WPI Stock Review: Value Unlocked?
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.
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 ₱407 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 ₱160 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 ₱400 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 ₱0.87/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 ₱0.87/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 ₱4,129 million. That equates to a cash per share of ₱1.65. Add book value at ₱1.98 and you get an intrinsic value of ₱3.63.
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 ₱1.22. Add book value and you get an intrinsic value of ₱3.20.
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 ₱0.80 to ₱0.91 provides a 75% margin of safety.
Even if the company loses money at a rate of ₱87 million based on FY2016 estimated owner earnings, the company will survive and should lose around ₱651 million of equity for the next 20 years. Still, that equates to an intrinsic value of ₱1.72.
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 |
Tab. 8 Intrinsic value calculation
At ₱0.86/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.
Thank you for this review!
You’re welcome Dora. 🙂
Thank you for such a good article.
Could you also please tell me which valuation method did you use above? I used DCF with 7.8% growth and got intrinsic value of P2.00/share
Hi Anuj. I used DCF, but instead of unlevered free cash flow, I used owner earnings, discounted to present using a 12% discount rate.
Good review as always Mark. The main driver of the massive upside move apart from the increase of net income was the buzz in new Casino investments in Mactan, if that happens then that would attract more tourists and overflow of clientele which will benefit the existing busineses in the area WPI being a pioneer will be one of the biggest beneficiary.
Thanks for the feedback MCor. 🙂
sir how do you compute intrinsic value? gusto ko din matuto magcompute. try ko icompute 3 hawak ko stocks. TY
Hi EJ,
Start by looking at the excess cash a company generates on a 3 to 5-yr. average. Use that figure to do DCF calculations. Then add the tangible book value. You then get the value of the company.
Thank you for this review. I bought WPI stock when it was at 0.85 after reading this review, and it’s now steadily rising. Keep up the good work in your blog. God bless!
Great! I also bought it at those prices. May the profits be with us. 🙂
Good day Mark salamat sa info mo,kaya lang ngayun kolang nabasa, pwede paba ako humabol since presyo na niya ay 1.3/ share?tnx
No sir. I can’t guarantee that and if you do, please consider the risk sir.
Ok Mark thanks for the reply, more power sa blog mo malaki naiitutulong nito.tnx ulit
Masyado kasi mabilis ang pagtaas niya. Although undervalued pa din at current prices, yung investor sentiment about the stock we can’t control yan. If you believe the stock will rise past P1.30, then do so. Take note na puwede din siya bumalik at P0.80 levels to which, you may lose 50% of your money.
Hi Engr. Mark. I’m debating with myself on whether to sell WPI when the price reaches 1.6 (the intrinsic value with 50% MOS and at 0% growth) or to hold on to my stocks for 2-3 years. I know nothing is ever assured, but which do you think is more sound? Thanks.
Hi Jun, I can’t say for sure but in Value Investing, patience is a virtue talaga. There’s still value in the business eh even at P1.45 current price. I’m confident it can reach book value kasi maganda cash flow ng business and sa assets pa lang sulit ka na. May retained deficit pa kasi sila pero once it’s gone, magdedeclare na yan uli ng dividends and that will again put positive sentiment and eventually raise its price. I’ll hold for now – possible bagger stock. 🙂
P.S. I’m currently up by 70.74%.
Thank you Sir Mark and God Bless!
Sir Mark,thankyou!!!??
You’re welcome Gi. 😀
ur right the price went up to 1.52 but wellex made a sale to westlink i think triggered a sell off not sure if it has an impact to it or not right now trading at 1.13 anyway hold parin ako at 1.12 sayang sana made a bail out at 1.50.q2 earning report is 2 weeks from now which is positive for sure make.sana make its way back to 1.52 or higher wait na lang uli ako f..k!
Hi RogueTrader5,
I sold all of my shares today at P1.12 and profited 32%. I was also hesitant to sell at P1.50 but no regrets. Initially, I only aimed for 12% but WPI gave me more. Now aiming to buy a new undervalued stock I just spotted yesterday currently trading at above 75% discount to its intrinsic value.
WPI is still a bargain and I’m sure it can reach book value price given good cash flow report in the next annual report.
Good luck and may the profits be with us Bro. 🙂
Great analysis! thanks!
You’re welcome Marc!
High Mark nakahabol ako 4th wave at 1.35 alam ko ma hit yung intrinsic value tiwala ako sa data na binigay mo.ayun sa bloom road to 1.8-2,,pero pagnabasag ang dos, ok na ok lalo.
good view! as of this current price at 1.26 and ASM September 23 is near, what are your thoughts? Thanks
Hi Joe, still the same. But I long sold my position on this stock. I hope they start declaring dividends as this will further drive the price to its intrinsic value.
they have not distributed dividends for more than a decade. aside from declaring dividends, will the privatization project of pagcor and dof, renovation early next year and tourism will boom under this administration will push the book value of wpi towards 1.98 or 2.03 ? i currently have it at 1.36 and it went down today to 1.26. my goal is medium to long term. planning to keep acquiring shares below 1.30 since it is still super undervalued.
The Gatchalians have no problem with this. They like that the regulator and operator should be separate entities.
Good pm Engr,Marc ask kolang kung yung evaluation ay same parin me lumabas kasi na news under investigation sila, ngayun presyo niya as low 0.87, planning to invest in wpi since meron silang project ngayun sa manila.tnx in advance sa reply.GOD BLESS
Hi Sir Ernie,
Actually yan ang problema kapag may bad news na lumalabas tsaka hindi natin masisisi ang market. Kung trader ka dapat talaga nakalabas ka na diyan kasi tiningnan ko din technicals niyan pababa talaga. Pero based sa fundamentals, it’s getting cheaper and cheaper again.
Yung news hindi naman yan talaga makakaapekto sa performance. Hindi naman lumiit ang revenues or income nila. Malalaman natin yan sa darating na 3Q filing and 2017 annual report. Traders matagal na dapat nakalabas. Sa Value Investors, the more it gets cheaper, the more it gets attractive. Proper position sizing lang naman kailangan mo para hindi masyado exposed ang port mo sa risk.
CAVEAT. May WPI ulit ako ngayon and namumula but it’s fine and just any other value investors out there, I think see they see this as an opportunity to enter or add to their existing positions.
Long-term po ang Value Investing. If the risk is too much for you, then try to consider short-term strategies.