FREE Special Report: Cebu Landmasters IPO Analysis #3 (by RCBC Securities)

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Other Cebu Landmasters (CLI) IPO Reports (with exclusive Recommendation and Target Prices!):

 

 

Cebu Landmasters (CLI) IPO — Our Partner Broker’s Analysis

SUMMARY OF ANALYSIS AND RECOMMENDATION

Cebu LandMasters, Inc. (CLI), one of the leading real estate developers in Cebu, is set to make its debut on the Philippine Stock Exchange via an initial public offering of up to PHP 2.9 billion. CLI’s key investment highlights are summarized below.

Expected Earnings per Share (EPS) growth of 22% for 2017 to 2019. The company has strong earnings visibility and we expect above average margins to be sustained. We forecast 2017 to 2019 EPS CAGR of 22%.

Geographical niching. CLI’s focus on Visayas and Mindanao is supported by its principal’s familiarity with those regions. The company’s projects are located in areas that are growing faster than the national average and have developable land that is generally cheaper than that in Metro Manila.

Homegrown developer and preferred JV partner. The principal’s presence in Cebu in particular and the company’s proximity to the Visayas and Mindanao regions in general allow it quick response time to close prospective joint-venture deals with landowners.

Landbank-light model. CLI avoids landbanking, preferring instead to acquire land in areas with immediately-marketable prospects and to develop them right away to avoid non-performing property assets and the high cost of maintaining a landbank.

Fast project turnover and high sales velocity. Project turnaround is quick. On average, the company is able to turn over a horizontal project just 1 year after pre-selling and a vertical project 2-3 years after pre-selling.

Above-industry margins. 2016 gross margin was 54%, 8% higher than the industry average, while 2016 net margin was 34%, 7% higher than the industry average.

Our Partner Broker’s Recommendation: 

We have a Target Price of PHP 6.58 for CLI, based on a 12-month forward EPS forecast of 0.70 and a PE of 9.4x, the forecasted average 2017 PE for the property sector ex- ALI and SMPH.

Our target price would yield a return of 31%; hence, we recommend to SUBSCRIBE.

 

COMPANY BACKGROUND

CLI is the leading local developer in Cebu. The company was established in 2003 by Jose R. Soberano III, starting with a residential subdivision for middle income earners. In 2007-2009, the company continued to build more subdivisions for mid-income earners. It was in 2010 that the company embarked on its first vertical project- Asia Premier and started diversifying to different market segments.

To date, CLI managed to become a top developer in Metro Cebu, with the second largest market share in condominium units. 53% of the company’s projects are condominiums.

 

IPO DETAILS

COMPANY DIRECTORS AND OFFICERS

USE OF PROCEEDS

INVESTMENT HIGHLIGHTS

Expected EPS growth of 22%

The company’s pipeline of projects supports strong earnings visibility at least three years forward. Further, we expect that above-average margins can be sustained and we forecast Earnings per Share (EPS) to grow at a compounded annual growth rate (CAGR) of 22% from 2017 to 2019.

 

Geographical niching

CLI’s focus on Visayas and Mindanao is supported by its principal’s familiarity with and on-the-ground experience in those regions, particularly in the former. CLI is already well-positioned in Metro Cebu, holding a condominium market share of 11%.

The company’s projects are located in areas that are growing faster than the national average, are relatively underserved compared with Metro-Manila, and have developable land that is generally cheaper than that in Metro Manila.

 

Homegrown developer and preferred JV partner

The principal’s presence in Cebu in particular and the company’s proximity to the Visayas and Mindanao regions in general allow it quick response time to close prospective joint-venture deals with landowners. Mr. Jose Soberano III, the company’s founder, Chairman and CEO, negotiates with prospective JV partners directly and, hence, is able to establish rapport and can make on-the-spot decisions to be able to close deals immediately when necessary.

In contrast, Manila-based developers tend to send only representatives. This tends to constrain relationship-building; at the same time, since the representatives usually only have limited authority and are not the ultimate decision-makers, this practice prolongs the negotiation process.

