Deutsche Bank Markets Research Rating Company Date Hold DMCI Holdings 3 April 2013 Recommendation Asia Philippines Change Price at 2 Apr 2013 (PHP) 54.80 Conglomerates Price target - 12mth (PHP) 57.20 Reuters Bloomberg Exchange Ticker 52-week range (PHP) 63.40 - 51.10 DMC.PS DMC PM PHS DMC MANILA S.E.COMPOSITE 6,748 Setting the stage; upgrading to Hold Klyne Resullar Deutsche Regis Partners, Inc. Research Analyst Core operations intact; upgrading to Hold (+63) 2 894 6645 The risk-reward for DMCI is now more even, in our view, following the stock's [email protected] underperformance the past year (DMC: +2% vs PCOMP: +34%). We adjust our estimates and raise our SOTP NAV to P63.56/sh due to: 1) revisions in our Gio Dela-Rosa, CFA numbers for Semirara, 2) the partial divestment of Maynilad, 3) a more bullish outlook for construction and 4) new investments. The stock is trading at a 14% Deutsche Regis Partners, Inc. discount to our revised SOTP NAV of P63.56/sh (vs. historical average of 12%). Research Analyst We upgrade to Hold from Sell. (+63) 2 894 6642 [email protected] Maynilad sale completed, special dividend likely DMCI completed the sale of a 16% stake in Maynilad last February, which reduced its stake to 25% and raised c. P13bn (after tax) for the group. We thus Key changes expect DMCI’s headline FY13 net profit to include a P12bn gain but we also Rating Sell to Hold ↑ cut our FY12-FY14E core profit by 10-26% to reflect this and a more subdued Price target 43.00 to 57.20 ↑ 33.0% outlook on thermal coal. A special dividend from DMCI, in our view, is likely Sales (FYE) 51,797 to 50,230 ↓ -3.0% this year given its net cash position ($340m) at the parent level. Op prof 27.2 to 21.8 ↓ -20.0% Medium-term drivers: power, construction and new investments margin (FYE) Over the medium term, we believe Semirara will continue to be the main driver Net profit 11,445.4 to ↓ -10.1% of DMCI’s profitability, with its plans to double generation capacity by (FYE) 10,288.4 2015/2016. DMCI’s construction business could also offer significant upside surprise, as the investment cycle starts in earnest. Beyond those, DMCI is also Price/price relative actively looking for new avenues for growth and has already begun to get its 70 feet wet in mining (nickel). 60 Raising SOTP NAV by 26% to P63.56/sh 50 We raise our SOTP NAV to P63.56/sh after rolling forward our estimates to 40 FY13, reducing our COE to 10.4% (from 11.6%), and re-valuing the 30 construction business to 20x PER (vs. 15x previously). Our price target of 4/11 10/11 4/12 10/12 P57.20/sh (based on 10% discount to SOTP NAV) approximates current trading DMCI Holdings levels. Hold. Upside risks: rise in power and coal prices, order book MANILA S.E.COMPOSITE (Rebased) expansion, value-accretive acquisitions. Downside risks: drop in power and coal prices, execution, and adverse macroeconomic/political risks. Performance (%) 1m 3m 12m Absolute 0.6 0.0 2.7 Forecasts And Ratios MANILA 1.6 15.1 32.0 S.E.COMPOSITE Year End Dec 31 2010A 2011A 2012E 2013E 2014E Reported NPAT (PHPm) 7,867.3 9,595.5 10,288.4 22,371.8 12,200.8 DB EPS FD (PHP) 2.69 3.63 3.97 3.92 4.60 OLD DB EPS FD (PHP) 2.69 3.63 4.41 5.30 5.31 % Change 0.0% 0.0% -9.9% -26.1% -13.2% PER (x) 7.7 10.8 13.8 14.0 11.9 DPS (net) (PHP) 0.50 1.00 1.20 1.50 1.80 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong This research has been prepared in association with Deutsche Regis Partners, Inc. The opinions contained in this report are those of Deutsche Regis Partners, Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012. 3 April 2013 Conglomerates DMCI Holdings Model updated:26 March 2013 Fiscal year end 31-Dec 2009 2010 2011 2012E 2013E 2014E Running the numbers Financial Summary Asia DB EPS (PHP) 1.49 2.69 3.63 3.97 3.92 4.60 Reported EPS (PHP) 1.76 2.96 3.61 3.87 8.42 4.59 Philippines DPS (PHP) 0.20 0.50 1.00 1.20 1.50 1.80 Conglomerates BVPS (PHP) 7.7 10.1 12.8 15.4 22.4 25.2 Weighted average shares (m) 2,655 2,655 2,655 2,655 2,655 2,655 DMCI Holdings Average market cap (PHPm) 17,324 55,220 104,122 145,521 145,521 145,521 Enterprise value (PHPm) 26,741 60,555 107,591 145,160 137,946 143,567 Reuters: DMC.PS Bloomberg: DMC PM Valuation Metrics Hold P/E (DB) (x) 4.4 7.7 