BA219Company Presentation-Megaworld PDF

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MEGAWORLD CORPORATION AND SUBSIDIARIES I.

Investment Summary and Decision Megaworld Corporation is among the country’s top property developers known for its mixed-use planned communities and pioneered the concept of LIVE-WORK-PLAY-LEARN integrated urban townships in the country. One of the company’s most notable projects is the development of the 18-hectare Eastwood City in Quezon City. Megaworld’s current capital expenditures program is focused on the development of big-ticket projects located throughout Metro Manila, Cebu, Iloilo and Davao. In its recent press releases, Megaworld’s CFO revealed the company’s plan to further expand its rental portfolio by building more office towers, malls and commercial spaces in all of its townships to boost income from its recurring income portfolio. The company went public on June 15, 1994 and its common shares are traded on the Philippine Stock Exchange under the symbol of MEG. Based on the analysis of financial performance of one of the country’s key player in the property industry, it is reasonable to buy Megaworld’s stocks at PSE trading dated November 20, 2015.

II.

Background: Firm, Industry and Economy Megaworld was founded by Mr. Andrew Tan on August 24, 1989 with the primary purpose of engaging in the development, leasing and marketing of real estate. The company was formerly known as Megaworld Properties & Holdings, Inc. and changed its name to Megaworld Corporation in August 1999. Megaworld Corporation was initially known for its reputation of building high-end residential condominiums and commercial properties in convenient urban locations that are easily accessible to offices and leisure and entertainment amenities in Metro Manila. Starting 1996, the Company began to focus on the development of mixed use communities in response to the demand for having the convenience of quality residences in close proximity to office and leisure facilities by the middle-income market. This particular need brought about the development of the Eastwood City community township. Megaworld’s real estate portfolio includes residential condominium units, subdivision lots and townhouses, as well as office projects and retail spaces. The company leases office space primarily to business process outsourcing enterprises, as well as retail spaces; and involves in the management of hotel operations. Megaworld also engages in other property related activities, such as project design, construction oversight, and property management. As of December 31, 2014, Megaworld Corporation and its affiliates have launched approximately 320 residential buildings, office buildings and hotels (floor area of more than 5.6 million square meters). The overall supervision and management of the company is carried out by the Board of Directors. Its Board is currently consists of seven members, of which three are independent directors.

Economy and Industry Overview In the course of the Philippine’s robust economic performance in recent years, the property industry grew rapidly as increasing demand for residential and commercial properties in the country became ever more evident. Resilient remittances from Filipinos overseas, strong business process outsourcing (or BPO), and upbeat tourism industry have paved the way for continued growth in the property market across all

its sectors (including office, residential, logistics, retail, and hospitality segments). Indeed, consumer outlook for buying big-ticket items such as real estate properties have been steadily favorable. Another important source of growth in the Philippine property market is rapid urbanization and the accompanying rise of the residential sector. It is projected that more than half of the Philippine population (56.3%) will live in urban areas by 2030 and 66% by 2050. At this point, condominiums and “townships” are expected to be more attractive not only to affluent buyers but also young professionals who choose to live near their workplaces. The ASEAN integration is also expected to support the Philippine real estate industry by boosting the demand for residential and commercial infrastructure, office spaces, retail complexes, as well as tourism and hospitality services. Needless to say, recent and future developments present a promising growth for the Philippine property industry. III.

Analysis 1.Balance Sheet Megaworld’s total assets posted a significant increase of almost 300%, from 55.5B in 2007 to 221.03B in 2014). Its residential shares for sale and investment properties have notably increased year by year. By 2014, the combined share of these two already accounted for 42% of the company’s total resources. Total equity, including non-controlling interests, grew by more than 242% in a span of seven years brought about by the company’s continuous profitability, issuance of shares and gains from the acquisition and sale of subsidiary and associate.

Megaworld’s liquidity has been stable for 2007-2014, without notable highs or lows, and the company’s current assets more than enough to meet its short term obligations every year. With the quick asset test using only cash and cash equivalents as current assets, the current ratio is lower but still positive.The cash and cash equivalents being held by Megaworld year by year are enough to cover its short term obligations.

