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13

Cebu Landmasters IPO Analysis (CLI)

After the announcement of EAGLE's IPO, another IPO is now being offered at the PSE. The company is Cebu Landmasters Inc. (CLI).

CLI is one of the top real estate players in Cebu second only to Ayala Land Inc. (ALI) and followed by Filinvest Land Inc. (FLI) with a market share of 11%, 17% and 8% respectively in terms of total supply of condominium. The market share in terms of condominium sold, CLI has 9% while ALI and FLI has 17% and 9% respectively.

The company started operations in 2004 and just after 12 years, it has become one of Cebu's top 3 developers in the local condominium and housing ​market.

​This post is for you if;

  • You're looking for a quick analysis of the data provided in its final prospectus.
  • You're interested in investing in CLI and wonder the best price to enter to get a decent return.

I'll present some of the data you need to know in order for you to be informed and make a better investment decision.

So let's begin.

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Details Of The IPO

CLI is offering 430,000,000 new common shares by way of primary offer, 75,000,000 shares by way of secondary offer and 75,000,000 by way of optional shares. Offer price is at P5.00 per share. 1,714,000,000 common shares will be outstanding after the offer.

The selling shareholders are the Chairman & CEO and the Executive Vice-President of CLI, Mr. Jose R. Soberano III and Ma. Rosario B. Soberano respectively.

CLI expects to raise approximately P2.02 billion after deducting fees, taxes and other expenses from the primary offer. The selling shareholders expects to raise approximately P689.84 million after fees, deductions and expenses. CLI will not receive proceeds from the secondary offer and optional shares.

The proceeds will then be used from the following;

  • Land acquisitions in the VisMin region - P1.05 billion.
  • Land acquisitions in Cebu - P730 million.
  • Investment in joint ventures & associates - P240 million.

The proceeds will not be used to pay off existing liabilities or reimburse any officer, director, employee or shareholder of CLI.

CLI's Company Structure

cebu landmasters ipo analysis

Fig. 1 CLI's organization structure as of Dec. 31, 2016

A B Soberano Holdings Corp. owns 76.77% of CLI. It has one wholly-owned subsidiary (CLI Premier Hotels Int'l Inc.), three associates and two joint venture partnerships as shown in Fig. 1.

Key Performance Indicators

Here are the relevant ratios based on the prospectus.

Indicators

2014

2015

2016

Gross profit margin

55%

57%

54%

Net profit margin

34%

35%

32%

Return on assets

15%

15%

13%

Return on average equity

-

50%

50%

Current ratio

1.90

2.05

2.13

D/E ratio

1.10

1.07

1.56

Tab. 1 Key performance indicators

In comparison with its number one competitor, Ayala Land Inc. (ALI), CLI has larger profit margins in the 3-year period from 2014 to 2016. CLI performed an average gross profit margin and a net profit margin of 55% and 34% respectively while its competitor's performance at 34% and 17% respectively.

CLI's ​ROA are also higher performing at 14% average compared to ALI's 4%. ROE is also significantly higher given the fact that ALI's performance plays around 14% within the 3-yr. period.

CLI's liquidity at 2.13 is also better than ALI at 1.12. However, when it comes to Debt to equity ratio, ALI wins this round at 0.88 compared to CLI's 1.56.

Bottomline is, when it comes to profitability, efficiency and liquidity, I can argue that CLI is better than ALI.​

Dividend Policy

CLI intends to pay dividends and those payments will depend on the company's future earnings, financial health and cash flow. Historically, cash and stock dividends were declared from 2014 to 2016 from its unrestricted earnings.

Analysis Of The Financial Statements

I've summarized the good and not-so-good aspects of CLI's financial statements and come up with these observations.

The good side of CLI;

  • Currently, the company is adequate in size considering FY2016 sales and total assets of P2 billion and P5 billion respectively.
  • ​Net working capital of P2.3 billion exceeds long-term debt of P1.6 billion.
  • Low P/E ratio of 6.10.
  • Earnings growth at 23% CAGR for the 3-yr. period.
  • Current assets exceed total liabilities as of FY2016.
  • High margins and returns for the last 3 years.
  • Cash to current assets ratio is good (2%). The company deploys cash assets in a manner that will give better returns as the management seems fit.

The not-so-good-side of CLI;

  • Total debt of P2.3 billion exceeds equity at P1.5 billion.
  • Slightly large price to book value (P/B = 2.78)
  • High D/E ratio (1.56) as of FY2016. I'm a little worried about their debts since CLI has been operating at a negative operating cash flow for the last 3 years.
  • The quality of dividends paid in 2016 is low. CLI earnings for FY2016 amounted to P702.32 million but paid dividends at P856.09 million. On the same year, CLI took out P1.6 billion of interest-bearing loans. I can argue that most of the dividends paid came from these loans.
  • Real estate inventory to current assets ratio is high (42%). Management should reduce inventory by increasing its marketing and sales strategy.
  • Accounts receivable to current assets ratio is high (47%). Receivables turnover should be improved.

Valuations

Here are the different valuation approaches I used to arrive at different estimated intrinsic value. These are educated guesstimates only and should not be taken as a sound financial advise.

Graham's Defensive Investor Criteria - Graham Number

Indicators

Values

P/E x P/BV < 22.5

16.94

P/E ratio

6.10

​P/BV ratio

2.78

Graham number

19.52

Intrinsic value @ 50% margin of safety

9.76

By using Graham's defensive investor criteria using P/E & P/BV as basis of a buy price and a 50% margin of safety, intrinsic value was calculated at P9.76/share.

Buffett's Equity-Bond Valuation

Indicators

Values

Offer price

5.00

Earnings per share

0.82

Initial rate of return

16.4%

10-yr. LCY gov't bond rate

5.00%

Price relative to the gov't bond

16.36

Intrinsic value @ 50% margin of safety

8.18

Treating the stock as an equity bond, returns calculated equates to 16.4%. This meant that at P5.00/share, we can argue that we're paying for an initial return rate of 16.4%. If the stock's value is compared to the returns of a 10-yr. LCY gov't bond, stock price should be at P16.36/share. By adding an adequate safety net of 50%, the estimated intrinsic value calculated was P8.18/share.

Assuming we want a return equal to the general market movement (that's 12%), intrinsic values calculated using safety nets of 25%, 33% and 50% equates to P5.14, P4.59 and P3.43 respectively.

P/E Valuation Model

Indicators

Values

Earnings per share

0.82

P/E ratio

6.10

Growth rate

23%

Discount rate

10%

Value in 10 years

32.23

Margin of safety

50%

Intrinsic value

12.43

Intrinsic value after applying safety net

6.21

Using P/E valuation , intrinsic value calculated equates to P6.21/share using a discount rate of 10% and a safety net of 50%.

At 12% discount rate with the same safety net, estimated intrinsic value equates to P5.19/share.

Final Thoughts

The booming real estate market in the VisMin region will enable CLI to position itself for long-term expansion and growth by using the proceeds for land acquisitions. This can increase CLI's market share in the said regions.

The company is aggressively financed given the high D/E and loans exceeding total equity. Some may see it as a deal breaker but for me, I see a company that's taking debt to finance most of its assets to capitalize on its condominium and housing development.

I like the numbers I got from the valuations I did. Given the previous high margins and returns generated by the company and its plans to further boost growth, I decided to participate in its IPO.

If you have any thoughts you would like to share, feel free to drop in your comments below.

Happy investing!​

Disclaimer: I subscribed to the IPO as of this writing. I'm also thinking to grab shares at its listing date for a price I feel comfortable with. I'm planning for a medium to long-term position.


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