FREE Stock in Focus: MEG (29 Apr 2019) by First Metro Securities

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Summary of Broker’s Recommendation
First Metro Securities BUY 6.70 29 Apr 2019


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Our Partner Broker’s Recommendation

Maintain BUY rating with higher Target Price of PHP 6.70.

MEG trades at an undemanding valuation of 11x/10x forward Price-Earnings (PE)ratio versus the peer average of 19x/17x despite its more sustainable earnings visibility. Potential upside may come from accelerated demand for MEG’s new townships (e.g. Pampanga, Davao, and Cavite) that are positioned to benefit from the new government’s thrust to improve infrastructure outside of Metro Manila.


Our Partner Broker’s Detailed Analysis

We reiterate our BUY call on MEG

We upgrade our Target Price of MEG to PHP 6.70 as we roll over our valuation base to 2019. Its business fundamentals remain positive and intact, and we see MEG’s growth being sustained mainly on the back of robust office leasing. MEG’s strategic positioning and exposure to both the Business Process Outsourcing (BPO) and Philippine Offshore Gaming Operators (POGOs) sectors allows it to take advantage of the exceptionally strong Chinese-driven take-ups on both the office and residential sales fronts. This offers investors positive rental growth and sustained value appreciation for its key projects despite headwinds in the market (i.e. concerns over BPO slowdown and a rising interest rate environment).


Strong margins to be sustainable

MEG’s blended EBIT margin has been notably expanding mainly on more prominent revenue contribution of its leasing portfolio, which carries an average EBIT margin of 75%. We continue to see improving prospects for its business segments, which would be continuously driven by Chinese-driven demand, and we expect rental rates to continue inching up for the year despite new supply in the market. Meanwhile, in the retail sector, we expect rental rates to remain stable, as the sector may be weighed down by hefty incoming supply.


Promised rental revenue of PHP 20 billion by 2020 doable

Management remains confident of reaching PHP 20.0 billion rental income by end-2020, from PHP 15.2 billion rental revenue it generated in FY18 (+15% CAGR). About 60% of MEG’s office space on average are taken up by its existing clientele base, with the remaining 40% coming from new contracts, giving the company reasonable visibility in terms of its clientele base.

We believe that the recovery in BPO and normalized strong demand from POGOs should continue to support rental income for MEG’s office portfolio. We foresee further positive impact on its retail front in light of the increasing presence of Chinese population living within its developments and working on its office projects.


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First Metro Securities
First Metro Securities

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