Megaworld: Blue-chip bargain buy?

Megaworld Corporation (MEG) is a bargain buy given its position as one of the country’s top property developers, its sizable and geographically-diversified portfolio of high quality real estate developments, and its stable financial position notwithstanding its current 33.47% discount to our calculated fair value. However, interested investors should also consider the potential threats to MEG’s future growth such as any possible disruptions to vital company operations as a result of the still ongoing COVID-19 pandemic and the highly competitive nature of the local real estate market.

Source: Megaworld Corporation

Company Overview

MEG, incorporated on August 24, 1989, is primarily engaged in the design, construction, and management of large-scale mixed-use planned communities and townships. Its current portfolio includes an assortment of condominiums, subdivision lots, townhouses, hotels, offices, and retail spaces.

For the year ended December 31, 2020, it reported PhP43.5 billion in sales, making it the fourth largest Philippine property developer in terms of revenues.

TOP STOCKHOLDERS

No.NameSharesOwnership (%)
1Alliance Global Group, Inc.11,590,219,05835.80%
2PCD Nominee Corporation (Filipino)6,943,582,40221.45%
3New Town Land Partners, Inc.5,066,514,39015.65%
4PCD Nominee Corporation (Non-Filipino)3,741,380,18611.56%
5Alliance Global Group, Inc.2,500,000,0007.72%
Source: List of Top 100 Stockholders (Common Shares) as of September 30, 2021

Key Personnel

NamePosition
Andrew L. TanPresident, Chief Executive Officer
Jesus B. VarelaLead Independent Director
Kingson U. SianExecutive Director
Lourdes T. Gutierrez-AlfonsoChief Operating Officer
Kevin Andrew L. TanExecutive Vice President, Chief Strategy Officer
Francisco C. CanutoChief Financial Officer, Treasurer
Source: 2021 General Information Sheet

Investment Considerations

MERITS

Leading local property developer

For the year ended December 31, 2020, MEG posted sales of PhP43.5 billion even despite the COVID-19 pandemic, making it the fourth largest Philippine property developer in terms of revenue behind only Ayala Land, Inc. with PhP96.3 billion, SM Prime Holdings, Inc. with PhP83.9 billion, and DMCI Holdings, Inc. with PhP70.8 billion.

MEG’s current property portfolio is also one of the largest in the country with locations in key Philippine economic hubs such as Metro Manila, Cebu, and Iloilo. Some of MEG’s largest completed developments include:

EASTWOOD CITY

Eastwood City, home to more than 25,000 residents, is an 18.5-hectare community property in Libis, Quezon City with three malls, 19 completed luxury condominium towers, 10 first-class corporate office buildings, and a modern IT park.

FORBES TOWN CENTER

Forbes Town Center is a 5-hectare development in Bonifacio Global City, Taguig, Metro Manila home to 12 residential towers with approximately 3,500 residential units and host to Forbes Town Road, a retail strip with 37 restaurants and shops. The township is also connected to Burgos Circle, a popular leisure spot in Bonifacio Global City.

MCKINLEY HILL

McKinley Hill is a 50-hectare community township in Fort Bonifacio, Taguig, Metro Manila consisting of office, residential, retail, educational, entertainment, and recreational spaces. The township is also home to the McKinley Hill Cyberpark which is a PEZA-designated IT special economic zone.

UPTOWN BONIFACIO

Uptown Bonifacio is a 15.4-hectare property located at the heart of Fort Bonifacio, Taguig, Metro Manila housing Uptown Place Mall, a high-end commercial center, a selection of top-grade office spaces, and a residential zone. It is also located near St. Luke’s Medical Center, one of the country’s most advanced healthcare institutions.

ILOILO BUSINESS PARK

Iloilo Business Park is a 72-hectare mixed-planned community located in Mandurriao, Iloilo. It is home to The Street of Festive Walk, a 1.1-kilometer retail strip and 5 residential condominium developments.

Forward-looking expansion plans

Despite its position as one of the country’s top property developers, MEG continues to aggressively expand its portfolio with a selection of properties yet to be completed located in areas beyond the comparatively more developed Metro Manila. Some of these properties include:

SUNTRUST ECOTOWN

Suntrust Ecotown is a mixed-use development located on 350-hectares of land in Tanza, Cavite which MEG hopes would become a major hub for world-class light to medium export-oriented industries and residential, commercial, and institutional establishments south of Metro Manila. MEG is allotting 111 hectares to the potential industrial park, an additional 40 hectares for the expansion of the industrial park as well as the integration of a hotel and various commercial, retail, and leisure spaces, and 200 hectares for future development which may include residential and recreational facilities.

