April 13, 2014

MEG’s 2013 core income up 11%

In its briefing yesterday, Megaworld Corp (MEG) announced earnings of P9.04b, up 22% YoY. Net of P760m in one-off gains related to its acquisition of a company with landholdings at a discount to book value, the core income amounted to P8.27b, up 11.6% YoY but slightly fell short of the P8.31b market consensus.

- Earnings growth came on a 20% YoY hike in gross revenues to P32.3b as real estate sales booking accelerated in 4Q13 (+48.3% YoY), bringing the total for the year to P25.8b (+20%). Gross margins on real estate sales also improved to 43% in 2013 vs. 40% in 2012. Meanwhile, rental income increased 21% YoY to P6.04b given the 13.5% expansion in leasable space and rent escalation. The proportion of rental income to gross revenues was relatively steady at around 19%.

Our take: MEG has guided for at least a 10% net income growth this year which we believe to be quite conservative given the average 20% in real estate revenues to be supported by P100b in unbooked residential revenues and the ~20% average annual rental income growth. MEG should realize the full-year contribution the additional leasable space last year and the expected 182,000 sqm in additional space this year.

What may justify MEG’s conservative outlook are the tail-ended completion of new leasing space this year (thus the benefits will instead be felt next year), a more conservative progress completion on residential projects, and additional interest expenses related to potential borrowings to support the P40b group capex this year.

Meanwhile, MEG disclosed that it is still on track with plans to consolidate Global Estate Resorts Inc (GERI, Not rated) within the year. However, it is still finalizing its options on how to acquire the company. MEG said it will no longer swap its ~10% stake in Travellers International Hotels (RWM) for the 49% stake of parent firm Alliance Global Group Inc (AGI) in GERI.

The latter will be done through a separate transaction. MEG is now leaning towards acquiring GERI via cash transaction. Based on yesterday’s price, AGI’s stake in GERI can be worth P9.6b. The potential cash acquisition is not included in MEG’s P40b capex for this year.

MEG is also looking at possible implications of the acquisition on the need for a tender offer to minority shareholders of GERI. Recall that MEG acquired its 23% stake in GERI at P2.26/sh. At this price, AGI’s 49% stake would be worth P12.2b. As at end-2013, MEG had cash of P31.7b and gross debt of P28.6b. Using cash to acquire GERI would put MEG in a slight net debt position (net gearing of about 10% by our estimates).

Consolidating GERI will bring tremendous benefits to MEG given its landbank of 3,000 hectares (up from about 2,200 hectares in 2012). Note that our quick and conservative NAV estimate of P2.81/sh for GERI only included the 2,000-hectare land bank that we earlier identified. – WealthSec