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28

WILCON IPO Analysis (WLCON)

Wilcon Depot, Inc. (WLCON) has set their IPO offer at P5.68 per share, selling about 1,393,906,200 new common shares by way of primary offer.

​Does the offer price presents a bargain opportunity? Honestly, I don't know.

​But in this post, I'll try to look deep in the company's fundamentals and try to identify the company's competitive advantage and underlying business value so that we can intelligently decide if this is a suitable investment for a value investor.

​If you're interested in participating in Wilcon's IPO, then this post is right for you.

​With that said, let's get started.

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​WILCON's Business Overview

Wilcon Builders Depot Inc. (WBDI) decided to build a company where they can transfer their home improvement retail business. Thus, Wilcon Depot Inc. was born.

​Wilcon Depot Inc. was incorporated on December 17, 2015 and is a wholly-owned subsidiary of WBDI. On April 1, 2016, WBDI transferred all of its retail business to Wilcon Depot Inc. and since began their trading operations.

​On November 11, 2016, with SEC's approval, WBDI changed its name to Wilcon Corporation (WC) and remains the parent company of Wilcon Depot Inc.

​Today, Wilcon Depot Inc. is the sole subsidiary of WC which is 99.06% owned by the latter. Take note that even though the company is still new, the retail business itself has been running for the last 38 years.

​Wilcon generate revenues on store operations and has two formats namely "Wilcon Depot" and "Wilcon Home Essentials". As of September 30, 2016, The company has 30 Wilcon Depot stores and 6 Wilcon Home Essentials stores and are located in 17 cities and 17 municipalities across the Philippines.

wilcon depot inc.

Fig. 1 Wilcon Depot in Cavite

wilcon home essentials

Fig. 2 Wilcon Home Essentials in Mindanao Ave., Q.C.

​Wilcon is set to use the total net proceeds of Php 7,584.20M for the following proposed items;

  • Store network expansion; Php 6,111,76M (81%). This 2017, the company is planning to put up 8 stores; 4 of which are now in various stages of development and construction.
  • Debt repayment; Php 972.44M (13%). The outstanding balance of the loans as of the recent 3Q2016 filing is Php 1,476.02M.
  • General corporate purposes; Php 500.00M (7%). Intended for additional working capital.

​The effect of the IPO will increase its equity from Php 3,123M as of 3Q2016 filing to Php 10,707M after the offer. Total invested capital would increase from Php 4,598M to Php 12,183M.

​The book value of WLCON as of 3Q2016 filing is Php 1.15/share. After the offer, book value will be Php 2.61/share.

​Common shares as of 3Q2016 filing is at 2,705,817,916. After the addition of the offer shares, the total common shares would be at 4,099,741,116.

Wilcon's Key Competitive Strengths

  • Industry leader in the booming home improvement sector in the Philippines
  • Well-recognized brand and a favored retailer offering a wide selection of home improvement products.
  • Excellent customer service, through highly-trained sales teams and design consultants and reliable after-sales support.
  • Solid long-term business relationships with its key suppliers.
  • Strong portfolio of in-house brands.
  • Dual-format with wide array of products, efficient and scalable business model positioned for further expansion.
  • Highly experienced management team.

Key Strategies To Drive Sustainable Growth

  • Expand store network in dominant markets and penetrate fast-growing cities.
  • Continue to appeal to existing customers and attract new customers.
  • Further strengthen synergies with suppliers and other strategic business partners and customers.
  • Leverage extensive product portfolio, market leadership and purchasing scale.
  • Increase focus on continuous introduction of in-house and exclusive brands.
  • Improve operating efficiencies through streamlining logistics and cost-engineering.
  • Further strengthen and increase brand awareness and visibility.

Projections Based on Pro-Forma Financial Statements​

Pro-Forma Income Statement And Projections: Fiscal Year

in millions PHP

2013

2014

2015

2016E

2017E

2018E

Net sales

% y-o-y

11,862

-

13,596

14.6%

14,450

6.3%

15,895

10.0%

17,845

10.0%

19,233

10.0%

Cost of sales

% of net sales

9,301

78.4%

11,076

81.5%

10,840

75.0%

12,398

78.0%

13,638

78.0%

15,002

78.0%

Gross profit

Gross profit margin

2,561

21.6%

2,520

18.5%

3,610

25.0%

3,497

22.0%

3,847

22.0%

4,231

22.0%

Operating expenses

% of net sales

(2,194)

