Case Study – PRC

Let’s improve our learning experience in this thread by taking real life examples.

Case Study – PRC

PHES’s stock price had been soaring in these past few months due to the possible joint venture with Ayala. Ayala is said to invest in PHES’s 60 hectare plastic city estate in Valenzuela City. A company that has a similar story would be PRC.

Philippine Racing Club, Inc. (the Company, PRC), operates a horse racing franchise.  Under the franchise, PRC may take or arrange bets for races conducted in or outside the Philippines.  Currently, the betting operation of the Company is being expanded by the addition of more Off-Track Betting stations (OTBs). The Company’s source of revenue is the 8.5% share in the gross receipts of the betting tickets.

PRC was the largest racing club in the Philippines when it was organized in 1937. The whole racetrack property was located in a 21.6 ha. land in Makati City. On December 21, 2008, the last official horseracing was conducted and starting January 6, 2009, horseracing was conducted in the new racetrack complex in Naic, Cavite.

On February 25, 2011, the Company disclosed that they executed a master development agreement (MDA) with ALI where the company will contribute its 21 ha land in Makati for a mixed-use real estate development. The agreement provides that PRC will have 18% share of the saleable units.

In October 2011, ALI purchased 2.96 ha. of land within the Makati property in compliance with the terms and conditions of the MDA. The selling price of the land sold was not disclosed but on its SEC 17-A filings in 2011, ALI advanced P554.5 million to PRC representing 24% of the agreed price or an implied selling price of P2.3 billion. Currently, no revenue regarding the transaction was recognized by the Company but the cash proceeds given by ALI are lodged as “advances from customer.”

The accounting treatment of the sale of land by PRC might serve as a market surprise as soon as PRC recognizes the transaction as revenue. The effect of the revenue recognition will be a sudden increase in the top line of P 2.3 billion. The cost of the whole 21 ha land was recorded at only P81 million. Assuming that the cost of the 2.96 ha land including cost to prepare it for sale is 50 million, possible increase in the profit of PRC will be 2.25 billion.

Management motivation might be present to recognize the revenues in 2012 as their by-laws stipulate that management bonus shall be 10% of annual income before tax. Also worth noting are the buy-back transactions made by the company since the approval by the Board of the buy-back program on April 17, 2012. The total shares bought back by the company are 5,070,500 shares at 9.50.

The downsides are:
1.   The gain to be recognized is one time only.
2.   There is a probability that the 2.3 billion revenue will not be recognized in 2012.

Let’s wait and see how the market will react as soon as the company presents the information above in their financial statements.

Disclosure: No position in any stock mentioned.

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