May 23, 2015 – $AGI – Would Benjamin Graham find value in this large cap at 22.70?

1Q15 results for $AGI was released and the market capitalization collapsed to P231 Bil or it traded down to P22.70 last Friday.  Technicians are calling for a P20.00 price target or a market capitalization of roughly P200 Bil.  Will it be cheap not simply due to technical rebound supports but possibly fundamentally if I were to look at the business value in the next 3 years? Let us see.

The cash flow statements show the following:

1.) Cash equivalents at the beginning of year 2015 was at P82 Bil.  Cash flows at the end of the quarter was at P75.7 Bil.

Here’s what happened in the interim: (note that all these numbers come from 1Q15 which can be quickly referenced via edge.pse.com.ph)

Cash Flows from Operations show EBT of P6.78 Bil ; adding back DA (depreciation and amortization) as well as the interest gives us an EBITDA before WCC of P8.45 Bil.  Now this is where it becomes bloody.  Notice the 6.18 Bil pesos in the trade payables.  The company paid off some Emperador related payables.  Due to that big decrease in trades and payables (meaning they paid off their suppliers) , the operating cash flows become negative 2.55 Bil instead of the 3.5 Bil it used to have last 4Q14.

Screen Shot 2015-05-24 at 8.36.18 AM

2.) Everyone knows that $AGI is investing a lot.  How much?  Property plant and equipment has ballooned to 3.18 Bil, Investment property has increased by P1.5 Bil; available for sale assets is P1.2 Bil .  Advances to land owners and joint ventures also went to P484 Mil.  Note that cash flows from investing is now a negative 7.89 Bil compared to the neg 6.6 Bil it had.  $AGI is indeed spending a lot of money and it will take time for those investments to bear fruits of their labor.  Screen Shot 2015-05-24 at 8.41.20 AM

3.) Can $AGI finance their growth?  It borrowed P5 Bil in interest bearing loans and bonds.  It’s net cash coming from the financing activities total P4.1 Bil

4.) If you add the Operating Cash flows, Investing cash flows and Financing Cashflows – you will have a negative 6.3 Bil pesos.  But note that $AGI has a huge retained earnings cash chest of P82 Bil leaving it adequately capitalized with a P75.7 Bil war chest of cash to cushion it should any market related forces affect its investments for future growth.

5.) Note that $MEG boasts a huge investment property and has real estate assets going through various stages of development.

6.) Note too that $GERI was consolidated in $MEG and thus also inside $AGI

7.) Its investments can be covered by its internal operations.

Screen Shot 2015-05-24 at 8.51.05 AM

8.) Investments are for Future Growth . 2015 is an aggressive year with Emperador going for 8 product launches.  Travellers is going for additional hotels, gaming and retail spaces by 2017.  GADC (McDonalds Philippines) targets 500 branches by year end.  Megaworld is going for TWENTY township developments.

Screen Shot 2015-05-24 at 8.53.52 AM

9.) Profitability – EBITDA is P9 Bil for one quarter.  Note that the decline in cash at the end of the year was largely attributed to Emperador for debt payments as well as the property additions of Megaworld.  Note too that the acquisition of land for future development via subsidiary GERI increased by P3.39 Bil.  Note too that interest from loans went up by P4.65 Bil or 57% due to Megaworld adding loans.

Screen Shot 2015-05-24 at 8.57.13 AM

10.) Noncurrent liabilities increased by Php 4 Bil from 8 to P12 Bil making total non current liabilities to P104.8 Bil as Megaworld increased loans for its growth plans. Overall though, the total liabilities decreased from P192 to P188 Bil as Php6 Bil of trade payables was paid off (Emperador related payables was paid off.)  You can see this in the cash flow statements as well.

Screen Shot 2015-05-24 at 9.01.49 AM

****

Let’s give you a snapshot of what you own again.

Profitable Businesses.