-18.5%

(2,428)

-17.9%

(2,848)

-19.7%

(2,861)

-18.0%

(3,147)

-18.0%

(3,462)

-18.0%

Operating profit

Operating profit margin

367

3.1%

92

0.7%

762

5.3%

636

4.0%

699

4.0%

769

4.0%

Interest expense

(71)

(76)

(61)

-

-

-

Other income - net

47

41

68

-

-

-

Income before income tax

343

57

769

636

699

769

Income tax expense

Tax rate

103

30.0%

17

29.8%

231

30.0%

191

30.0%

210

30.0%

231

30.0%

Net income

Net profit margin

240

2.0%

40

0.3%

538

3.7%

445

2.8%

490

2.8%

539

2.8%

Tab. 1 Pro-Forma income statement and projection based on average historical performance.

​Based on the assumptions I made in the above table by taking on the average percentages of historical performance, I'm expecting that Revenues would amount to Php 15,895M and Net income is expected to reach Php 490M once the FY2016 income report goes out.

Pro-Forma Income Statement And Projections: 9-Month Ended

in millions PHP

9M2015

9M2016

9M2017E

9M2018E

Net sales

% y-o-y

10,638

-

11,729

10.3%

12,902

10.0%

14,192

10.0%

Cost of sales

% of net sales

7,976

75.0%

8,773

74.8%

9,664

74.9%

10,630

74.9%

Gross profit

Gross profit margin

2,662

25.0%

2,956

25.2%

3,238

25.1%

3,562

25.1%

Operating expenses

% of net sales

(2,195)

-20.6%

(2,265)

-19.3%

(2,580)

-20.0%

(2,838)

-20.0%

Operating profit

Operating profit margin

467

4.4%

691

5.9%

658

5.1%

724

5.1%

Interest expense

(56)

(34)

-

-

Other income - net

51

35

-

-

Income before income tax

462

692

658

724

Income tax expense

Tax rate

138

29.9%

209

30.2%

197

30.0%

217

30.0%

Net income

Net profit margin

323

3.0%

483

4.1%

461

3.6%

507

3.6%

Tab. 2 Pro-Forma income statement and projection for the nine-month ended.

Earnings projections based on the latest Pro-Forma 3Q2016 filing estimates the Revenues to be at Php 12,902M and Net income at Php 461M this coming 9M2017.

The profit margins calculated the 9M16 and historical year filings I think are at par compared to its competitors being a retail industry business. On average, I'm expecting Wilcon to give us at least 3% net profit margins for the next couple of years.

​Pro-Forma Balance Sheet: Assets

ASSETS (in Mil PHP)

FY2013

FY2014

FY2015

9M2016

Current assets

Cash

Cash to current assets

188

3.0%

243

3.7%

323

4.1%

235

2.6%

Trade and other receivables

Receivables to current assets

Days receivables (DSO)

279

4.4%

8.5

332

5.1%

8.8

365

4.6%

9.1

453

5.1%

-

Merchandise inventories

Inventory to current assets

Days inventory (DIO)

5,660

89.7%

171.8

5,766

87.9%

152.7

7,153

89.9%

178.2

6,791

76.5%

-

Due from parent company

-

-

-

599

Other current assets

184

222

120

798

Total current assets

6,311

6,563

7,961

8,876

Non-current assets

Property and equipment - net

219

169

296

324

Deferred tax assets

106

140

166

199

Other non-current assets

105

106

158

168

Total non-current assets

430

415

620

691

TOTAL ASSETS

6,741

6,978

8,581

9,567

Tab. 3 Pro-Forma assets balance sheet for FY13, FY14, FY15 and 9M16.

It's notable that most of the current assets comes from the inventory. The company also has little cash and receivables. On average, 86% of its current assets comes from inventories, 3.3% comes from cash and 4.8% from receivables.

​The DSO figures shows that it's efficient in turning over receivables (9-day average). The DIO on the other hand shows that it turns over its inventory on an average of 168 days.