10.8 13.8 14.0 11.9 P/E (Reported) (x) 3.7 7.0 10.9 14.1 6.5 11.9 Price (2 Apr 13) PHP 54.80 P/BV (x) 1.26 3.55 3.24 3.55 2.45 2.18 Target Price PHP 57.20 FCF Yield (%) nm nm 5.0 4.5 17.5 0.1 Dividend Yield (%) 3.1 2.4 2.6 2.2 2.7 3.3 52 Week range PHP 51.10 - 63.40 EV/Sales (x) 0.9 1.4 2.3 2.9 2.6 2.4 Market Cap (m) PHPm 145,521 EV/EBITDA (x) 5.0 5.3 7.5 10.1 8.0 6.5 USDm 3,561 EV/EBIT (x) 6.9 7.5 9.6 13.3 10.5 8.6 Company Profile Income Statement (PHPm) One of the Philippines' oldest construction companies, Sales revenue 29,711 43,484 47,803 50,230 53,380 60,540 DMCI has transformed itself into an engineering and Gross profit 6,732 12,942 16,374 16,869 19,734 24,236 construction-based conglomerate, with businesses EBITDA 5,343 11,424 14,262 14,438 17,27121,962 ranging from construction, property, water utilities Depreciation 1,493 3,299 3,094 3,497 4,1425,325 management, coal mining, and power. Amortisation 0000 00 EBIT 3,850 8,125 11,168 10,941 13,12916,637 Net interest income(expense) 250 -519 -164 652 -681 -921 Associates/affiliates 1,680 1,893 2,185 2,610 1,9582,478 Exceptionals/extraordinaries 40 677 0 0 12,0000 Other pre-tax income/(expense) 224 488 433 31 392 390 Price Performance Profit before tax 6,044 10,664 13,622 14,234 26,798 18,585 Income tax expense 614 1,029 1,345 1,148 1,262 3,209 70 Minorities 747 1,768 2,681 2,798 3,1643,175 60 Other post-tax income/(expense) 0 0 0 0 0 0 Net profit 4,683 7,867 9,595 10,288 22,372 12,201 50 DB adjustments (including dilution) -735 -719 55 263 -11,974 26 40 DB Net profit 3,947 7,148 9,650 10,551 10,398 12,227 30 Apr 11 Jul 11 Oct 11Jan 12Apr 12 Jul 12 Oct 12Jan 13 Cash Flow (PHPm) Cash flow from operations 9,439 12,358 8,775 14,492 27,090 17,377 DMCI Holdings MANILA S.E.COMPOSITE (Rebased) Net Capex -10,583 -14,315 -3,539 -7,941 -1,557 -17,248 Free cash flow -1,145 -1,957 5,235 6,551 25,532 129 Margin Trends Equity raised/(bought back) 0 0 0 0 0 0 40 Dividends paid -531 -1,328 -2,655 -3,187 -3,983 -4,780 36 Net inc/(dec) in borrowings 2,735 10,199 3,249 4,967 19,971 9,835 32 Other investing/financing cash flows -867 -525 -1,417 -1,305 -1,636-1,781 28 Net cash flow 192 6,389 4,411 7,027 39,884 3,404 24 Change in working capital 2,819 1,138 -4,863 520 -630 -846 20 16 Balance Sheet (PHPm) 12 09 10 11 12E 13E 14E Cash and other liquid assets 3,476 10,169 15,197 22,230 62,121 65,532 Tangible fixed assets 21,970 21,541 23,419 27,863 38,278 50,202 EBITDA Margin EBIT Margin Goodwill/intangible assets 0 0 0 0 0 0 Associates/investments 9,364 9,746 10,992 15,554 6,0129,991 Growth & Profitability Other assets 22,828 29,817 34,576 33,448 34,570 37,554 50 50 Total assets 57,638 71,273 84,184 99,096 140,981 163,278 Interest bearing debt 19,331 19,777 23,080 28,047 48,018 57,853 40 40 Other liabilities 14,913 19,072 20,633 20,678 21,041 22,907 30 30 Total liabilities 34,244 38,849 43,714 48,726 69,059 80,760 20 20 Shareholders' equity 20,468 26,951 33,892 40,994 59,382 66,803 10 10 Minorities 2,926 5,472 6,578 9,376 12,54015,715 Total shareholders' equity 23,394 32,423 40,470 50,369 71,922 82,518 0 0 09 10 11 12E 13E 14E Net debt 15,855 9,608 7,883 5,817 -14,103 -7,678 Sales growth (LHS) ROE (RHS) Key Company Metrics Sales growth (%) 40.4 46.4 9.9 5.1 6.3 13.4 Solvency DB EPS growth (%) 48.5 81.1 35.0 9.3 -1.5 17.6 80 80 EBITDA Margin (%) 18.0 26.3 29.8 28.7 32.4 36.3 EBIT Margin (%) 13.0 18.7 23.4 21.8 24.6 27.5 60 60 Payout ratio (%) 11.3 16.9 27.7 31.0 17.8 39.2 40 ROE (%) 25.3 33.2 31.5 27.5 44.6 19.3 20 40 Capex/sales (%) 38.7 33.1 7.4 15.8 27.3 28.5 0 20 Capex/depreciation (x) 7.7 4.4 1.1 2.3 3.5 3.2 -20 Net debt/equity (%) 67.8 29.6 19.5 11.5 -19.6 -9.3 -40 0 Net interest cover (x) nm 15.7 68.2 nm 19.3 18.1 09 10 11 12E 13E 14E Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Klyne Resullar +63 2 894 6645 [email protected] Page 2 Deutsche Bank AG/Hong Kong 3 April 2013 Conglomerates DMCI Holdings Portfolio update Semirara: Power plant expansions progressing We cut our FY12-FY14 forecasts for Semirara by 20-36% to account for soft thermal Power to drive Semirara’s coal prices but upgrade our FY15-FY16 forecasts by 19-59% to reflect our more bullish medium-term profitability outlook on the company’s power plant expansions.