1.) $Megaworld – 67% stake mostly

Screen Shot 2015-05-24 at 9.12.25 AM

2.)$GERI related assets and more malls

Screen Shot 2015-05-24 at 9.17.24 AM

Screen Shot 2015-05-24 at 9.17.45 AM

3.) $EMP assets — International as it gets.

Widely known brands.  $EMP as the main brand, The Bar, Grupo Emperador Spain, Bodega San Bruno, Emperador Europe. Emperador Asia, Emperador UK, Whyte and Mackay.

Screen Shot 2015-05-24 at 9.19.30 AM

4.) McDonalds, Pik-Nik Screen Shot 2015-05-24 at 9.21.27 AM

5.) Travellers or Resorts World Manila

Screen Shot 2015-05-24 at 9.22.50 AM

6.) Holding Companies (for investments)

Screen Shot 2015-05-24 at 9.23.27 AM Screen Shot 2015-05-24 at 9.23.41 AM

On a segment basis,

a.) Megaworld still dominates majority of the contribution in quarterly income with its BPO leasing now at P1.99 Bil.  $AGI owns 67% of $MEG and gets a P2.35 Bil profit for the quarter of 2015.

Screen Shot 2015-05-24 at 9.25.48 AM

b.)   Emperador still delivered P1.4 Bil while Travellers P1.7 Bil.

Screen Shot 2015-05-24 at 9.27.08 AM

c.) Golden Arches (McDonalds) 461 total in the Philippines . net profit P161 Mil

Screen Shot 2015-05-24 at 9.27.24 AM

5.) Here’s  a nice summary of the 1Q15

Screen Shot 2015-05-24 at 9.30.20 AM

*****

Conclusions:

At P20 , it will give us a P200 Bil market cap.  At 23, it will be at P230 Bil market cap.

We know that the expectations missed for the quarter because $EMP was thought to deliver large profits which didn’t happen yet.  We also know that $MEG missed slightly but it still earned P2.35 Bil (from P2.65 Bil last 1Q14), I believe that the weakness is a buy mainly because

a.) leasing income from BPO will never go out of style.  Note that $MEG is now earning close to P10 Bil pesos of recurring income from the leases.  With $AGI owning 67% , that’s a wonderful business indeed.  That alone will make the $AGI business profitability sustainable.

b.) While everyone is selling $AGI due to $EMP dragging down the business; we should know that acquisitions and investments can last all the way till 2017 to bear fruit.  The company is aggressively launching 8 Emperador product launches this 2015 so it will negatively affect cash flows and profitability in the short term but will be good for the future years.

c.) $RWM or Travellers is still generating a P1.7 Bil income for the quarter.

d.) If you add the $EBITDA of the business its still P9.5 Bil for the quarter.

A Market Cap of P200 Bil versus an annualized $EBITDA of 40 Bil

We do have to add the net liabilities of around 188 Bil and minus the net cash of 75 Bil to get an enterprise value of P313 Bil for $AGI at 20 or about P343 Bil at 23.

That gives us approximately 8X EV/EBITDA (313/40 or 343/40)

I know conglomerates like these are supposed to be valued by NAV but to value them via NAV, I’d have to use DCF and WACC which I didn’t prepare a model for.

It will largely be a disappointment for short term investors who are looking for great earnings from $EMP considering the massive investments and the 20 township developments of $MEG.  That however is not a bad thing for longterm investors.

*****

Faceless Trader keeps her shares and plans to buy more should the stock fall near 20 levels. Will it pour down there?  Oh well, we have 2016-2017 to wait.  The money placed in $AGI can be placed in the long term portfolio.

Sucks to have bad earnings but high quality companies can always rebound in the next year.

It will definitely take a long time for $AGI to recover but maybe value investors shouldn’t panic and instead purchase more shares at 20 levels should it happen. 🙂

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One Response to May 23, 2015 – $AGI – Would Benjamin Graham find value in this large cap at 22.70?

  1. Excellent analysis, thanks!

    I enjoy reading this, as a budding fundamentalist who loves reading balance sheets and going beyond the bare earnings reports.

    Like

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