Discovery World Corporation IPO

The Discovery World Corporation is a resort and upscale real estate developer which owns the world class Discovery Shores Boracay, Discovery Country Suites in Tagaytay, and the Discovery Primea condominium in Ayala Ave, please read some of the articles and my comments below.

DISCLAIMER: The author does not guarantee the accuracy of the information, nor does this serve as a buying recommendation. The author is not a registered financial planner or business professional. The author is a fellow retail investor. Prospective investors should use their own discretion in their investments and if necessary should ask the assistance of an investment professional. Stock market investing is subject to internal and external risk factors that may result in substantial loss.

Please read about Mr. Mangun's (PSE Trader, US Stockbroker) insight on IPOs in this article published in the newspaper last week:

http://www.businessmirror.com.ph/index.php/en/news/opinion/22415-what-to-do-about-initial-public-offerings

This is the official prospectus for prospective investors in the Discovery World common shares:

http://www.discovery.com.ph/files/Discovery-World-Corporation-Prospectus.pdf

Summary (important points): 

Offer shares: 168,000,000 shares with a par value of P1.00 being offered to the public for P3.28 per share.

These 168,000,000 shares represent 26.84% of the outstanding shares after the offer.

After the completion of the IPO, there will be 626,000,000 common shares outstanding.

The net proceeds from the offer will be used for:

[a] the acquisition of Discovery Fleet Corporation and Palawan Cove Corporation

[b] debt retirement

[c] working capital purposes

On July 22, 2013, the Board of Directors of the Company approved its dividend policy wherein it shall distribute to its shareholders as dividends at least 10% of company's net income for the previous fiscal year.

Sept. 27, 2013, the Company has acquired a 67% stake in Euro-Pacific Resorts Inc. which operates Club Paradise in Coron Palawan.

Summary of Financial Information

Revenues                         Net Income        Outstanding Shares     Earnings Per Share

[2010] P308,640,000        P38,030,000         626,000,000                 P0.06

[2011] P347,780,000        P62,640,000         626,000,000                 P0.10

[2012] P366,000,000        P21,220,000         626,000,000                 P0.03

P/E Ratio

[2010] 55

[2011] 33

[2012] 109

Equity [Book Value]   % increase in equity  Outstanding Shares  Book Value per Share

[2010] P422,870,000                                         626,000,000                       P0.676

[2011] P462,560,000                9.39%               626,000,000                       P0.74

[2012] P548,550,000              18.59%               626,000,000                       P0.88

[2013] P578,901,111*              5.53%                                                          P1.26

[2013] P1,095,356,917**        89.21%               626,000,000                       P1.75

*as of June 30, 2013 as stated in p.58 of the official prospectus

**pro-forma net-tangible book value after the IPO 

(increase in tangible assets reflecting the P516,455,806.9 proceeds from the sale of the stock in the IPO, and addition of 168,000,000 shares from the offer)

Price to Book Value

[2010] 4.85

[2011] 4.43

[2012] 3.73

[2013] 2.60*

[2013] 1.87**

For more information about book value / equity valuation, look here:

http://pilifinance.blogspot.com/2013/09/how-to-value-stocks-basic-ie-asset.html

"Dilution" p.58 from official prospectus

Here is the Capitalization Structure from the official prospectus:

COMMENTARY:

From an investment (in contrast to a trading) point of view, my opinion is that the price is too expensive for the value of the company judging from its owned properties, and net income.

The estimated P/E Ratio is above 100 for year 2012 after the shares have been added from the offer.

Remember that the offer price is P3.28 and the book value or equity or "net worth" is only P1.75, including the proceeds from the IPO. That is a premium of P1.53 above the tangible assets of the business.

This does not mean that the price will not go up once the company is listed in the exchange.

For me, the price is too high at the moment. But if you believe in the company's management, that they can successfully sustain and increase profits and expand the value of the business in the long run, you may buy this company. Or else you can just wait for a lower price in the market after the IPO.

Images from Skyscrapercity.com and discoveryprimea.com. credits to the owners.