2.Efficiency Analysis

Being a property company with a large asset base, Megaworld has a low total asset turnover, ranging from 0.21 to 0.27 for the past seven years. Megaworld classifies its properties as either investment properties, owner-occupied properties or land for future development. The company considers only property and equipment as fixed assets in its balance sheet, resulting to the above fixed asset turnover figures. The fixed asset turnover decreased from 51.65 in 2013 to 28.45 in 2014 due to a 166% increase in fixed assets from 2013 to 2014 resulting from an increase in the net carrying

amounts of land, transportation equipment, office furnitures, fixtures and equipment, and condominium units (Note 13). 3. Segment Data Analysis Megaworld Corporation has three primary business segments, namely: real estate sales of residential and office developments, leasing of office space (BPO and retail) and management of hotel operations, and others.

Real estate sales generate, on the average, 72% of the revenues of Megaworld, followed by rental income (12%) and hotel operations (1%). Other income such as equity in net earnings of associates and interest income contribute 14% to the total revenues of the company.

Significant decreases in growth can be observed for real estate sales, hotel operations and other income during 2009 and 2010, mainly attributable to the economic crisis during that period. With all the other business segments experiencing a decline during 2009, rental income increased by 54% due to escalation and the completion of additional leasing property. However, growth rental income has declined in the years thereafter. Real estate sales has experienced the most stable growth among Megaworld’s business segments. Other income is the most volatile, with revenues decreasing by 32% in 2012 and increasing by 305% in 2014 due to the reclassification of shares in Travellers International Hotel Group, Inc. (TIHGI) (Notes 1, 9, 11, 23) 4. Competitive Analysis Real estate companies compete with each other primarily on the basis of location, affordability, quality, timely delivery and reputation. A support to Megaworld’s competitive position is its rollout of more new townships and office spaces, particularly in key growth areas, which would help it sustain an annual double-digit growth in its earnings. Also, Megaworld has built a reputation and brand that will carry them through this competition gracefully. In addition, one of the primary drivers of a real estate company’s growth is the availability of a landbank suitable for future development. In this regard, Megaworld sets aside a sizeable funds (P285.8B) to finance its capital expenditure program from 2015 to 2019, which includes development of its residential, office and retail projects as well as some land banking initiatives. With these to back it up, Megaworld will certainly be able to compete effectively on the aforementioned competition factors.

To better gauge the competitive environment and Megaworld’s relative performance, analysts looked on the publicly listed property companies at PSE. Among the 40 listed companies, 29 are actively trading, including Megaworld (MEG). A. Market share

Megaworld has 13% of the total assets of the property industry – third to Ayala Land (24%) and SM Prime Holdings (24%). This means that it has relatively bigger resources for its operation. With 15% share, MEG also falls third to ALI (28%) and SMPH (19%) in terms of the aggregated industry revenues. On the other hand, MEG tops the listed companies with 25% of the industry’s net income followed by SMPH (22%) and ALI (20%). B. Revenue growth

2014 was a stellar year for Megaworld as shown by its growth in revenues (47%) and net income (139%) which radically outpaces the industry average (20% and 31% respectively). C. Financial Ratios

Profitability ratios which are twice as much as the industry average indicates that Megaworld has a most likely better ability to generate profits. Even though its current ratio is below the industry average, Megaworld still has comfortable liquidity position because it has P3 for every peso of current liabilities. Its figures within the leverage ratios do not significantly deviate from that of the industry, indicating that Megaworld’s solvency is at par with the majority of the property companies. The company also has a better than industry performance in terms of efficiently generating revenues and collecting receivables, as shown by the efficiency ratios. This is noteworthy because receivables comprise a significant portion of the total assets (Total Gross Trade Receivables – 22%). Altogether, these ratios show that Megaworld has a relatively profitable operation, and comfortable liquidity and debt position relative to its peers in the property industry. D. Stock valuation

MEG is among the best performing stock in 2014 in terms of price appreciation relative to its competitors in the property sector. And as of November 20, 2015, it’s among those which have the lowest P/E ratio indicating a cheap value for its earnings. But with the country’s robust economic

condition and opportunities, MEG’s earnings that are expected to grow steadily by double digits in the next few years and a sound capital expenditure program to promote future growth, it can be inferred that the Megaworld stocks are undervalued relative to its competitors.

