Here’s What The Fundamentals Say About WILCON IPO
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.
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.
Fig. 1 Wilcon Depot in Cavite
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
Key Strategies To Drive Sustainable Growth
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 3-17-2017: Wilcon 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!
Sir Mark,
Thank you for this informative analysis of Wilcon Depot, Will watch this IPO until it release in our brokers…cheers!
regards,
Richard
Thanks Richard. 🙂
will definitely buy.
Great, do let us know of your results. 🙂
Hi Sir,
I’m interested in investing in Wilcon. I have a COL account. Will I be able to avail of their IPO?
Thanks,
Doogz
Yes Doogz, you can avail. Just wait for the announcement in your COL dashboard.
No offer from col y?
Offer period will run from March 20 to 24.
Hi Mark,
Still thinking if ill get the IPO =) but i participated already just need to transfer fund hehehehe.
regards,
Richard
Nice. Let me know of your results in the upcoming days. 🙂
I think i’ll have to wait for the fiscal year report just like what you have written, but you know there is an inclination to buy because of the revenue that may generate in the next further years with their expansion. Considering also that the company was tested in time, its been running for 38 years. I don’t know sir, can you please elaborate more?hehehe
Hi Jerone,
Yes, nothing wrong with the company. But you need to ask yourself; is the price worth the risk? It really depends on the purpose of buying. Is it for quick profits? Will you hold it for a year? Honestly, we can’t really tell how it will perform on its first day. We can only speculate.
A good company is a good investment to hold if you’ll buy it at a reasonable price. Bad investment if you’ll buy at little to no upside.
If you want to speculate on its price movement on its first day, then do so with a trading plan. 🙂
thank you sir, it is indeed depend on the purpose of buying. Thank you for your input…
Thanks Sir! Very informative and helpful for a newbie like me. God bless you.
You’re welcome Ric. God bless you too.
5.05 i think its a good for test-buy… Thanks for sharing your thoughts, i have learned a lot.
but COL just approve for 1000 shares 🙂 hehe 2m lang daw kasi , raffle lang nila yan.
Let me know of your results Jason. 🙂
Bought already ipo at5.05 believe a good stock
Let me know if you make some beer money. 🙂
Can i still buy?
Yes Lito it’s already listed in the PSE.
Hi Mark
I’m a WLCON shareholder From Thailand, sorry for my poor English. hope you can understand
i think you missed the big picture looks of how can this industry can go in the future(not only wilcon)
Your estimated for Profit in 2017 and 2018 are too low
I”ll tell you what this industry(home improve/material retail) looklikes in Thailand
There are Big 5 players HomePro, Global, TaiWasadu, Megahome, DoHome
when combined all every branches of all 5 playes , there are 3.5 millon sq.m of sale area
meanwhite Thailand have 68m people = 19 people per 1 sq.m of sale area
then looks at PH
Wilcon + Cebu Oversea + CITI + CW combined
there are 550,000 sq.m of sale area
PH have 100m people = 181 people per 1 sq.m of sale area
…for me personaly that mean
Home-improvement industry in PH have huge room for growth
at least 10x times from today and a good news is WLCON is the No.1 mkt.share
I forecast WLCON can growth in 20-30% a year in both Topline and Bottom-line with SSSG and stores expansion
my fair-valued in my mind for WLCON is Double-digit
Thank you sharing Mark! i have read all your post in this blog and hope we can make friend
I’m a Value Investor in Thailand for 10 year i started invest in PH stockmarket since 2015
I’m the admin of Facebook group called “ASEAN VI” we talk about stocks all over ASEAN
– Giggs Akarat
https://www.facebook.com/giggswalk my facebook
https://www.facebook.com/groups/1428819634071463 our group ASEAN VI
Hey Giggs,
These are interesting figures especially if growth is considered. I think that a growth of 20% to 30% is not sustainable in the long run. If you give it much thought, WLCON can double in size in just a matter of 2 1/2 years if it grows at 30% annually. For the 20% growth, it may be possible.
I looked at the recent annual report and found out that WLCON generated an excess cash of P838M. Cash return on invested capital turned out to be 6%.
I believe that a 6% growth is a much better estimate because real growth can only be achieved when excess cash can be taken out of the business to reinvest back without affecting its operations.
Assuming excess cash remains the same but grows at 6% and by using a discount rate of 12%, I now value the company at P19.3 billion – or roughly P4.71/share.
Growth investors will surely benefit from WLCON. It’s okay to pay a premium price if you’re willing to hold it for as long as possible. But I look at value more and I will only initiate a buy if it looks undervalued statistically.
In my opinion, the market is already pricing the stock way above its value. There’s so much optimism in the stock and its ability to grow in the future.
You may PM me in my FB page and looking forward to be your friend to discuss ideas and learn from each other.
Have a great day Giggs! 🙂
Thanks Mark for sharing your opinion,
it’s great to hear what local think esp. the Value investor like you
i’ll pm you in your facebook page, i think it’s good to share Value investing idea between us
Now 16 peso ?
Nice!
Hi Sir Mark,
Thank you for the insight :D, I’m also into trading via COL Financial, so far the returns of WLCON is very attractable (looking at the monthly returns):D currently I’m holding stocks with ALI. The returns of WLCON is invigorating and tempting. I should have bought when the price was at 5.00+php ? .. do you think is it still viable to buy shares with WLCON moving forward?
thank you and Godbless ?
Hi Jovalmarie,
Based on recent FY2016 and 1Q17 reports, I see WLCON on an intrinsic value of P4.71 to P5.04 per share. WLCON is a growth stock – buying at current prices means that you’re paying at a premium based on its book value (P2.62/share). Also, you’re betting that the excess cash they make will be used to achieve huge returns on equity in the long-term.
Just to add, intrinsic values differ depending on a number of variables including growth rates. So just keep them in check so that you can get accurate calculations.
2Q17 WLCON did 30% growth YoY in net profit
or more than +100% if looks at operation income before tax