Profiling: Belle Corporation (PSE: BEL)

Belle Corporation (BEL, the “Company”) has the following notable subsidiaries and associates:

BEL1

Highlands Prime, a publicly listed company, focuses primarily on the high-end leisure property market. Highlands Prime’s property assets are located mainly in the vicinity of Tagaytay Highlands and Tagaytay Midlands golf clubs in Clamba, Tagaytay City and Batangas. Pacific Online, also a publicly listed company, leases online betting equipment to the Philippine Charity Sweepstake Office (PCSO) for their lottery operations.

A significant business development of BEL that can impact the Company’s fundamentals is the cooperation agreement of BEL’s wholly owned subsidiary Premium Leisure & Amusement, Inc. (PLAI) with Melco Crown Entertainment Limited (MCE) which was finalized on March 13, 2013.[1]

Initially, PLAI was in agreement with Leisure and Resorts World Corporation (LR)’s wholly owned subsidiary AB Leisure Global, Inc. (ABLGI), where ABLGI will act as an operator and manager of the Belle Grande under a lease agreement. BEL recognized P62.1 million in rental revenue in 2011. However, according to LR, changes in the development guidelines issued by the Philippine Amusement and Gaming Corporation (PAGCOR) on July 18, 2011 caused ABLGI and LRWC to amend their previous agreements. Amended agreement requires ABLGI to contribute 30% of PLAI’s interest or approximately P4 billion. In exchange, ABLGI shall be entitled to 30% of the fixed yearly income generated from the leasing of all commercial spaces of the project, and 30% of PLAI’s 50% share in the earnings before interest, taxes, depreciation and amortization (EBITDA) from casino operations or PLAI’s 15% share on Net win, whichever is higher. [2]

Below is the illustration of BEL-MCE agreement:

BEL2

Contribution of PLAI-MCE agreement to BEL’s valuation:

Contribution of the PLAI-MCE agreement to BEL’s valuation can be estimated by:

  1. Estimating the revenue contribution of the agreements
  2. Determine the life of the agreement
  3. Apply discounted cash flow method (DCF) of valuation

According to BEL’s Vice Chairman, Mr. Willy Ocier, BEL will be earning P1.5 billion a year as soon as phase 2 of Belle Grande Manila is completed.[3] It can then be reasonably expected that the P1.5 billion will be received by BEL on or beyond 2015.[4] Since the license agreement granted by PAGCOR will expire on 2033,[5] we can say that the MCE will be paying BEL P1.5 billion beginning 2015 for 18 years. Assuming that the interest rates of a 20-yr government bonds on 2015 will be the same as the recessionary years of 2008-2009 of 9.50%[6] we can arrive at the following valuation:

BEL_DCF

Based on the DCF method applied on the assumptions made, the PLAI-MCE agreement can contribute P0.67 to BEL’s intrinsic value.

The valuation above has many pitfalls:

  1. Phase 3 expansion is not included in the calculation
  2. Increase in rental income is not considered
  3. Share on earnings before interest, taxes, depreciation and amortization (EBITDA) is not included

Kindly take note that the valuation above is only for the PLAI-MCE agreement and not the valuation of the whole BEL.

Sources:

  1. Press Statement: “Belle Closes Cooperation Agreement With Melco Crown”,  http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-2199_BEL.pdf
  2. Press Statement re: details of agreement with AB Leisure Global, Inc., Premium Leisure and Amusement, Inc., and BEL; Voluntary Trading Halt, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-7787_LR.pdf
  3. Clarification of news article: “Belle Earns P777.7 Million In Q1”, http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-3451_BEL.pdf
  4. Belle wants addt’l land for Entertainment City project,http://www.abs-cbnnews.com/business/04/22/13/belle-wants-addtl-land-entertainment-city-project
  5. 2012 Annual Report, Investment agreement on PremiumLeisure& Amusement, Inc. (“PLAI”), p.7, http://www.pse.com.ph/resource/corpt/2013/BEL_17A_Dec2012.pdf
  6. Government Securities Yield Rates, http://www.treasury.gov.ph/statdata/yearly/yr_gsyieldrates.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

Advertisements

One thought on “Profiling: Belle Corporation (PSE: BEL)

  1. Pingback: A lot of catching up, Free Accounting Course, Stock thoughts: VMC, BEL, MER | Fundamental Enthusiast

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s