February 19, 2014

ALI tops consensus 2013 earnings forecast

Ayala Land Inc (ALI, Buy) yesterday reported 2013 net income of P11.7b, up 30% YoY and topped the P11b consensus forecast. Growth was evident across business segments and was further buoyed by commercial and industrial lot sales in NUVALI and Arca South (formerly FTI complex) as well as commercial office for sale which the company has not done since the early 1990s. Key takeaways from yesterday’s briefing are as follows:

- Residential revenues rose 32% YoY to P42b, primarily driven by the high-end Ayala Land Premiere (+41%) and lower-end Avida (+42%) and Amaia (+54%) even as the mid-end Alveo brand delivered a creditable 18% growth. There was a token P64m contribution from socialized housing.

- Leasing revenues grew 21% on higher occupancy and average leasing rates especially for Office leasing (+18% yoY). Shopping center leasing grew 10% to P10.5b weighed only by the continuing redevelopment of Ayala Center although average occupancy rate was at 95% (even including the additional space from the redevelopment of Glorietta mall).

- Expansion in room count and REVPAR growth boosted hotels and resorts revenues by 64% to P4b

- Additional key drivers were the sale of commercial/industrial lots (+256% to P8.8b) and office space from the High Street corporate office buildings worth P1.1b (+974%). ALI’s investments in its own energy and power subsidiaries to support mixed-used development projects also paid off with Property Management revenues almost tripling to P3.4b.

- RoE was at 13% or still short of the 15% company target for 2014 as a result of the equity issuances in the past two years and notwithstanding the strong earnings growth.

Our Take: ALI’s results came in better than expected largely due to the continued strength of its residential business, steady recovery of the leasing business, and additional sources of revenues (commercial/industrial lots and office space sale).

While the strong growth in the past two years could have set a high base for earnings, we believe that this is sustainable given ALI’s aggressive expansion geographically and across business segments and given the following:

The residential segment should remain a key driver especially in light of ALI’s plans to launch 30,000 units this year but with a view to calibrate this in terms of actual demand and keeping in mind to keep inventory levels at a year’s worth of sales which we believe is prudent (the average industry inventory levels was at 1.5-2 years’ worth of sales during the crisis years).

Existing unbooked residential revenues worth P99b which is equivalent to 2.3x the actual 2013 residential revenues;

2014 buildup of shopping center GLA (+9% in operating GLA; +14% if we consider those under construction and for launching), and +14% in actual office GLA (+36% inclusive of those under construction and for launching);

Potential to sustain contributions of commercial/industrial lot sales and office space in light of strong demand and the company’s conscious efforts to expand its industrial estate exposure amid a growing economy.

The company is also replicating the NUVALI concept across the country and in strategic areas that will benefit from various key infrastructure projects.

More aggressive expansion of the various retail ventures to take advantage of demand from (and support) the various mixed-use development projects.

We also note that the company intends to raise capex this year to P70b (from P66b in 2013) with P29b earmarked for land acquisition to support growth.

More importantly, the capex programme will primarily be financed by debt given the company’s comfortable 62% net gearing. No equity issuances are being eyed in the next two to three years.– WealthSec