University of the Philippines Diliman Student Research This report is published for educational purposes only by Philippine Real Estate Industry students competing in the CFA Institute Research Challenge. Robinsons Land Corporation Date: 2 Dec 2011 Ticker: ●RLC (PSE Ticker) Recommendation: ●BUY Price: ●Php 11.70 Price Target: ●Php 15.32 Highlights We initiate a BUY rating for Robinsons Land Corporation (RLC) with a one-year target price per share of Php 15.32, offering a 30.9% upside potential from its closing price on December 2, 2011. We ground our recommendation on RLC’s timely expansion in its Build-and-Keep segments to effectively capitalize on growth opportunities in the Philippine real estate industry. Stable Growth in Earnings from Build-and-Keep Component: Aggressive expansion in the Commercial Centers, Office Buildings and Hotels segments will increase Build-and-Keep core revenue contribution from 72.6% in 2011 to 87.9% by 2016. Capitalizing on the stable growth of the economy, the company focuses on developing these rental-based segments, which are expected to fuel most of RLC’s revenues in the next five years. This results in a Compounded Annual Growth Rate (CAGR) of 8.1% for total revenues over a five-year period. Together with this increasing revenue, EBIT will have a CAGR of 7.0% over the same period. Strong Operating Cash Flows: The strengthened position in RLC’s Build-and-Keep segments will translate to even stronger operating cash flows, reaching an estimated Php 8.8B in 2016 from Php 5.2B in 2010. The nature of its Build-and-Keep businesses, where most of the expenses are in the form of depreciation, explains why operating cash flows are high. Consequently, the earnings quality ratio (OCF/EBIT) is expected to improve from 1.13 in 2010 to 1.30 in 2016. Financial Flexibility and Diminishing Reliance on Debt: Significant capital expenditures in 2012 will be financed by operating cash flows and proceeds from the recent stock rights offer. Moving forward, RLC’s strong operating cash flows will be sufficient not only to fund future capital outlays, but to service debt as well. As as result, long-term debt-equity ratio will decrease from 54.1% in 2010 to 10.3% in 2016. This gives RLC the financial flexibility to seize opportunities as they arise. Valuation: Using the discounted free cash flow to firm method, a one-year target price of Php 15.32 per share was computed. The price is expected to be driven by the company’s strategy to focus on the Build- and-Keep component, which contributes 81.1% to the price estimate. Market Profile 52 Week Price Range (Php) 10.00 - 17.26 Beta 1.32 Dividend Yield 3.1% Shares Outstanding (M) 4,093.83 Market Capitalization (Php M) 48,880.34 Free Float 39% Long-term Debt to Equity 0.34 Return on Equity 10.8% EPS, 30 Sept 2010 (Php) 1.31 P/E Ratio, 2 Dec 2011 8.93 Source: PSE S o urce: P S E, B lo o m berg CFA Institute Research Challenge 2 Dec 2011 Business Description Robinsons Land Corporation (RLC) is one of the leading real estate companies in the Philippines. It is mainly engaged in building, operating, and leasing of malls, office buildings, and hotels, as well as developing and selling of residential real property. Incorporated on June 4, 1980, the company is a 61%- owned subsidiary of JG Summit Holdings, Inc. (Ticker: JGS). Its shares were publicly listed on October 16, 1989. In 2011, RLC successfully concluded a stock rights offer, raising Php 13.6B to fund its expansion. As of September 30, 2010, the company’s assets amounted to Php 53.1B and generated net income of more than Php 3.6B from its two components, namely Build-and-Keep and Build-and-Sell. The Build-and-Keep Component provides the company with stable cash flows primarily based on rental income of real properties. It is comprised of the following segments: Commercial Centers Segment It develops, leases out and manages shopping malls. Currently, it earns rental and amusement revenue through six commercial centers in Metro Manila and 23 in developing provinces. Approximately 40% of total rental revenue is based on fixed lease rates, while the remaining revenue is based on a percentage of tenant sales. Lease contract terms range from one to five years. Office Buildings Segment Source: RLC disclosures It develops and leases out office spaces. At present, rental revenue earned by this segment comes from eight office buildings. Lessees are subject to long-term contracts ranging from three to five years, with predetermined annual escalation clauses. Hotels Segment It develops and operates its own hotel brands, Go Hotel and Summit. In May 2010, RLC opened its first Go Hotel, located in Pioneer, EDSA. The company also earns revenues from its other hotels, Crowne Plaza and Holiday Inn Galleria, which are managed by the Intercontinental Group, one of