​Pro-Forma Balance Sheet: Liabilities

LIABILITIES (in Mil PHP)

FY2013

FY2014

FY2015

9M2016

Current liabilities

Short-term borrowings

Current portion of long-term debt

Total short-term debt

2,080

79

2,159

1,335

16

1,351

843

180

1,023

504

258

762

Trade and other payables

Payables to current assets

Days payable (DPO)

2,254

35.7%

68.4

3,051

46.5%

80.8

3,745

47.0%

93.3

4,679

52.7%

-

Income tax payable

5,660

5,766

7,153

6,791

Total current liabilities

4,450

4,402

4,768

5,502

Non-current liabilities

Long-term debt - net of current portion

21

1,181

968

714

Retirement liability

196

237

358

404

Total non-current liabilities

217

1,418

1,326

1,118

TOTAL LIABILITIES

4,667

5,820

6,094

6,620

Tab. 4 Pro-Forma liabilities balance sheet for FY13, FY14, FY15 and 9M16.

​Wilcon's payable comprises of almost 45% of its current assets. With much of its inventories as current assets, the company should improve its efficiency to pay for its payable and hoard lots of cash for faster growth.

I like that the company's current assets are greater than its total liabilities based on its 3Q2016 filing. The net current asset value of Wilcon is at Php 2,256M. Unfortunately, its net net working capital is at negative Php 2,650M because of its large inventory base.

NCAV & NNWC (in Mil PHP)

FY2013

FY2014

FY2015

9M2016

Net current asset value

1,644

743

1,867

2,256

Net net working capital

(1,440)

(2,445)

(1,921)

(2,650)

Liquidity Ratios

LIQUIDITY RATIOS

FY2013

FY2014

FY2015

9M2016

Debt to equity ratio

1.05

2.19

0.80

0.50

Current ratio

1.42

1.49

1.67

1.61

Tab. 5 Liquidity ratios for FY13, FY14, FY15 and 9M16.

The D/E ratio has improved for the last couple of years and is now down to 0.50. Current ratio has also improved.

Profitability​ Ratios

PROFITABILITY RATIOS

FY2013

FY2014

FY2015

Return on equity

11.6%

3.5%

21.6%

Return on invested capital

5.6%

1.1%

12.0%

Tab. 6 Profitability ratios for FY13, FY14, FY15 and 9M16.

On average, ROE is at 12.2% while ROIC 6.2%. Wilcon looks profitable in ROE but looks average on ROIC.

Intrinsic Value Calculations

Using Initial Rate Of Return

Based on the 9M2016 and FY2015 income reports, we can assume that the company makes around Php 500M per year on average. With that assumption, we can calculate our initial rate of return.

in Mil PHP except per share items

Values

Net income (assumption based on historical performance)

500

Shareholder's equity (9M2016)

2,947

LCY 10-yr. Gov't bond rate

5.1%

Shares outstanding (before dilution)

2,705

Estimated value

9,804

Estimated per share value

Php 3.62

Tab. 7 Initial rate of return calculation.

The table above shows an estimated buy price of Php 3.62 per share based on a Php 500M Net Income assumption. 

Buying the stock at its offer price of Php 5.68 per share will only give you an estimated yield of 3.255% which is not attractive.

At 5.1% return, Wilcon needs to make around Php 784M to be fairly valued based on the offer price of Php 5.68 per share.

If you expect an initial return of 10%, Wilcon needs to make around three times of its assumed Net Income or an approximate Php 1,536M to be fairly priced.

Take note that these assumptions doesn't yet include the effects of dilution once the new shares are added. I'm pretty sure that the planned expansion will boost the earnings once sales start to pile up in the proposed new stores.

Update 3-17-2017Wilcon Depot sets final IPO price at P5.05 per share

With this development, expected return rate increased from 3.255% to 3.660% based on a Php 500M profitability. Gov't bonds still looks more attractive if you'll take this thinking approach. However, you should also consider the potential growth the company can achieve given enough time for revenues to roll.

Final Thoughts​

Investing in Wilcon I think will provide an opportunity for investors to ride the company's planned future expansion. In the retail industry, more stores mean more sales and more sales means more shareholder value growth.

Wilcon also has more current assets than its debt and its profit margins and returns are at par with its competitors.

As for me, I'd rather wait for its fiscal year report to get a clearer picture of its performance after the IPO. But if the price would drop at levels near my estimated per share value, I would probably grab some to make some beer money.

So what do you think? Will you participate in Wilcon's upcoming IPO? If so, kindly share your thoughts in the comments section below.

This concludes my Wilcon IPO analysis.​

Happy investing!​

Disclaimer: This post contains personal ideas and opinions of the author and is designed for educational purposes only. The author is not responsible for any liabilities and losses which may arise from the use of the information presented in this post.
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