Double Dragon Prospectus at a Glance

Key points:

  •          DD’s current business is not that attractive
  •          DD’s value is largely derived from the anticipated success of CityMall’s strategy to expand in the Visayas and Mindano.
  •          DD could be valued at P2.55 assuming that CityMall is a success for the Company.

This post is a supplemental post to an article found here. The current business of Doubledragon Properties Corp. (DD, the Company) has the following performance:

DD1

Amazing at first glance but when compared with operating cash flows:

DD2

As revenues increase rapidly and cash flows bleeding, the only option that DD could do to fund the growth of its real estate operations is to raise capital or acquire more debt. Negative operating cash flow is not all bad. Rapidly growing companies are expected to have negative operating cash flow to fund growth.  DD generated negative operating cash flows due to the recognition of unrealized gains on investment properties as revenues, recognition of more accounts receivable sales, and build-up of more inventory. The risk that DD is most sensitive to is the lack of demand for the inventory they built.

DD’s most promising business development is its entry in the retail industry through CityMall Commercial Centers Inc. (CityMall) which will provide the company with recurring revenue stream and stable cash flows from rental income. The Company aims to open 100 CityMalls around the country and targets 1 million leasable sq. m. of commercial and office property projects by 2020. CityMall will provide prime spaces for the fast food brands of Jollibee group and will house SM Group brands with the acquisition of SM Investment Corporation of 34% interest in CityMall last February 17, 2014. The supermarket area of CityMall, is non-exclusive and will be open for all the top supermarket chains in the country.

What makes CityMall attractive that even SM group invested for a 34% stake?

CityMall will operate in the retail industry under community shopping centre (community centre) format. Below are key retail formats in the Philippines:DD3

Community centres generally have supermarket or hypermarket as its anchor locator along with various specialty stores. Investment in the community centres is a bet on the strong and rising consumer spending in the Philippines. Community shopping centres thrive despite the presence of large malls as consumers seek convenience in their shopping experience. DD plans to expand CityMall in Visayas and Mindanao and such strategy is well founded:

DD4

Majority of community centres are located in Luzon and Metro Manila while the community centres in Visayas and Mindanao are largely concentrated in Metro Cebu and Davao City. Clearly, there is room for growth in expanding community centre retail formats in Visayas and Mindano.

One of the competitive strengths mentioned in the prospectus is the local knowledge of Mr. Injap Sia of the Visayas and Mindanao markets. With that management experience in mind, DD is in the position to tap the potential markets in Visayas and Mindanao through the expansion of CityMall to these regions.

Valuation

Currently, DD’s revenues are all non-recurring which means application of PE ratio on its current business to value the company will not be valid. Therefore price to book value multiples is the appropriate valuation metric for DD.

Computation of DD adjusted book value are shown below:

DD5

Comparison of DD’s price to book value ratio to other publicly listed companies:

DD6

Based on the table above, DD is valued higher than the established real estate companies that have stable cash flows from rental like RLC and MEG. PGOLD is DD’s most comparable company assuming that CityMall will be DD’s major revenue contributor in the future. That said, DD could be valued at least 3.5x P/BV or a target price of P2.55 (P0.73 x 3.5).

 

 

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: No plans to initiate position in DD

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23 thoughts on “Double Dragon Prospectus at a Glance

  1. Pingback: 5 Reasons Why DoubleDragon Properties, Inc ($DD) Will Pullback Below Php 2/share in less than a year | Technimentalist

  2. I echo most of your opinions except the latter. Pgold and dd are not comparable. Pgold is a supermarket and at best DD is a community/retail mall REIT. The Cosco commercial mall – which houses DD is probably the one you’re talking about. If you will make a comparison- then you should factor only the commercial mall space of Cosco- as this is a conglomerate that has a commercial mall – where Puregold is an anchor tenant so Cosco capital is a landlord to at least 25% of all Puregold malls – aside from its new acquisitions of cabanatuan shopping mall. The net operating income approach will be the best way to value DD in my opinion which is to get estimated sales per square feet similar to how SMPH pre merger with smdc is valued. Take into consideration the percentage sales as well since SMPH has that- and I’m not sure if dd has that blended rate charge when it comes to rental leasing 🙂 thank you.

