first metro sec

Stock Picks For The Week (Sept. 18 - 22, 2017) By First Metro Securities

Check out the Stock Picks for the week by First Metro Securities in this special report which you can find only here in PinoyInvestor.

16

Finding Value In PHES (Philippine Estates Corporation)

phes stock review

In today's post, my hunt for bargains has led me to analyze PHES (Philippine Estates Corporation).

​PHES, which is majority controlled by The Wellex Group, Inc., is engaged in the business of holding and developing real estate with projects located in several developed areas all over the country.

This post summarizes the valuations based on net current asset value, net-net working capital and owner earnings analysis which supports my conclusion of the stock being an undervalued security.

If you are looking forward to invest in PHES, and want to know the range of prices to buy and sell the stock based on value, then this post is right for you.​

pinoyinvestor

Which stocks to BUY or SELL? Find out on PinoyInvestor.com!

Switch from FREE Version to PREMIUM ACCESS now! Subscription starts at P399 per month. Click here and try it today!​

ADVERTISEMENT

Net Current Asset Value

The latest quarterly financials (1Q17) recorded the following items in the balance sheet. Excluding all other non-current assets, total net assets equates to P952 million. Subtracting total liabilities, we get an estimated net current asset value of P549 million.

Items

1Q17 Book Value (in Mil of PHP except per share values)

Cash and cash equivalents

12.268

Trade and other receivables

180.260

Real estate inventory

689.469

Prepayments and other current assets

26.778

Fixed assets

43.324

Total net assets

952.099

Total liabilities

402.787

Shares outstanding

1,445.549

Net current asset value

549.312

Net current asset value per share

0.3800

This value if divided by the outstanding shares, we get a NCAV per share value of P0.3800. At the time of this writing, PHES price closed at P0.3750. Clearly, PHES trades at a slight discount to its NCAV value.

Net-net Working Capital

Getting the net-net working capital equates to a value around P229 million or a per share value of P0.1589. I consider a price like this a safe buy and if the market offered an opportunity, I would not hesitate to grab a lot of shares

Items

% of BV

1Q17 Liquidating Value (in Mil of PHP except per share values)

Cash and cash equivalents

100%

12.268

Trade and other receivables

80%

144.208

Real estate inventory

67%

461.944

Prepayments and other current assets

20%

5.356

Fixed assets

20%

8.665

Total net assets

632.441

Total liabilities

402.787

Shares outstanding

1,445.549

Net-net working capital value

229.654

NNWC value per share

0.1589

Discounted Owner Earnings Analysis Adding Equity

Owner earnings analysis reveal that the company burned cash at a rate of P5.2 million a year since 2014. At 0% growth (which I consider a conservative assumption), the value of the future cash projected at 20 years at a discount rate of 12%, discounted to present equates to negative P39 million.

Book value recorded for the first quarter of 2017 ​equates to P1,054 million. Less the future cash, the value of the company at present equates to P1,015 million or a per share value of P0.7023. At a 50% margin of safety, an estimated buy price of P0.3511 per share is calculated.

Items

in Mil of PHP except per share values

Total cash discounted to present

(39.294)

Equity (1Q17)

1,054.467

Shares outstanding

1,445.549

Intrinsic value

1,015.173

Intrinsic value per share

0.7023

Intrinsic value @ 25% MOS

0.5267

Intrinsic value @ 50% MOS

0.3511

Intrinsic value @ 75% MOS

0.1756

Discounted Owner Earnings Adding NCAV

An interesting idea came up to me. Instead of considering the book value, I used the net current asset value instead and added the discounted future cash. Intrinsic value calculated turned out to be P510 million or a per share value of P0.3528. At 33% margin of safety, buy price calculated was P0.2364 per share.

Items

in Mil of PHP except per share values

Total cash discounted to present

(39.294)

NCAV (1Q17)

1,054.467

Shares outstanding

1,445.549

Intrinsic value

510.018

Intrinsic value per share

0.3528

Intrinsic value @ 33% MOS

0.2364

Discounted Owner Earnings Adding NNWCV

Using net-net working capital, we should expect a much lower value. At this rate, value calculated was estimated at P190 million or P0.1317 per share. This is a very conservative value especially if a 33% margin of safety will be applied.

But in this scenario, I don't think a safety margin should be applied at this point. NNWC per share is already a safe buy price in my opinion.

Items

in Mil of PHP except per share values

Total cash discounted to present

(39.294)

Net-net working capital (1Q17)

229.654

Shares outstanding

1,445.549

Intrinsic value

190.360

Intrinsic value per share

0.1317

Intrinsic value @ 33% MOS

0.0882

Interpretation Of Calculated Intrinsic Values

You can see that a price anywhere below P0.3500 per share pose an opportunity to buy and a target of at least P0.5000 based on owner earnings analysis backed by NCAV and NNWC calculations.

We can also see that the stock traded at prices we expect them to reach in the past. It may be possible for the stock to rally if good news presents itself and investors respond positively.

phes stock review

What I don't like about the stock is that PHES is a thinly traded security. You can make a lot of money if a good price presents itself or if it goes south, you'll be left with an illiquid stock and would have to wait for an indefinite amount of time for the market to effectively price the business. I would buy this stock if it meets at least a 50% margin of safety - the more the better.

If the stock and price meets value at P0.7000, it's definitely a no-brainer sell.​

Final Thoughts

I would love to buy this stock regardless of its historical bad earnings because of the market's inefficient pricing. What I learned from the greatest value investors in our time is that we wait for the best offer. If the market presents that offer especially at net-net working capital values, it's a no-brainer.

This concludes my PHES stock review. I would love to hear your thoughts so make sure you leave them in the comments section below.

Happy investing!​

quantitative data solutions

Know The Numbers And Trade Smart Using Quantitative Data Solutions!

Applicable in PSE, Forex and Commodities. Click here and start trading intelligently!​

ADVERTISEMENT

truly rich club

Do You Want to Gain Financial Wealth and Spiritual Abundance at the Same Time?

If you want Bro. Bo to be your personal financial coach and know more about the Truly Rich Club, then click this link here.

ADVERTISEMENT

first metro sec

Model Portfolios: Unloved, Value Play, Yield Seeker, Riding The Momentum (Sept. 20, 2017)

Looking for model portfolios to guide your stock picking decisions? Don't worry, we got you covered! Check out this special stock picks and model portfolio report today!

Click Here to Leave a Comment Below 16 comments