Eagle Cement Corporation (EAGLE) is scheduled to list its shares through an IPO this coming May 29. The company is offering 575,000,000 common shares at ₱16.00 per share. The company is engaged in the business of manufacturing, developing, processing, marketing, sale and distribution of cement, cement products and other minerals and by-products.

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Check out my Eagle Cement Corporation IPO analysis by continuing reading below.

EAGLE will offer 500,000,000 common shares by way of primary offer and 75,000,000 common shares by way of secondary offer. The shares will have a par value of ₱1.00.

The selling shareholder for the secondary shares is Far East Cement Corporation. FECC holds 68.57% of the outstanding shares before the offer. After the offer, it would now hold 63.35%.

The shares will be offered at ₱16.00 per share. Prior to the offer, the company has a total of 4,500,000,005 issued outstanding common shares. After the IPO, the company will now have 5,000,000,005 shares.

The company plans to raise a total of ₱7.39 billion net proceeds after deduction of fees and expenses which will be used to partially fund the construction of the Cebu Cement Plant. Other funds needed to complete the project will come from debts and internally generated funds. The company plans to start the project on 4Q17 and expects to finish it at 1Q20.

The book value of the company based on the current financial statement as of Dec. 31, 2016 is ₱3.38 per share. After receiving the net proceeds of approximately ₱7.39 billion, book value will become ₱4.52 per share. This is an increase of ₱1.14 per share to existing shareholders and a decrease of ₱11.47 per share to investors of the offer shares.

The following tables below show the cement market share in the Luzon, Visayas and Mindanao regions.

Table 1 Luzon Cement Market

Table 2 Visayas Cement Market

Table 3 Mindanao Cement Market

EAGLE's market share is only in Luzon at 17%. ECC has no market share in the Visayas and Mindanao region.

Table 4 Philippine Demand Statistics Per Region (2015)

The demand for cement in Luzon, Visayas and Mindanao region equates to 277 kgs., 262 kgs. and 130 kgs. per capita respectively. The construction of the Cebu Cement Plant will enable ECC to penetrate the Visayas and Mindanao regions and directly compete with Cemex, Lafarge Holcim and CRH-Aboitiz being the top players in the said regions.

The cement industry forecast from 2017 to 2025 suggests that the cement market will require additional capacity to support future growth due to the expected increase in construction and infrastructure spending. By 2025, cement demand is estimated to range from 47.10 to 72 million tonnes. With a base cement supply and expansion capacity of 23.12 and 11.55 million tonnes respectively, cement deficit would range from 12.43 to 37 million tonnes.

Solutions to this demand gap requires building additional capacity expansions or importing of cement by the top industry players. EAGLE, being one of the top players in Luzon, will benefit from this future demand​ if the Cebu Cement Plant will become operational in 2020.

The table below shows the key ratios for 2015 and 2016.

Table 5 Key Performance Indicators

The figures shows healthy numbers giving the impression that the company is maintaining liquidity and finance conservatively. Most of its current assets are held in cash & equivalents comprising 60% of its total current assets. Current assets and total liabilities are almost equal (₱9.2 billion and ₱9.3 billion respectively) which gives the company so much liquidity if it decides to settle down all its liabilities using current assets.

Returns generated both on assets and equity are way above my expectations. Recent filings show that the company made ₱4.1 billion using its shareholder's equity at ₱18.2 billion thus giving us a high return on equity of 25%.

The high returns are also evident on how the company utilized its retained earnings for the last 3 years. From 2014 to 2016, Total earnings equated to ₱1.33/share. During the same period, EAGLE paid out dividends for a total of ₱0.13/share and retained the remaining ₱1.20/share.

During the same period, EPS increased by ₱0.78/share; from ₱0.10 in 2014 to ₱0.88 in 2016. It follows that the increase in earnings was in fact due to how the management has utilized its retained earnings. The returns generated in this manner equates to 65% (0.78/1.20).

Table 6 Profit Margins

I'm also impressed with the margins the company generated for the last 3 years. The recent filing shows that they are able to keep ₱0.297 centavos for every ₱1.00 they made which is pretty high based on the industry they are in and considering that cement is a commodity type of product.

By using the P/E valuation model, I calculated the Weighted Average Cost Of Capital and the EPS growth rate to be 12.26% and 13.89% respectively. At ₱16.00/share and P/E of 18.18, I projected the EPS in the 10th year to be ₱2.84/share which equates to a market price of ₱51.58/share.

Discounting that back to 10 years, that equates to an intrinsic value of ₱16.23/share which is insignificantly higher than the offer price.

Now based on equity-bond comparison, initial return rate calculated is at 5.5% which is almost equal to 10-yr. LCY bond rate at 5.2%. If the stock were compared that to a bond's return, intrinsic value would be ₱16.83/share.

Since the sustainability of the earnings it will generate for the next 10 years can't be predicted with a high level of certainty, the projected annual compounding rate of return can't be measured. But assuming that it can be measured, the projected book value and earnings per share at the 10th year equates to 19.04 and 4.14 respectively. At a P/E of 18.18, projected stock price at the 10th year would be ₱75.21/share and that equates to an annual compounded growth rate of 18.8%.

In theory, buying the stock at ₱16.00/share equates to an annual return of 5.5% and this return increases by 18.8% compounded annually. Take note that this estimate has a higher chance of probability if we can just predict the company's growth sustainability. But with just 3 years of data provided, we can only assume otherwise.

The table below shows the different growth rates and discount rates if substituted in the P/E valuation model. For illustration, assuming a growth rate of 12% and a discount rate of 10%, intrinsic value equates at ₱17.10/share.

Table 7 Sensitivity Analysis

It would be best to apply at least 25% margin of safety in each of the values given. At ₱17.10/share and by applying a 25% safety, adjusted intrinsic value should be around ₱12.83/share.

Sensitivity analysis based on change of IPO offer at ₱15/share

Table 8 Updated Sensitivity Analysis

As the IPO draws near, it's wise to study more about the company we are interested in investing in. The valuations I did above should give you the basic information you need to make an investment decision.

I like the company because of the high returns and profit margins it generated in the last 3 years. With just one cement plant in Bulacan, it lags behind its competitors but once the 2nd cement plant is commissioned in 2020 and starts to generate income, the company will be able to increase its market share and therefore increase its earnings and value in the long run.

This concludes my Eagle Cement Corporation IPO analysis. If you have any inputs to share, I would love to hear them in the comments section below.

Happy investing!​