    Reply
    • Hello facelesstrader,

      SMPH is trading at above 5x P/BV multiple making 3.5x P/BV multiple assigned to DD a conservative assumption.

      Why compare DD to a supermarket PGOLD?

      DD is not comparable to PGOLD in terms of revenue source but according to DD’s prospectus, PGOLD is one of its competitors under the community centre retail format. Therefore, DD is comparable to SMPH in terms of business model but in terms of company size and retail format, DD is most comparable to PGOLD.

      I understand that you are suggesting that the best way to value DD is through PE multiple.

      Lease agreements in SMPH can be fixed monthly rental or percentage rental basis where SMPH will have a share in the gross sales of the tenant. In a comment in stockqoutient.com, I suggested a method of forecasting SMPH’s future earnings: “The operation of DD’s CityMall can be compared to that of SMPH in which majority of the revenues will be from rental income. Assuming a rate of P700/sq.m. and a profit margin similar to that of SMPH of 35% and multiply by the % ownership of DD in CityMall we can have the estimated earnings.”

      Forecasting DD’s earnings has many uncertainties: 1) rental rates of DD 2) desired profit margin of DD 3) success of DD’s strategy.

      By using DD’s BV, we are using a figure that is readily available and using only one assumption which is that DD’s management will not issue more shares in the future. By using P/BV multiple, we are answering the question: How will the market value the BOOK VALUE of a company that has a growth potential similar to that of PGOLD?

      Thank you for the wonderful comment.

      Regards,

      Renzie

      Reply
  3. i was thinking of not using PE. I was thinking more of using dcf of net oper income and yup, 700/sqm *estimated npm *1m sqm by 2020 discounted to 2014 (6 years) by interest rate you’re comfortable in assigning. thanks for above blogpost 🙂

    Reply
  4. In any case, I echo the view that it’s very risky at the price of P2.00 per share since you’re not getting a lot of margin of safety buying at a price where you’re supposed to value the 1M square meters of the community malls which are 6 years from now. Also, maybe 700 pesos/sqm is high considering I presume Iloilo locations would have to be cheaper than Manila.

    Reply
      • sa bagay, 700 pesos per sqm by 2020 is like 350 pesos today assuming 12% interest rate per year (owing to rule of 72.) 😀 Masyadong forced to think longterm kasi si DD eh. lahat ng mga plans year 2020 pa. I too think better to wait for community malls to open before doing anything.

  5. I think as of today based on Peter Lynch calculation on PEG Ratio if you consider and disclosure by DD to PSE http://www.pesobility.com/disclosures, They bought Zion Land they will forecase P85.6M Net profit and existing business of DD they are forecasting for this year 348M Net income, so P433.8 that is total net income which means their net income for this year is P433.6M and getting this year % grow P433.60/P4.458B (Paid up Capital)= 9.72% and I forecast their grow at 15.70% average per year. they get PEG Ratio = 1.03/15.70 = .07 (this is considered the current price of DD P10/share). According to analysis of Peter Lynch a company which has below one (1) PEG ratio is Undervalue. 1 is Fair Value and above 1 is Over value. Here’s the company undervalue or value;
    Price/share(26 May) PEG Ratio Remarks
    Alliance Global Inc. ———————- 30.55 —————- 1.08 ——- Fairly value
    Aboitiz Power Corporation (AP) 37.3 0.56 Under value
    Banco de Oro Unibank, Inc. (BDO) 88.4 0.59 Under value
    Bank of the Philippine Islands (BPI) 87.9 0.47 Under value
    China Banking Corporation (CHIB) 54.55 0.37 Under value
    DOUBLEDRAGON PROPERTIES CORP. (DD) 10 0.07 Under value
    DMCI Holdings, Inc. (DMC) 77.2 0.74 Under value
    Energy Development Corporation (EDC) 6.15 0.51 Under value
    Filinvest Land, Inc. (FLI) 1.6 0.27 Under value
    Megaworld Corporation (MEG) 4.57 0.52 Under value
    Metro Pacific Investment 5.15 0.50 Under value
    Puregold Price Club, Inc. (PGOLD) 41.1 0.95 Under value
    Robinson’s Land Corporation (RLC) 22.5 0.60 Under value
    San Miguel Corporation (SMC) 78.50 0.40 Under value
    SM Prime Holdings, Inc. (SMPH) 16.30 0.76 Under value

