Earnings Analysis FY2016: Double Dragon Properties Corp. (DD)
From P622 million in 2015, Double Dragon Properties Corp. posted earnings of P1,470 million in 2016 - a significant 136% increase which made many investors happy.
But a closer look at its owner earnings reveals that it burned down P849 million last year - the highest since 2014.
You might be asking, is the business starting to create real value thus creating an opportunity for growth? Or is it just a cash hungry business that a value investor should stay away for now?
Find out in this post so read on.
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Owner Earnings Analysis - FY2016 Financial Statement
Here's some numbers for you to crunch on. From the FY2016 annual report, we get the following figures and add them all up to come up with owner earnings. For the capital expenditures, we get the average of the figures within the period.
DD (in Mil of PHP)
Depreciation & Amortization
Decrease (increase) in:
Due from related parties
Prepaid expenses and other current assets
Increase (decrease) in:
Accounts payable and other current liabilities
Due to related parties
Capital expenditures (3-yr. average)
Tab. 1.0 DD's FY2016 financial statement
Last year, Double Dragon burned P849 million of cash roughly because of negative net working capital which I find normal in a real estate business. But unlike its industry peers like Ayala Land (ALI) and Megaworld (MEG), both generated positive owner earnings of P25,475 million and P774 million respectively.
As you can see on Table 1.0, the company had burned a total of P1,872 million of cash - that's P624 million per year since 2014.
Double Dragon's Intrinsic Value Based On FY2016
The ability of a company to create value lies in the excess cash it can generate during its lifetime. If cash is burned consistently, then value is destroyed. Unless DD generates positive owner earnings in the coming years, DD will not create real value.
If we project the value of the company's future cash at 0% growth for 10 years and 0% terminal growth for another 10 years (assuming the business continues to burn cash at this rate) and discount that back to present using a 12% discount rate, we arrive at a total cash of negative P4,665 million.
The reason I used a 0% growth is that we don't want to assume that the business will burn more cash as succeeding years come by. That would be unrealistic and we are also ignoring the fact that it will generate positive cash in the future.
Now, shareholder's equity is at P13,152 million. Adding the equity and the future cash results to an intrinsic value of P8,490 million or P3.81 per share.
At the current valuation of P109,105 million as of this writing, we can really say that the market is inefficiently pricing the company at this point. I believe that a price drop will happen that will eventually level with the company's value or the price would hold in that level for a very long time until the company's value meet that price.
The question of when will these happen is something I can't predict with a certain level of accuracy. It may or may not happen. We don't know for sure.
If you missed the price run-up in the second half of 2016, you should not be sad because you may also have avoided huge losses when the market corrected during the last quarter. There are other opportunities out there. You just have to search for them.
You may also want to check this post I did about the company 11 months ago. I still have the same sentiments about the company.
If you have thoughts you would like to share, feel free to post them at the comments section below.
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