Stock Review: Leisure And Resorts World Corporation (LR)
So I bought some Leisure And Resorts World Corporation (LR) shares yesterday because I find it undervalued.
In this post, I'll share the valuations I did that made me decide to buy this stock and hopefully get some huge gains from it.
If you're looking to find fundamental information about the company to guide you in your investment decisions, then this post is definitely for you.
Check out my LR stock review below.
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Quick Overview
Leisure And Resorts World Corporation (LR) is a holding company that's focused on the realty and leisure business. The business makes around P10 billion of revenues and has around P10 billion of assets.
It's current financial condition is healthy. Current ratio is at 1.19. Its net working capital is greater than its long-term debt (P447 million and P395 million respectively) and total debt doesn't exceed its book value (P1.861 billion and P6.849 billion respectively).
It's also trading at 6.52 price times earnings and 0.75 price times book value. Its strong financial condition and attractive valuations made me look deeper into the stock.
Book And Net-Net Working Capital Values
The table below shows the book value recorded in the recent 1Q17 filing.
Description | Book Value (in Mil of PHP) | % of BV | Net-net values |
|---|---|---|---|
Cash | 2,089.922 | 100% | 2,089.922 |
Receivables | 806.516 | 80% | 645.213 |
Inventories | - | 67% | 0.000 |
Prepayments | 192.993 | 20% | 39.599 |
Other assets excl. goodwill - net | 4,074.409 | 50% | 2,037.205 |
Fixed assets | 2,021.451 | 20% | 404.290 |
Total liabilities | 3,147.148 | 100% | 3,147.148 |
Total | 6,043.143 | | 2,069.080 |
Tab. 1. LR's Estimated Book and Net-net Asset Values.
Book value and net-net asset values on a per share basis equates to P5.04 and P1.72.
As of this writing, current price of LR is P4.70 - less than its current book value but greater than its net-net asset value.
Based on book value, company is already attractive. Now for the owner earnings..
Owner Earnings Calculations
What about the company's ability to generate excess cash? The table below shows the calculations on a 5-yr. period from 2012 to 2016.
Description | 2016 | 2015 | 2014 | 2013 | 2012 |
|---|---|---|---|---|---|
Net income | 1,055.380 | 1,030.422 | 749.838 | 323.788 | 279.449 |
Depreciation & amortization | 360.426 | 288.911 | 147.063 | 124.253 | 125.986 |
Change in working capital | (1,015.209) | (114.819) | 382.008 | (137.318) | 318.245 |
Capex (average) | (455.435) | (455.435) | (455.435) | (455.435) | (455.435) |
Cash from operating activities | 578.239 | 1,292.672 | 1,321.524 | 379.425 | 748.443 |
Owner Earnings | (54.838) | 749.079 | 823.474 | (144.712) | 268.245 |
Tab. 2. LR's Owner Earnings and FCF.
It's noticeable that the owner earnings calculated doesn't show consistency. The calculations I made where negative in the years 2016 and 2013. Because of this, I used a higher margin of safety to calculate my buy price. More on that later.
The average owner earnings figure equates to P328.250 million. With invested capital at an approximate of P8.949 billion, cash return on invested capital (CROIC) equates to 3.67%.
On a 3-yr. average, CROIC equates to 5.65%. With the CROIC figures, I decided to use a an average CROIC of 4.5% as my growth rate - which is reasonable if the returns they generate on invested capital is effectively used to increase the net worth of the business.
These figures led me to believe in the company has the ability to generate excess cash to make room for growth. Let's see what the intrinsic value calculations say.
Intrinsic Value Calculations
The variables I used are as follows;
- Expected rate of return (discount rate) - 12%
- Growth rate - 4.5% (slows by 5% from year 1 to year 10)
- Terminal growth rate - 1% (year 11 to year 20)
Projecting the owner earnings and discounting it back to present, we get a present value of P3,117.973 or P2.60 on a per share basis. If you add back LR's book value, we get an intrinsic value of P7.63 per share.
If net asset value is added instead, intrinsic value equates to P4.32 per share - which is a very conservative valuation. It's a no-brainer buy any time LR's price dip below P4.32 per share.
At P7.64 per share, calculated buy below prices based on different margin of safety is as follows;
Description | Values |
|---|---|
Intrinsic value at 25% margin of safety | 5.73 |
Intrinsic value at 33% margin of safety | 5.12 |
Intrinsic value at 50% margin of safety | 3.82 |
Intrinsic value at 75% margin of safety | 1.91 |
Tab. 3. LR's buy below prices.
LR's price hovers between the 33% and 50% margin of safety which I believe is already a huge safety net. This is the price range where I bought because of the uncertainty of its cash flows.
In addition, I believe that there's a huge chance that the price will meet value sometime in the future. But to say exactly when, I don't know.
Historically, LR traded above my assumptions in the past year as shown in the chart below. So I believe that it isn't impossible to rebound at those prices especially if you consider the book value and the company's ability to generate positive cash flows.
Fig. 1. LR's buy below prices.
Final Thoughts
A company with a strong financial condition, generates positive cash and trades at an attractive price is a no-brainer buy for me. I'm hoping that the market will price the stock as where it should be in the near future - near its intrinsic value or at least; at P5.7x per share to net a nice profit.
This concludes my LR stock review. Any thoughts and reactions? I want to hear them in the comments section below.
Happy investing!
Disclaimer: I currently hold shares of LR as of this writing.
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Kaka open ko lng po ng account sa col. I’m planning to copy PSEI bit by bit, like investing in an index fund. Chineck ko po yung mga available na index fund sa PH but found out that the fee is quite high. Any thoughts on this strategy sir?
Hi Mark,
It’s a good idea but I think you’re just putting more work on your end. Why stress yourself copying the index? It’s much better to just invest in an index fund. Look for the one that charges the lowest fees.
If you’ll do active investing, then do Value Investing instead and make it a goal to beat the index y-o-y.
Hi Mark salamat sa 4 tips mo, me natutunan na naman ako, bukas benta ko ibang stocks ko at ibili ko ng RL, Target price ko php 12 base ako sa history.alam ko ma hit yung intrinsic value niya 7.64 patience lang.tnx ulit