    Reply
      • I recalculated it. I guess you mean a PEG of .65.
        I agree that using that metric, it is cheap. However, as a humble student of the stock market, i could not comprehend the concept behind pairing PE and growth rate. Why pair the two numbers? I understand PE ratio’s concept (shorthand for DCF), P/Sales (price paid for revenue stream), and P/BV (price paid for earning assets of the company). But not PEG.

      • The analysis of calculating PEG Ration is you project the growth net income against paid up capital. I project the growth very conservative. 15.70% cumulative yearly. So i just calculate the disclosure against this year paid up capital which they disclose to PSE. They bought Zion Land and forecast this year net income of P85.60 and DD itself is P348M so approximately total net income of P433.60M. P/E = P433.60/P4.456B= 9.72% x P9.40 as of this trading = is 0.91/share this year. The PEG Ration is Current Price /P.91/ (3 yrs average growth) = 0.65. You are exactly correct that is the PEG Ratio. The father of PEG ratio is Peter Lynch he believe that if Company has forecast well and it falls to less than one (1) PEG Ration the company is undervalue which means you can buy now. Now the current paid up capital of Company as of Today is 2.229 Billion shares x P9.4 = P20.95B if somebody will buy in DD company which means accoding to Peter Lynch analysis to get 1 as PEG ratio to have fair value the company must have a current price today of P153 / share that is given by program calculation. The person or analyst who are giving analysis of DD which is have no basis should think and research properly. The Three Tycoons ( Sia, Tan and Sy) who formed this Company are successful in their respective business. That is why Retail or Foreign Investors must know the PEG Ratio of any companies before buying. And They Should also considered CAN Slim Techniques by William O’niel ( The next heavy weight analyst in the US, Peter Lynch is the first). Next time I will discuss CAN Slim Stock techniques.

    • Hello Renzie you can buy those that are undervalue and after one year I believe that your investment will hit 40% based on the analysis of Peter Lynch usually undervalue makes it 40% per year. Here are my update as of 27 May 2014 under value Corp.
      (Price/share) (PEG Ratio)
      Alliance Global Inc. AGI 30.7, 1.08, Fairly Value – buy
      Aboitiz Power Corporation (AP) 37.15, 0.56 Under Value- Buy
      Banco de Oro Unibank, Inc. (BDO) 88.9 , 0.59 Under Value- Buy
      Bank of the Philippine Islands (BPI) 87.85, 0.47 Under Value- Buy
      China Banking Corporation (CHIB) 55, 0.37 Under Value- Buy
      DOUBLEDRAGON PROPERTIES (DD) 9.9, 0.66 Under Value- Buy
      DMCI Holdings, Inc. (DMC) 73.75, 0.71 Under Value- Buy
      Energy Development Corporation (EDC) 6.11, 0.50 Under Value- Buy
      Filinvest Land, Inc. (FLI) 1.61, 0.27 Under Value- Buy
      Megaworld Corporation (MEG) 4.64, 0.53 Under Value- Buy
      Metro Pacific Investment MPI 5.23, 0.51 Under Value- Buy
      Puregold Price Club, Inc. (PGOLD) 43.3, 1.00 Fair Value – buy
      Robinson’s Land Corporation (RLC) 22.45, 0.60 Under Value- Buy
      San Miguel Corporation (SMC) 75.8, 0.38 Under Value- Buy
      SM Prime Holdings, Inc. (SMPH) 16.44, 0.77 Under Value- Buy

      Reply
  6. Hi Rolly,

    Just to clarify, to arrive at the EPS, shouldn’t we just divide P433.60 by the number of outstanding shares which is 2,229,730,000?
    Computation as follows:
    433.60/2229.73 = EPS of 0.194 per share
    PEG = 7.5 (price as of today)/0.194/15.7 = 2.46

    I don’t understand why net income would be divided by paid up capital and then multiplied to the market price to arrive at EPS. It would be great if you can clarify the computation below.

