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Stock Picks for the week (Nov 20 - 24, 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.

30

WPI Stock Review: Value Unlocked?

wpi stock review

In this post, I'll discuss one of the stocks I currently own - Waterfront Philippines Inc. (WPI).

The stock is now up by 80% since the annual report two months ago came out.

An analysis of the financial statements reveal that the stock still appears to be undervalued despite the recent rally. The stock looks speculative, but the fundamentals reveal the opposite. The business has ​done a great job of creating excess cash with little leverage, is fairly liquid, has good margins and has favorable prospects in the future.

If you're interested to invest in WPI but not entirely sure of making a smart decision, then this post is right for you.​

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Owner Earnings Analysis

Excess cash is the main reason why I bought the stock. With cash, a company can grow faster without the need to take on debt or issue more equity. This is evident in the analysis of its recent annual filing.

From the period of 2014 to 2016, the business produced an average of P407 million of owner earnings as shown in Tab. 1.

in Mil of PHP

FY2016

FY2015

FY2014

Net income

287.392

127.211

9.713

Depreciation and amortization

255.392

333.683

398.822

Working capital changes:

 - Receivables

(25.188)

(16.328)

3.309

 - Inventories

1.111

(1.482)

(2.229)

 - Prepaid expenses and other current assets

(13.420)

(26.858)

(2.085)

 - Accounts payable and other accrued expenses

(14.410)

64.127

59.410

 - Other current liabilities

(523.576)

468.612

2.861

Property and equipment (3-yr. average)

(54.468)

(54.468)

(54.468)

Owner earnings

(87.167)

894.497

415.333

Tab. 1 Owner earnings calculation of WPI for FY2016.

​Although estimated owner earnings turned out to be negative for FY2016, it doesn't matter because of the previous year's performance.

In fact, the 1Q17 filing shows a positive owner earnings estimated at P160 million which makes me believe that WPI has no problem generating that average cash in the future.

in Mil of PHP

1Q17

Net income

156.259

Depreciation and amortization

51.463

Working capital changes:

 - Receivables

(65.090)

 - Inventories

0.813

 - Prepaid expenses and other current assets

12.212

 - Accounts payable and other accrued expenses

118.631

 - Other current liabilities

(60.479)

Property and equipment (approx. for every quarter)

(53.789)

Owner earnings

160.020

Tab. 2 Owner earnings calculation of WPI for 1Q17.

I'm expecting WPI to generate P400 million of cash for the next three to five years. But I don't know for sure. We just have to see for ourselves.​

Cash Yield & CROIC

At a basis P0.87/share, the average cash yield calculated for the last three years averaged at 18.7% as shown in Tab. 2 which implies a very attractive 3-year annual yield.

in Mil of PHP

Values

Market capitalization

2,174.122

Average owner earnings

407.555

Cash yield (%)

18.7%

Tab. 3 Average Cash yield calculation of WPI.

In layman's terms, if you're seeking an investment with an 18% yield, then WPI is definitely the right choice. So if you buy the whole company at P0.87/share, then expect WPI to generate 18% of excess cash. As an owner, you can deploy that cash in growing the company or other investment opportunities.

How about CROIC (Cash Return On Invested Capital)? 

CROIC

Values

FY2014

6.93%

FY2015

15.61%

FY2016

-1.30%

Average CROIC (%)

7.08%

Tab. 4 Average CROIC of WPI.

A measure of growth I used is the average CROIC. At 7.08%, I'm expecting the company to grow at this pace for the next three to five years.

Liquidity And Leverage

Tab. 4 shows the leverage and liquidity ratios which I always check to determine a healthy balance sheet.

Liquidity And Leverage

1Q17

FY2016

FY2015

FY2014

Current ratio

1.38

1.15

0.86

1.19

D/E ratio

0.53

0.56

0.75

0.91

Tab. 5 Current ratio and D/E ratio of WPI.

I liked the results of the recent quarterly filings. It showed improvements on its liquidity and leverage in comparison for the last three years.

A company with a healthy cash flow and balance sheet sure warrants an investment decision.

Intrinsic Value Calculation

Assuming a 7.08% growth rate which slows down at a rate of 5% every year for the next ten years, a terminal growth rate of 1% for the 11th to the 20th year and a discount rate of 12%, The average cash projected and discounted back to present would be P4,129 million. That equates to a cash per share of P1.65. Add book value at P1.98 and you get an intrinsic value of P3.63.

Intrinsic Value Calculation

Values

Intrinsic Value

3.63

Intrinsic value at 25% MOS

2.72

Intrinsic value at 50% MOS

1.81

Intrinsic value at 75% MOS

0.91

Tab. 6 Intrinsic value calculation at 7.08% growth.

At 75% margin of safety, the stock is still trading below that value.

To make it more conservative, we'll assume a no-growth scenario.​ At 0% growth, cash per share equates to P1.22. Add book value and you get an intrinsic value of P3.20.

Intrinsic Value Calculation

Values

Intrinsic Value

3.20

Intrinsic value at 25% MOS

2.40

Intrinsic value at 50% MOS

1.60

Intrinsic value at 75% MOS

0.80

Tab. 7 Intrinsic value calculation at 0% growth.

As you can see, buying at a range between P0.80 to P0.91 provides a 75% margin of safety.

Even if the company loses money at a rate of P87 million based on FY2016 estimated owner earnings, the company will survive and should lose around P651 million of equity for the next 20 years. Still, that equates to an intrinsic value of P1.72.​

Intrinsic Value Calculation

Values

Intrinsic Value

1.72

Intrinsic value at 25% MOS

1.29

Intrinsic value at 50% MOS

0.86

Intrinsic value at 75% MOS

0.43

At P0.86/share, you're still buying the company at a 50% discount to value.

Technically speaking, WPI is really undervalued based on these findings.​

The management has the ability to unlock the real value of this business if only they would do something that will benefit shareholder's interests. Thus, market may soon realize the inefficiencies and therefore correct the current price near its intrinsic value.

Final Thoughts

I like the company because of two things - 1) the company's ability to generate excess cash​, and 2) The market price is undervalued and thus presents an opportunity to buy.

If the management will do something to attract investor's interests, I'm optimistic that the company will reach the intrinsic value especially for the no-growth scenario. But whether this happens or not, I'm not entirely sure as no one can really predict market movements. ​We'll just have to see what the management is capable of now that the market is trying to price the business nearer its intrinsic value.

This concludes my WPI stock review. If you have anything to share, I would love to hear them on the comments section below.

Happy investing!​


Disclaimer: I own shares of WPI as of this post.

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