NORTHILL GATEWAY

Northill Gateway is a 53-hectare property that will rise in the northern part of Bacolod. MEG plans to construct a commercial town center, upscale residential villages, and mixed-use office and retail developments on the property.

WESTSIDE CITY

Westside City is a planned 31-hectare leisure and entertainment township located in Entertainment City, Parañaque, Metro Manila. The township will be the home of upscale residential condominiums, a luxury mall, a selection of international hotels, as well as the Philippines’ first Grand Opera House.

Stable financial position

As of September 30, 2021, MEG has over PhP28.9 billion in cash and cash equivalents, more than enough to cover the current portion of its interest-bearing loans and borrowings amounting to PhP12.4 billion.

Furthermore, MEG’s poorest performing net income year over the past five (5) years was only the PhP9.9 billion it reported in 2020 due to the global economic impact of the COVID-19 pandemic. For the period beginning 2016 to 2020, its average was PhP13.5 billion. This is more than enough to cover the PhP52.0 billion MEG expects in maturities on its interest-bearing loans and borrowings and bonds and notes payable over the next five years as per MEG’s 2020 annual report.

MEG’s financial soundness indicators are further broken down in the table below.

Ratioas of September 30, 2021
Current Ratio3.34
Acid Test Ratio1.55
Debt-to-Equity Ratio0.42
Solvency Ratio0.17
Interest Rate Coverage Ratio3.92
Source: Q3 2021 Quarterly Report
Discounted price

MEG’s closing price of PhP3.06 as of December 22, 2021 is 33.47% below the calculated median PhP4.60 fair value of MEG as computed below. This meets our minimum required 30.0% margin-of-safety. The median was employed in lieu of the average to provide a more stringent indicative valuation given that with regards to MEG’s indicative fair value the median is lower than the average.

ValuationPrice
Book Value Per SharePhP5.86
Relative Value, Peer P/E AveragePhP6.63
Relative Value, Peer P/E MedianPhP3.34
10.0x 2020 EPSPhP2.90
AveragePhP4.68
30% Margin-of-SafetyPhP3.28
MedianPhP4.60
30% Margin-of-SafetyPhP3.22

MEG’s indicative fair value was calculated by finding the average and median of the company’s book value per share, relative valuation based on the average and median P/E of local industry peers, and 10.0x its 2020 earnings per share (EPS).

MEG’s book value per share was based on the PhP5.86 it reported as of September 30, 2021.

MEG’s relative value of PhP6.63 and PhP3.34 are based on the average and median P/E respectively of the local industry peers listed below. The EPS employed to calculate the final relative value was MEG’s 2020 EPS given that 2020 was the company’s poorest performing year in the last five years due to the widespread impact of the COVID-19 pandemic.

Ayala Land, Inc.Ayala Land, Inc. is the real estate arm of the Ayala Corporation. It was the largest Philippine property company in terms of revenues for the year 2020.
DMC Holdings, Inc.DMC Holdings, Inc. is a holding company consolidated the construction, property, mining, power generation, and water concession interests of the Consunji family.
Robinsons Land CorporationRobinsons Land Corporation is the real estate investment arm of JG Summit Holdings, Inc. It has five main business units: commercial centers, residential, office buildings, hotels and resorts, and industrial and integrated developments.
SM Prime Holdings, Inc.SM Prime Holdings, Inc. is the real estate investment arm of SM Investments Corporation. It has four main business units: malls, residential, commercial, and hotels and convention centers.
Vista Land & Lifescapes, Inc.Vista Land & Lifescapes, Inc. is the holding company for the Vista Group’s property interests. Vista Land and Lifescapes, Inc. mainly operates through its residential, commercial, and recreational segments.

MEG’s price at ten times its 2020 EPS falls to PhP2.90. MEG’s EPS for the year 2020 was chosen to provide a “weakest year” valuation given that this was its poorest performing year over the last five years.

RISKS

PH property market still largely vulnerable to economic impact of COVID-19 pandemic

The continued threat of business disruptions as a result of the COVID-19 pandemic is not expected to subside any time soon especially with the recent spread of the Omicron (B.1.1.529) COVID-19 variant.

As such, any possible disruptions to the construction sector may lead to delays in property turnover and generally weaker economic conditions may make it more difficult for MEG to sell its properties at ideal prices.

Highly competitive local property landscape

The local property market is also highly competitive and MEG must remain strategic in its approach to expansion if it plans to maintain any of its current advantages. Moreover, property prices in Metro Manila have become increasingly less affordable which may lead to future difficulties in MEG’s ability to acquire lots in the capital city at reasonable prices for its future development plans.

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