Filinvest Land Inc., Attractively Priced But may Face Headwinds

Disclaimer: The following is unsolicited investment advice and must not be construed as a recommendation to buy or sell securities. Investors must seek professional legal counsel and invest at their own risk.

As Philippine equities continue to become more attractively priced, we may now start appraisal and valuation of some securities.

Filinvest's extensive property in up and coming Central Business District of the South, adjacent to the South Luzon Expressway (Metro Manila Skyway under construction).

This scale model shows more plans and room to grow on the property.

Filinvest Land Inc.

Data compiled by Pilifinance:

Computations:

10 year Earnings per Share Average (2005-2015): 0.13

Latest market price as of December 2, 2016: Php 1.72 per share

1) Adequate size of the Enterprise - FAILED
"subject to more than average vicissitudes."

Filinvest Land Inc. is one of the leading developers in the country, however it is a second-liner stock.

2) A Sufficiently Strong Financial Condition
 A - For Industrial Companies, Current Assets should be Twice Current Liabilities. Let us take a look at the latest 2015 Annual Report: - FAILED
Total current assets - 40,345,182,000 (from 2015 annual report: 30,133,130,000)       

Total current liabilities - 15,939,234,000 (from 2015 annual report: 33,426,062,000 - we assumed that all 15,946,927,000 loans payable might be payable short term)

To meet this criterion, Total current assets must at least be at least 2x current liabilities or 31,878,468,000 (or basing on the 2015 annual report: 34,958,270,000 to 66,852,124,000)
But Filinvest Land Inc. may not be fully considered an industrial company.

At best (if the entirety of the loans payable is considered long term):

30,133,130,000 current assets  < 34,958,270,000 (2 x current liabilities of 17,479,135,000)

B - Long-term debt should not exceed the net current assets or working capital: - FAILED
In my understanding, net current assets mean total current assets less total current liabilities:
Total current assets - 40,345,182,000 (from 2015 annual report: 30,133,130,000)        

Total current liabilities - 15,939,234,000 (from 2015 annual report: 17,479,135,000 to 33,426,062,000 if we assumed that all 15,946,927,000 loans payable might be payable short term)

=Net current assets - 24,405,948,000 (from 2015 annual report: -3,292,932,000 to 12,653,995,000

Total non-current liabilities - Bonds payable: 31,749,909,000

At best, 12,653,995,000 net current assets (if loans payable is excluded) < Bonds Payable: 31,749,909,000

To meet this criterion, Net current assets or working capital must be > Total non-current liabilities.
However, this criterion is another for an industrial company, of which Filinvest Land Inc, a conglomerate, cannot be fully classified.

C - For public utilities, the debt should not exceed twice the stock equity at book value: - PASSED
Total Liabilities - 65,497,910,000
Total Equity - 55,600,393,000

Total Liabilities must not exceed twice the total equity or 111,200,786,000

Total Liabilities 65,497,910,000 < 111,200,786,000 (2x Total Equity)

3) Earnings stability - PASSED
"Some earnings for the common stock in each of the past ten years."

4) Dividend Record - FAILED
"Uninterrupted payments for at least the past 20 years."

Filinvest Land Inc. may have only started paying dividends in 2008, or for only 7 years, but showed no default in payment of dividends in those 7 years. 

2008 dividend was Php 0.0200

2015 dividend was Php 0.0560 per share

(7 year dividend growth is 180%)

At the latest market price of December 2, 2016: Php 1.72 per share,

Dividend yield is at 3.26%

5) Earnings Growth - PASSED
A - "A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end."
That means to say at least 33.3% increase in earnings per share for the beginning and ending 3-year averages of the 10 year period.

3 year beginning Earnings per share (2004-2006): 0.049

3 year ending Earnings per share (2013-2015): 0.19

Difference between Beginning and Ending earnings: 0.141

Difference / beginning balance x 100 = 287.76% 

Passed. Not only has Filinvest Land Inc. met the minimum increase of 33% but has made an explosive growth in earnings of 287.76% in the past 10 years.

6) Moderate Price/Earnings Ratio - PASSED
"Current price should not be more than 15 times average earnings of the past 3 years."

Past 3-year average:  Php 0.19

Current price as of December , 2016: Php
Price / Earnings Ratio: 1.72  / 0.19  = 9.05

To pass this criterion, current price must be, at the most, 15 times latest earnings per share or Php 2.85. It's at 1.72.

As an additional computation, here is the P/E ratio for the 10 year period 2005-2015:

10-year Earnings per Share Average (2005-2015): 0.13

10-year P/E ratio: 13.23

In both cases, the P/E ratio poses an attractive purchase by Graham standards.

7) Moderate Ratio of Price to Assets - PASSED
"Current price should not be more than 1 1/2 times the book value last reported."

