Php9.15 Bil respectively.
Reducing 2017 net income forecast
Factoring in all the changes revenue and expense estimates, the net impact on our net income
forecast is a 1.4% improvement for 2016 and a 1.9% reduction for 2017. The improvement in net
income forecast for 2016 was brought about by the increase in hotel revenues and reduction in
operating expense, which offset the lower real estate sales forecast. On the other hand, our 2017
net income forecast dropped slightly as the lower real estate sales offset the positive impact of
higher hotel revenues and lower operating expenses.
Exhibit 4. Summary of changes to forecast
FY16E % FY17E %
in Php Mil Old New change Old New change
Real estate sales 30,129 27,822 -7.7% 32,873 27,293 -17.0%
Gross profit 12,504 12,102 -3.2% 13,642 11,327 -17.0%
Realized gross profit from prior years 4,166 4,014 -3.6% 4,582 4,215 -8.0%
Hotel revenues 836 1,102 31.8% 878 1,157 31.8%
Operating expenses 9,031 8,551 -5.3% 10,385 9,150 -11.9%
Net income 11,279 11,435 1.4% 12,578 12,343 -1.9%
Source: COL estimates
Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside 3
of the COL Financial website as these may be subject to tampering or unauthorized alterations.
C o m p an y U p d at e I M eg awor l d C or por ati on
TH U 02 F EB 2017
BUY rating and FV estimate of Php5.08 maintained
We are maintaining our fair value estimate of Php5.08 on MEG. Our fair value estimate is based
on a 30% discount to our NAV estimate of Php7.26. Recall that we previously increased our target
discount to NAV from 25% to 30% following MEG’s 3Q16 results to factor in downside risk from
the residential segment. We are also maintaining our BUY rating. We believe that at MEG’s current
price of Php3.67, the downside risk on its residential business is already priced in. Note that if we
exclude the value of MEG’s residential properties from our NAV estimate, MEG’s NAV will still be
Php5.84/sh. This implies that the MEG’s current price is still 37.15% below its NAV even without
the residential properties. Furthermore, at Php3.67, MEG is trading at only 9.63X FY17E P/E. We
don’t think that the significant discount to NAV and depressed P/E multiple are warranted given
that 44% of MEG’s operating income is derived from its investment properties, making it the third
largest landlord (in terms of income contribution) next to SMPH and RLC.
Exhibit 5. NAV and FV estimate
in Php Mil Valuation method % of total
Value of Residential Properties 45,807.1 DCF 19%
Value of Investment Properties 96,707.3 EBITDA Cap rate 41%
Value of Land Bank 93,611.1 Market price/DCF 40%
Value of 1.84% stake in Travellers 988.0 DCF 0%
Value of 80.4% stake in Global Estate Resorts 13,248.9 50% Discount to NAV 6%
Value of 81.7% stake in Empire East Land 8,490.0 Market value 4%
Add: Net Cash (debt) (23,800.0)
NAV 235,052.4
Diluted outstanding shares 32,394.9
NAV/Share 7.26
FV (30% discount) 5.08
Source: COL estimates
Exhibit 6. Relative valuation table
Current 9M16 EBIT
2017 FV Current Upside to fair
Discount to contribution
estimate price value estimate
NAV of leasing
ALI 39.14 35.55 10.1% 13.7% 35.2%
MEG 5.08 3.67 38.4% 49.4% 46.8%
SMPH* 24.5 29.70 -17.5% -21.2% 78.3%
FLI** 2.02 1.62 24.7% 51.9% 33.4%
VLL 6.24 5.07 23.1% 47.2% 21.2%
RLC 29.4 25.10 17.1% 31.6% 74.1%
Source: COL estimates
Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside 4
of the COL Financial website as these may be subject to tampering or unauthorized alterations.
C o m p an y U p d at e I M egawor l d C or por ati on
TH U 02 FEB 2017
Important Rating Definitions
BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.
HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.
SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.
Important Disclaimer
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount
invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said
information may be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the
report and are subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase
or sale of a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the
companies mentioned in this report and may trade them in ways different from those discussed in this report.
COL Research Team
April Lynn Tan, CFA
VP & Head of Research
[email protected]Charles William Ang, CFA George Ching Richard Lañeda, CFA
Deputy Head of Research Senior Research Manager Senior Research Manager
[email protected] [email protected] [email protected]Frances Rolfa Nicolas Andy Dela Cruz Justin Richmond Cheng
Research Analyst Research Analyst Research Analyst
[email protected] [email protected] [email protected]Kyle Velasco John Martin Luciano
Research Analyst Research Analyst
[email protected] [email protected]Contact
COL Financial Group, Inc.
2402-D East Tower, Philippine Stock Exchange Centre,
Exchange Road, Ortigas Center, Pasig City
1605 Philippines
Tel No. +632 636-5411
Fax No. +632 635-4632
Website: www.colfinancial.com
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