Analysis of Accounting Policies 1. Revenue Recognition Revenue is recognized by the company to the extent to which it can be reliably measured and the probability of being recognized by the company is likely. The following are the specific recognition criteria used by Megaworld: a. Sale of residential and condominium units - Megaworld uses the percentage-of-completion method in accounting for its real estate sales. The use of this method requires the company to estimate the portion completed to date as a proportion of the total budgeted cost of the project. The sale is recognized when a certain percentage of the total contract price has already been collected. If the transaction does not yet qualify as sale, the deposit method is applied, with the payments received from buyers reported as a liability in the customers’ deposits account. b. Sale of undeveloped land and golf and resort shares for sale - Revenues for this type of sale are recognized using the full accrual method. Under this method, revenue is recognized when ownership of the undeveloped land and golf and resort shares for sale have been passed on to the buyer. c. Rendering of services - Revenue for rendering services (rental income, hotel operations, property management and income from cinema operations and others) is recognized when a substantial portion of the contractually agreed tasks have been rendered. Rental income is recognized on a straight-line basis over its lease term, with advance rentals recorded as deferred rental income. Advance collections from real estate customers are recognized as unearned revenues. d. Construction contracts - Revenue for construction contracts is recognized when a substantial portion of the contractually agreed tasks have been rendered. For this type of revenue, Megaworld uses the cost recovery and percentage-of-completion method. Note 2.15: Revenue and Expense Recognition Note 3.2 a: Revenue Recognition Using the Percentage-of-Completion Method 2. Accounting for real estate for sale and land held for future development Acquisition costs of land intended for future development which includes all relevant costs and expenses incurred to transfer of title of the property from its seller to Megaworld are recorded the land for future development account. When the development of the property starts, these costs are reclassified as property development costs. Related property development costs are also included in this account. Other costs such as the Borrowing cost on loans incurred during the development of the real estate properties are also capitalized by as part of the property development costs. When a revenue transaction occurs, on a per project basis, until the unit is sold, the relevant property development costs are reclassified to residential, condominium units and golf and resort shares for sale account. If the real estate property is sold before completion, its cost is computed using the actual costs incurred to the date of sale and estimated costs to complete the development of the property. These costs are estimated by project engineers and are charged in the cost of real estate sales account in the income statement with a corresponding credit to reserve for property development (liability account). Costs of properties and the accounting for projects are assigned using specific identification of their individual costs. These are valued at the lower of cost and net realizable value, where net realizable

value is the estimated selling price (in the ordinary course of business) less the estimated costs for completion and estimated costs of selling. Revisions in the total project cost estimates are appliedin the year they are discovered. Note 2.6: Real Estate Transactions (2014) 3. Classification of accounts receivable Megaworld classifies its accounts receivable as either current or non-current, with current receivables further classified as trade, advances to contractors and suppliers, or others. Non-current receivables are composed solely of trade receivables. Trade receivables can be current or non-current, depending on the length of its maturity. This type of financial asset is generally non interest-bearing, initially recognized at fair value and subsequently stated at amortized cost using the effective interest method (if maturity is beyond one year).Current and non-current trade receivables are both adjusted using an allowance for impairment. (Note 2.5 b: Loans and Receivables)

4. Accounting for investment properties

Megaworld classifies its properties as either investment properties, owner-occupied properties or land for future development as follows: ● ● ●

Investment properties - if the property generates cash flows largely independently of the other assets held by an entity Owner-occupied properties - if the property generates cash flows that are attributable not only to property but also to other assets used in the production or supply process Land for future development - properties intended solely for future development

Some properties are used for different purposes, with portions used to earn rental or for capital appreciation or used in Megaworld’s main line of business or for administrative purposes. If these portions can be sold or leased out separately, Megaworld accounts for the portions separately. If the portions cannot be sold or leased separately, the property is accounted for as investment property. But this method of classification is only used if the portion of the property used in the main line of business or for administrative purposes is insignificant. Note 3.1.b: Distinction Between Investment Properties, Owner-Occupied Properties and Land for Future Development (2014)

References: Megaworld Corporation Annual Reports (2008-2014) Megaworld Corporation SEC Form 17-A (2008-2014)...