For more information about stock investing, please visit my blog at: pilifinance.blogspot.com

Use Interest Rates to Your Advantage: The Money Movement Strategy

While browsing for books in Book Sale, I came across a book by Charles J. Givens called "Wealth Without Risk"

What caught my attention was the page about the MONEY MOVEMENT STRATEGY:

I think all of us have an intuitive idea of how the prevailing interest rates in the economy affect our wealth and finances. All of us have heard about time deposit rates, how much interest is on your car, your home amortization, credit card and personal loans.

But interest rates can be used to your advantage too.

The MONEY MOVEMENT STRATEGY tells us that when general interest rates are: 

LOW - the economy is usually on a roll, invest in stocks or equities. The author, Mr. Givens, claims that the greatest bull markets in history have occurred on low interest rate environments. And this is not hard to believe since low interest in the economy stimulates people to buy products and take out loans. Profits roll in and there is much liquidity in the system for that can be used for expansion.

When interest rates are: 

HIGH - Invest in debt-instruments or bonds and money-market. In other words, lending your money when interest rates are high. This makes perfect sense, since this is the main principle in bond or debt investing. The higher interest rate coupons you have on your bond, the higher interest you receive from it. When prevailing interest rates go down, the value of your bond with a higher rate goes up because all the other bonds have lower rates. 

Money-market are bank the time-deposits and other highly liquid "cash equivalents". Invest in these when the interest rates are high.

According to the strategy you have to set a decision line for the interest rate. This is highly a personal or arbitrary choice.

The main interest rates in the Philippine economy that I watch out for are:

The BSP Policy Rates: Overnight Lending / Borrowing Rates

[http://www.bsp.gov.ph/monetary/monetary.asp]

and the Bellwether Interest Rates

[http://www.bsp.gov.ph/statistics/sdds/tbillsdds.htm]

You may also check:

[http://www.tradingeconomics.com/philippines/indicators]

As we speak, interest rates are at record low levels, following a stable inflation rate and other factors such as the recent investment grade ratings upgrades in the first half  of this year 2013.

Is Your Bank Really Secure?

Recently, I have been contemplating whether to put my money in this rural bank. I will not specify the name of the bank for privacy purposes.

I have been attracted to this rural bank because of the higher interest rates on time deposit, especially those with terms of greater than 5 years.

Rural banks, and smaller banks in general offer a much higher interest rate than bigger established banks whose deposit products are often so low, your money will be eaten up by inflation.

Personal time deposit products with terms greater than 5 years are still exempted from 20% withholding tax, unlike retail treasury bonds for example which have recently been removed from the exemption of 20% withholding tax for terms 5 years and above.

I have been studying financial statements and balance sheets of listed companies, but I have yet to analyze a bank financial statement.

Before "investing" my money in this rural bank, like most investments, I have to check the soundness of the institution by doing a little bit of homework. On my list are forums, customer experiences, and balance sheet.

I encountered the term NPL or Non-Performing Loan Ratio which seems to be very important metric for a creditor or lending institution.

 

Photos: Mike Gonzalez (wikipedia.org/wiki/User:TheCoffee)

As you know, the main business of banks is money lending. If they lend money and do not get them back nor paid interest they lose money. That is what the NPL (Non-Performing Loan) ratio measures.

Investopedia.com defines Non-Performing Loan Ratio as:

"A sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. If the debtor starts making payments again on a nonperforming loan, it becomes a reperforming loan, even if the debtor has not caught up on all the missed payments."

Basically, Non-Performing Loans are loans that are on default or near default; the debtor has not paid his due payments and are beyond due.

In the Philippines, there are many rural banks that close every year. According to BanksPhilippines.com there were 24 banks that closed in 2012 alone.

The trend in most established banks today have a Non-Performing Loan ratio of below 3% of gross loans.

Bank of the Philippine Islands or BPI for example had a NPL ratio of 2.1% in the first half of 2013. [source info.bpiexpressonline.com]

This rural bank that I'm looking at has 15% non-performing loan ratio. That is a whopping 7.5x the industry norm of non-performing loans. I also noticed an increase of this ratio from 14% of the previous year to 15% this year.

