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.

EMP – Valuation Growth on Premiumization and Buy-back

On January 19, 2018 EMP closed at 7.97, just -5.12% below its 52-week high of 8.40 set on July 11, 2017.  We believed EMP can still go higher that its 52-week high of 8.40.  Following is a discussion on why we believe EMP can soar beyond its recent high.

The “premiumization” strategy of EMP will bear fruits in this TRAIN regime.  TRAIN imposes a new excise tax of 12 Pesos per liter on drinks using high-fructose corn syrup.  This affected the major beverage companies like Coke and Pepsi.  In reaction, Coke and Pepsi will reformulate their beverages to utilize local sugar.  This, we believe, will increase the demand for local sugar, thus, increasing local sugar prices. To take advantage of this sugar boom, sugar millers will have to make their plant more efficient.  That means they will extract more sugar from the production leaving little molasses for the production of ethanol.  Short supply in ethanol will cause its prices to increase.

While we project that TRAIN law will make ethanol in short supply another law is projected to shore demand for ethanol. The Biofuels Act of 2006 mandates the blending of locally-produced bio-ethanol into fuels.  The demand from fuel companies will further fuel the rise of the prices of ethanol.

How this will result to the positive impact of the “premiummization” of EMP?  EMP domestically is mainly competing on liquor companies utilizing ethanol as raw materials. Those ethanol-based liquors are generally cheaper than EMP’s “premium” products. Those ethanol-based liquor products will have to increase their prices.  The price increases of the ethanol-based products will make the EMP’s “premium” product price competitive.  We see a switch by the consumers to EMP’s “premium” product.

As of year-end of 2016, revenue fell by 6.02% yet revenue increased 10.54%.  This means margin is improving.  In 2018, we see volume growth and revenue growth from the switch. We see no factors that can cause an increase in the costs of EMP so we believe margin will be sustained.  Revenue growth with a sustained high profit margin will result to a much more improve bottomline of EMP.

Another factor that will shore up the valuation of EMP, is its buy-back program.  EMP maybe committed to buy-back up to 480 Million of its shares, but so far as of December 29, 2017 only 45.2 Million shares have been bought-back from the market.  Of the total 5 Billion Pesos appropriated for the buy-back, only 0.32 Billion has been spent purchasing its own shares.  Further exercise by EMP of the buy-back is expected to increase the stock price of EMP.

We believe EMP at below 8.0 is a good buy.

ABS – Wait and See

ABS set a new 52-week low as of December 12, 2017 trading session when it reached 34.75. Over this period, the share price is down 21.56%.  Although, the shares is at lowest during the 52-week period, we cannot recommend to buy or sell the same at the moment.  The following is a discussion of why we do not recommend to buy or sell it in the meantime.

 

Blockchain is changing how we use and think about money.

We are in the period of technological disruption.  Broadcast is no longer the prime platform for news, information and entertainment as it was in the 1990s.  The internet and mobile has replaced broadcast as the primary go-to place for news, information and entertainment.  In the advent of mobile internet, people now spend more time on their computers and mobile devices than in their television sets.  This technological sea change is most evident in the recent elections in the Philippines and in the US, where information proliferated in the internet more particularly in the social networking sites impacted the elections more than the mainstream broadcast media outlets.

ABS is the local broadcast giant. For the 9-month period of 2017, 52% of the revenue of ABS came from advertising revenue from its broadcast unit.  The said revenue provides virtually all of the net income of ABS of 2.3 Billion.  As what has been said there is a technological sea change in the telecommunications and media industry and this technological disruption gradually erodes the revenue of ABS.  In the 9-month period of 2017 advertising revenue of ABS is down 517 Million or 3% lower year-on-year.

The technological disruption affecting ABS’ business would be a convenient reason to recommend to sell it but we do not.  First, ABS is generating positive operating cash flows and free cash flows.  EBITDA for 2016 was 9.85 Billion and for 9-month period 2017 EBITDA is 7.03 Billion.  Second, ABS is the local leader in content creation and content is still king.  ABS has invested in capabilities to create local content.  It has Star Magic, ABS-CBN University and it has invested in studios and sound stages.  Its capabilities to create world class content is hard to replicate.  Third, it has been doing something to mitigate the effects of disruption.  It has gradually balanced advertisement revenue with consumer sales.   This endeavor of ABS, makes-up our reason to recommend to wait and see before recommending buying or selling it.

ABS is doing something to mitigate the effect of technological disruption.  It ventured into mobile telecommunications with ABSCBNmobile.  So far, this venture has not been profitable.  Another venture is Kidzania, which in the meantime has also not been so profitable.  Its cable, satellite and broadband distribution platform has not provide meaningful contribution to the bottom line.  To us the more promising investments ABS have made is its investments in digital and interactive media more specifically in Iwanttv and TFC.tv.

ABS, no doubt, has great catalog of great contents and has the ability to create best-in-class content.  In the age of broadcast erosion and internet dominance, ABS must find a way to sell its content directly to the consumers as what Netflix is doing. We believe, Iwanttv and TFC.tv are steps in the right direction.  Presently, there contributions to the bottom line is insignificant.  This is so because Iwanttv and TFC.tv are not world-class.  They are mediocre platforms.  The challenge of ABS is to make Iwanttv and TFC.tv world-class.  Those platforms should be like Netflix, Amazon Prime, Fox Plus or NBA Game Time.

ABS has word-class content creation capabilities.  Content capabilities would be not so valuable if it does not have a world-class delivery platform to its consumers where consumers can actually enjoy the content and pay for it.  In the meantime, ABS has a cash pile and positive operating cash flows.  With its cash pile let us wait for few more periods to see whether ABS will be able to build a world-class internet delivery platform direct to consumers as a hedge to the declining broadcast business . Let us wait and see then.