Book Value per Share: Php 2.3
Current price as of December 2, 2016: Php 1.72

1.5x Book Value per Share: Php 3.45


***"However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier (15) times the ratio of price to book value (1.5) shall not exceed 22.5."

P.s. Some modern versions of this rule make use of the formula called the Graham Number:
 Square root of 22.5 times earnings times book value to arrive at a specific figure in between the two

   ___________________________
  /
\/  (earnings x 15)   X   (book value x 1.5)

OR

   ___________________________
  /
\/  22.5   X   earnings    X   book value

OR

   ___________________________
  /
\/   22.5  X  Php 0.19   X    Php 2.3

=

Php 3.14 Value, with respect to latest 3 year earnings and book value at the prescribed multipliers

>>As you can see Graham uses EARNINGS in the form of historical averages and Net ASSETS in the form of book value to gauge the VALUE in the market price.

>>He also gauges SAFETY by applying certain financial ratios to the debt, equity and current accounts.

The Graham Number, as seen in our previous post: (http://pilifinance.blogspot.com/2016/05/the-graham-number.html)
takes into account the square between these two factors.

However, as Pilifinance prescribed in our post on The Graham Number, we used an even more conservative multiplier of P/E ratio of 10, and an less than or equal book value of 1.
That changes Benjamin Graham's multiplier from 22.5 to 10.
Using 10 as a multiplier, we arrive at the figure:

   ___________________________
  /
\/   10  X  Php 0.19   X    Php 2.3

=

Php 2.09 Value, with respect to latest 3 year earnings and book value at the Pilifinance multipliers

IN CONCLUSION:

I. QUANTITATIVE:

With regards to price, Filinvest Land Inc. already constitutes a considerable bargain with an excellent earnings growth record and assets to back more of the market quotation.

However, Filinvest Land Inc. has also failed 3 tests, ranked according to importance as follows:

A) Financial Condition

B) Size of Enterprise

C) Dividend Record

But, it may be argued, 

regarding A) that these tests were specifically made of industrial companies, and Graham's views might differ with real estate companies, to which Filinvest Land Inc. is a part of.

regarding B) that even if Filinvest Land Inc. is a second-liner or not a leading stock, the Philippine Stock Exchange in general has very stringent requirements for listing companies, and small enterprises that may be vulnerable in "more than average vicissitudes" are usually excluded. However we reserve the example of the Uniwide Sales Group, a PSE listed firm that was insolvent during the Asian Financial Crisis.

regarding C) that Filinvest Land Inc. was only listed in 2007, the same year of its first dividend, and a relatively young enterprise.

So of all these three, the most significant risk might come from the failure of the standard of financial condition of company. More study and prudence must be done by the investor on this part.

II. QUALITATIVE

IN ADDITION to financial ratios and tests, we also look at the qualitative aspect of the business. Recent political and economic developments abroad and locally might have a significant impact on Filinvest Land Inc.'s business.

1) Trump win in the USA. Filinvest Land Inc.'s investment properties and office leasing business heavily rely on the Business Process Outsourcing or BPO Industry. If President Trump proceeds with his protectionist agenda to repatriate jobs to the USA, the Philippine BPO industry may suffer, and so will the demand for Filinvest Land Inc.'s office space.

2) Devaluation of the peso. It has been stated in the 2015 Filinvest Land Inc. bond prospectus that depreciation of the peso may pose a risk to the supply and acquisition of raw materials such as lumber, cement, and steel needed for construction and delivery of projects.

3) Interest rates. A weaker currency may also mean raising of interest rates in the near future, which may pose another problem for the demand of real estate projects. Higher mortgage and bank interest rates will not only make debt servicing more expensive for the company, but make it more expensive for consumers to buy real estate, lowering demand and the company's bottom line.

4) General economic slowdown. Increasing geopolitical risks and instability here and abroad, and the overall prosperity in the past few years may be a precursor to a general slowdown in the economy in the following years. Bloomberg has included the Philippines as one of the most vulnerable ASEAN emerging market to a Trump Presidency, citing its heavy reliance on OFW remittances and the BPO Industry. Increasing political turmoil, a change in Government and agenda are also risks to the continuity to the Philippine infrastructure and economic growth story.

OUR OPINION:

Although Filinvest Land Inc. is priced attractively, backed by its good performance record, the investor must also take into account headwinds that are increasingly probable. The good performance of the company itself may be evidence of management competence, and its relative size and impressive growth record may prove to have more opportunities. But for the defensive and conservative investor, it may be best to wait it out.

In the face of external headwinds and increasing internal debt, it is best to proceed on the side of caution and watch out for more developments, politically and economically. Specifically the actions of Trump. increasing political instability in the Philippines, interest rates ,investor sentiment and the over-all economic conditions in the country. 

However, outside of these factors, Filinvest Land Inc. is a performer, and must not be ignored as an attractive stock purchase, but perhaps, at a less uncertain time.