 

Landbank-light model

CLI avoids land banking, preferring instead to acquire land in areas with immediately- marketable prospects and to develop them right away. This has the following advantages:

1. There are no non-performing property assets in the balance sheet that would weigh down on both ROA and ROE. The company avoids the risk of property speculation eventually turning out to be wrong.

2. It avoids the high cost of maintaining a land bank, including direct maintenance costs, the payment of property taxes, and protection from illegal settlers.

 

Fast project turnover and high sales velocity

Project turnaround is quick. While negotiations to acquire a property are ongoing, the company is already preparing the plans for the project that will be developed on the prospective site and acquiring the necessary permits. Majority of the company’s projects are sold out within the first year of sales launch.

Among CLI’s key projects, economic housing Casa Mira Linao was most notable with all 725 units sold during the first month of pre-selling. Mid-market projects- Midori Plains, Velmiro Heights, Mivesa Garden, and MesaVerte exhibited an average sales take up of 65 units per month. High-end projects- Asia Premier and Base Line Residences exhibited an average sales take up of 16 units per month. On average, the company is able to turn over a horizontal project just 1 year after pre-selling and a vertical project 2-3 years after pre-selling.

 

Above-industry margins

Due to its geographical niching, which results in low land acquisition and construction costs, among others, CLI’s margins are above the industry average. 2016 gross margin was 54%, 8% higher than the industry average, while 2016 net margin was 34%, 7% higher than the industry average.

 

FINANCIAL ANALYSIS

We forecast CLI to grow its net income by 41% to PHP 985 million in 2017. The company starts to recognize revenue at 80% percentage-of-completion. Based on the company’s ongoing projects, we estimate revenue from real estate sales to increase 43% to PHP 3.06 billion. Based on an expected 5,000 sqms of leasable gross floor area (GFA) from the completion of office and commercial spaces for lease, we expect rental income to grow by 27% to PHP 49 million.

We forecast 2018 net income of PHP 1.25 billion, 27% higher year-on-year (y-o-y). We estimate revenue from real estate sales to reach PHP 3.9 billion, an increase of 27%.There will be minimal leasable GFA roll-out in 2018; hence, we forecast a more modest 8% growth in rental income, using 7% rental rate hike guidance from the company.

For 2019, we forecast a net income of PHP 1.78 billion, 42% higher yoy. Based on the company’s ongoing projects, we estimate real estate sales to grow 40%. We expect rental income to reach PHP 116 million based on 60,000 sqms of leasable GFA from the expected completion of office and commercial spaces for lease.

Despite the dilutive effect of the additional 430 million new shares from the planned IPO, EPS would grow 26% to PHP 0.69 in 2017 and reach PHP 0.73 in 2018, based on our forecasts.

 

FINANCIAL HIGHLIGHTS

VALUATION HIGHLIGHTS

 

Cebu Landmasters (CLI) IPO — Our Partner Broker’s Valuation and Recommendation

We have a Target Price of PHP 6.58 for CLI, based on a 12-month forward EPS forecast of 0.70 and a PE of 9.4x, the forecasted average 2017 PE for the property sector ex- ALI and SMPH.

Our target price would yield a return of 31%; hence, we recommend to SUBSCRIBE.

 

 

Risk factors

Limited landbank. The company’s asset-light strategy could turn against it if land prices in the Visayas and Mindanao shoot up, forcing the company to sell at high prices or squeezing its margins. In contrast, developers with more extensive landholdings acquired when prices were cheaper would have a cost advantage and would be able to price cheaper.

Intense competition. Real estate developers are already flocking to the Visayas and Mindanao as a result of the attractive growth prospects of these regions, intensifying competition. This could slow CLI’s sales velocity and reduce profitability and margins.

Higher interest rates. After three 25bps rate hikes by the US Federal Reserve since December 2015, consensus expectations are for up to three more rate hikes this year. If these result in interest rate increases in the Philippines as well, then the higher rates would discourage real estate acquisition.

Cash flow management. We note the high level of the company’s receivables (342 days’ receivables) as of end- 2016. If this persists, then we forecast that the company would be very tight by 2019, requiring additional financing. However, we do forecast that net D-E would be 0.29x by then, allowing them room to borrow.

 

Other Cebu Landmasters (CLI) IPO Reports (with exclusive Recommendation and Target Prices!):

 

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