the world’s largest hotel chains. The Build-and-Sell Component is responsible for the residential projects for sale. It has one segment: Residential Segment It develops and sells residential condominium spaces, as well as subdivision houses and lots. For the nine- month period ending June 2011, RLC had launched a total of 14 projects all over the country under its different residential brands. Philippine Economic Overview With an estimated GDP growth of 4% in 2011, the Philippine economy has emerged resilient despite global economic downturns. This is largely driven by high consumption, which continues to be the biggest GDP contributor at 70.2% in 2011.1 Steadily Increasing Consumption In 2011, Household Final Consumption Expenditure is estimated to total Php 7.1Tr, which grew by 5.5% from 2010.2 Consumption has been steadily growing due to strong Overseas Filipino Worker (OFW) remittances, a robust Business Process Outsourcing (BPO) sector, and a healthy domestic tourism industry. Resilient OFW Remittances As the fourth largest remittance recipient in the world,3 the Philippine economy is highly dependent on the inflow of remittances from OFWs, which increased by 5.6% in 2009 amidst the global economic crisis at that Source: National Statistical Coordination Board time. With several labor agreements with different countries and the rising foreign demand for Filipino workers, the World Bank forecasts a high growth in remittances, with 2011 projections reaching US$ 23B. This represents a 22.3% growth from US$ 18.8B in remittances 2010. The strong OFW remittances are expected to continue in the foreseeable future.4 Thriving BPO Sector The BPO sector provided an estimated 100,000 additional jobs in 2011, contributing to the high growth of consumption. According to the Business Processing Association of the Philippines (BPAP), sector revenues may more than double from US$ 11.0B in 2011 to US$ 25.0B by 2016, should the government provide additional support through public-private partnerships. Without this government support, the sector is still expected to grow by a CAGR of 12.7% from US$ 11.0B in 2011 to US$ 20.0B in revenues by 2016.5 Source: Business Processing Association of the Philippines 2 CFA Institute Research Challenge 2 Dec 2011 Domestic Tourism: Backbone of Tourism Industry Domestic mobility of Filipinos is influenced by 1) the upward trend of employment rate, 2) availability of cheap transport (e.g. passenger ferries and low cost air carriers), 3) increasing internet penetration and 4) growth in the use of credit cards and Electronic Payment Systems (EPS).6 In 2010, Domestic Tourism Expenditure (DTE) reached Php 932.8B, which is 8.5 times higher than Foreign Tourism Expenditure at Php 109.2B.7 For 2012, the government has prioritized the tourism industry through its National Tourism Development Plan.8 Low Interest Rates Affected by the monetary policy direction of the Central Bank of the Philippines, bank lending rates have eased to an all-time-low of 6.8%.9 Low borrowing rates benefit the economy as it fuels purchases of Source: Central Bank of the Philippines residential properties and other big ticket items. In the coming year, the Monetary Board of the Central Bank of the Philippines has pronounced its decision to maintain current interest rates because of the stable and manageable outlook for inflation.10 Commercial Centers Segment Table 3.1: Major Mall Competitors Industry Overview and Competitive Positioning Number of Malls Highly integrated into the country’s culture, shopping is a favorite pastime of many Filipinos, with about Major 80% of the population considered to be mall patrons.11 Consumers depend on malls not only for food and Players Metro Provincial Manila Areas clothing options, but also for the varied entertainment and multi-faceted services such as cinemas, day care, Sunday mass, and even driver’s license renewal. Key industry players include SM Prime Holdings (Ticker: SMPH 16 25 SMPH), RLC and Ayala Land, Inc. (Ticker: ALI), with an aggregated foot traffic of 4.1M daily (see RLC 6 23 Appendix I). ALI 7 4 Thriving Middle Income Class Sources: SMPH, RLC, ALI disclosures According to the National Statistical Coordination Board (NSCB), the middle income class comprised 18.0% of total families as of 2010. This segment’s average monthly income per family grew at a CAGR of 5.7% from Php 25,100 in 2003 to Php 36,900 in 2010. Spending about an average of 80.6% of their income, average monthly expenditure for the middle income class grew at pace with income. This serves as a positive indicator for the major players, specifically RLC and SMPH, who target the middle income segment.12 To effectively compete in this market, RLC selects locations accessible through public transport while SMPH banks on its sheer size and number of tenants.