Cemex Holdings Philippines (CHP) Unravels

Undescripts.com has previously reported that CHP may have overpaid its parent, Cemex Mexico, in the acquisition of the controlling interest in the two cement operating companies it now wholly owns resulting to the booking of a massive goodwill in its balance sheet which at year-end 2016 constitute 55% of CHP’s assets.  The massive goodwill was justified by the existence of an assembled workforce and dealer network in the two cement operating companies. However, scrutiny on CHP’s finances showed that in the face of fierce competition in the cement industry its much touted “workforce” and “dealer network” fails to provides a “moat” for them.  Its “workforce” and “dealer network” did not present cost advantages to the company as other cement companies showed lower costs than them allowing the other cement companies to easily enter the market and capture significant market shares.  We expected then that CHP’s massive “goodwill” will unravel itself.  Please see our previous report.

On February 9, 2017 CHP issued a press release announcing their 2017 full-year results.  CHP reported that revenue declined from 24.3B to 21.8B due to lower cement prices.  Prices of cement were low because of the fierce competition in the industry with the influx of imported cement.  CHP’s “workforce” and “dealer network” did not deter other cement companies and cement importers from entering the market.  This event shatters the justification of the massive “goodwill” booked in its balance sheet.

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The poor results of CHP makes its share price expensive.  CHP, as of end of February 15, 2018, is trading at 4.01.  With the poor results, it is now trading at 29.85 PE ratio as compared to Holcim Philippine’s (HLCM) 17.49.

The price of CHP has gone down 56.88% from a year ago to 4.01 resulting to a price-t- book ratio of 0.7077.  We sensed that the market is now recognizing the impairment of its goodwill,thus, a share price lower than its book value.  With the current price of CHP some institutional investors have gobbled it up.  Institutional investors are reportedly now holding 13.68% of CHP’s total oustanding shares.

Undescripts.com maintains that the price of CHP has still to go down to make it a rational investment. At the current price its PE ratio is unjustifiable, its stock price has to go down further to align its PE ratio to its peers. In the meantime we cannot expect any dividend from CHP as it is presently struggling with its earnings.

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FLI – Get to know Filinvest Land, Inc. and its prospects

Filinvest Land, Inc. (FLI) is one of the leading real estate developers in the Philippines.  It is engaged mainly in residential developments and in investments in rental properties for office and retail  use.

Revenue Stream

As of year-end 2016 FLI derived its revenue as follows:

Real Estate Sales from sales of residential units from its development – 14.3 Billion (80%)

Rents from its investment in office buildings and retail/mall properties – 3.4 Billion (20%).

Residential developments of the company covers the varying income segments of the Filipinos.  FLI’s Futura Homes offers value-for-money communities while its Spatial series offers affordable mid-rise condominium units (condos) for the low-income segment.  The mid-income segment is being catered through the Studio series of condos and the Oasis resort-style enclaves.  Filinvest Premiere offers luxury residences and premium leisure developments suited for the most discriminating tastes of the affluent segment.

Its investments in commercial retail properties is mainly anchored on the Festival Supermall in Filinvest City in Alabang (South Metro Manila) while its investments in office properties include the Northgate Cyberzone a business process outsourcing (BPO) Park also in Filinvest City. Filinvest City is owned and developed by Filinvest Alabang Inc. which is a 20% owned-affiliate of FLI. Rentals from investment properties provide steady recurring revenue and cash flows for FLI.

Growth Strategy

FLI has been acquiring large track of raw land for development into a sprawling mix-use townscape that features work-live-play environment. Master-planned townscapes allow FLI to sell residential units and at the same time invests in the retail and office rental properties. It has been noted that FLI has been increasing its investments in rental properties – retail and office. As of 3Q 2017, its investment properties has grown to 41.3 Billion from 38 Billion as of year-end 2016. Rental revenue as of 3Q 2017 now accounts 30% of the total revenue up 10% from year-end 2016.

Financials

FLI has a strong operating cash flows which as of 3Q 2017 amounts to 5 Billion Pesos. The strong cash flow generation from operations can be attributed to its disciplined costs management of its developments and investments. For the period up to 3Q 2017 it was able to generate a gross profit of 50% of its revenue. It generates a net income before tax 0.32 Pesos for every 1 Peso of revenue.

Although investments in rental properties takes a lot of resources to build, FLI has able to tap the capital/debt markets for funding for those investments. The predictable and recurring revenue and cash flows from the investment properties can very well cover repayment of debts. Residential developments of FLI are self-funding through pre-selling and project financing. The availability of funding avenue strengthens the balance sheet of FLI.

Funding for acquisition and/or development of assets are available to FLI. Assets acquired/or developed provide returns greater than their funding costs, thus, value accretive to stockholders. As of this writing FLI is trading at a dividend yield of 2.40%.

Ownership

FLI is controlled by Filinvest Development Corporation (FDC) which owns 59.4% of its outstanding common stocks. FDC is controlled by the Gotianun family. Aside from real estate development, FDC has investments in banking through East West Banking Corporation, sugar through Pacific Sugar Holdings Corporation, and power generation through FDC Utilities, Inc.

Of the 40.6% owned by the public, around 13% is held by institutional investors the biggest of which is Invesco Asset Management Ltd. holding around 5.05% of the total outstanding shares.