Although, this bank's depositors are insured by the PDIC up to P500,000, being the conservative investor that I am, I will pass up on this opportunity.

How to Value Stocks (Basic) i.e. using Balance Sheet / Asset Values

Basic Concepts and Easy Step-by-Step Process of Common Stock Valuation by Balance Sheet Analysis

BASIC CONCEPTS (You may skip to the Step-by-step Process below if you wish)

In order to value stocks, we must first know what buying a stock means. A stock is a portion of a business, which is represented as a share of a corporation. A corporation is the legal entity of the business. Therefore, when you buy stocks for investment, you buy a portion of a business and you should view it as such. That is the underlying principle of fundamental investing; looking into business behind the stock. This is in contrast to, for example, trading or technical analysis where the focus of buying and selling is the price of the stock and the patterns it creates, among other things.

How do we make sense of all of this to buy stocks?

Well, we must first
(1) attempt to value the business as a whole, (2) then divide that figure by the number of shares or stock available (outstanding). This will give as an intelligently estimated purchase price PER SHARE of the business.

The most basic form of valuing a business is by looking how much the owners actually spent/invested in the business. For example the utensils, chairs, the ovens, stove, building, land the owners bought before starting a restaurant. These things used in the business are called business ASSETS. These items are listed in the BALANCE SHEET in the corporate FINANCIAL STATEMENTS. These financial statements are released annually or quarterly (every 3 months), and available for free download at the PSE Website.

If there are assets, there are also LIABILITIES which are "utang" or loans or other people's money used in the business.

So looking at how much was actually spent to buy stuff for the business, we will get an idea how much it should be sold if the owner decides to sell his business, or incidentally, if you want to buy his stock.

In calculating how much the stock is worth or BOOK VALUE in the balance sheet, we must:
*Subtract the Liabilities (loans/utang) from the owner's equity/Assets (stuff used in the business, including cash etc.)

EQUITY is another term for the word OWNERSHIP. So in business, owner's equity is the owner's own contribution to the business from his own pocket.

Thus we arrive at the basic formula:

ASSETS - LIABILITIES = Net Asset Value / Book value of business / Owner's Equity

Next step, you simply divide this resulting number by the number of shares available or outstanding shares to get the PER SHARE Price or Per share book valuation of the business/stock.

Step-by-Step Guide
(Images courtesy to PSE, Inc.)

1) Go to PSE website at www.pse.com.ph
2) In the top right corner type in the stock quote of the stock you want to value. Example "CPG" for Century Properties Group.

3) Take note of the number of outstanding shares.

4) Click the Corporate Disclosures tab

5) Download the latest annual report or quarterly report. I suggest annual report because these are comprehensive results for the entire year. These reports contain the financial statements for the period.

6) Find the Balance Sheet part of the Financial Statement.
Subtract Total Liabilities from Total Assets (as described in our concepts above)
(Example taken from CPG, courtesy of Century Properties Group)
ASSETS (total in red box)

MINUS
LIABILITIES (total in red box)

EQUALS
Book Value or Owner's Equity.

This Book Value / Equity Amount is what the owners actually own and invested in the business.


7) To get the PER SHARE amount, simply DIVIDE this number by the number of shares outstanding from Step 3.

You can use this number as a reference or rough guide how much a stock might really be worth. This number is in PESOS, so you can directly compare it to the price of the stock in the market.

(Sometimes, I use the equity minus equity of non-controlling interests)

P.S.

You can also compare this big number (Total Equity, not the per share basis) to the market capitalization, to see how much the market is valuing the entire business as compared to the owner's equity.

 VERSUS 

We see in this example that Market Capitalization (market price x number of shares) is larger than actual owner's equity. This means the market is paying P11 billion for P8 billion worth of business assets.


YOU'RE DONE! Of course Book Value is just one of many ways to value a business and it is also one of the basic. Stay tuned for PART 2, to value stocks using other methods using data such as earnings multiple or P/E.

Thanks for reading, please share to your friends.