    P/E = P433.60/P4.456B= 9.72% x P9.40 as of this trading = is 0.91/share this year. The PEG Ration is Current Price /P.91/ (3 yrs average growth) = 0.65.

    Best,
    Ben

    Reply
  7. Renzie,

    The simple explanation for PEG ratio is that it allows you to interpret the PE ratio in a more meaningful way. For example, if you have two companies that have the same PE ratio of 5, it does not mean that they are equal in terms of attractiveness. The Growth “G” indicates the likely size of the “E” in the forward PE ratio. PE ratio of 5 divided by a growth rate of 3% = PEG of 1.67. PE ratio of 5 divided by a growth rate 10% = PEG of 0.50.

    DD’s current situation of 430m of earnings on 2.2B outstanding shares, share price of 7.55 and a 15% growth rate will not translate into a desirable PEG ratio. Having said that, I am heavily invested in DD since the IPO because I think the management team can grow earnings and meet their targets by issuing corporate debt to fund capital expenditure. To illustrate simply, if they borrow money at 10% and get a return of investment of 30%, then the 20% difference goes to creating shareholder value which should ultimately be what drives the increase in share price.

    If they meet the stated goal of 525m net income for FY2014, this will make the PE ratio (based on today’s market share price) 7.55/(525/2229) = 32.06x which is much more reasonable than the current PE ratio of 150x+.

    Should they meet their 1B earnings target by 2016 without increasing the equity base, the PE ratio (based on today’s market price) would be 7.55/(1000/2229) = 16.83x!
    Should they meet their 5B earnings target by 2020 without increasing the equity base, the PE ratio (based on today’s market price) would be 7.55/(5000/2229) = 3.37x!!!

    Of course the market price will anticipate the growth and will not remain static at 7.55 per share. Also, DD will likely issue more equity to finance part of the capital expenditure.
    So the real question comes down to whether you think management can achieve the earnings targets by financing the capital expenditure more with debt than additional equity.

    Here is a back of the envelope calculation (loaded with simplified assumptions) without taking into account NPV, dividends, changes in cost of funds, inflation etc.

    Assumptions:
    – Each mall is 10,000 square meters and costs 250m to build
    – Capital expenditure will be financed 50% equity, 50% debt
    – Market share price moves gradually higher year on year but gravitates to maintaining PE ratio of 19
    – Yearly earnings targets are achieved linearly

    Year 2016 – 20 malls x 250m = 5 billion
    Share price = 7.55
    Additional shares issued = 2.5billion/7.55 = 330million
    PE ratio = 7.55/(1000/(2229 + 330)) = 19.09x

    Year 2017 – 20 malls x 250m = 5 billion
    Share price moves from 7.55 to 8
    Additional shares issued = 2.5billion/8.00 = 313million
    PE ratio = 8/(2000/(2559 + 313)) = 11.49x

    Year 2018 – 20 malls x 250m = 5 billion
    Share price moves from 8.00 to 13.30
    Additional shares issued = 2.5billion/13.30 = 188million
    PE ratio = 13.3/(3000/(2872 + 188)) = 13.57x

    Year 2019 – 20 malls x 250m = 5 billion
    Share price moves from 13.30 to 18.6
    Additional shares issued = 2.5billion/18.60 = 135million
    PE ratio = 18.6/(4000/(3060 + 135)) = 14.9x

    Year 2020 – 20 malls x 250m = 5 billion
    Share price moves from 18.60 to 23.70
    Additional shares issued = 2.5billion/23.70 = 106million
    PE ratio = 23.7/(4000/(3195 + 106)) = 19.6x

    Share price by 2020 would be 24pesos. However, due to earnings growth (1 billion to 5 billion in 4 years) it is likely that market sentiment will inflate the price over and beyond 24… maybe 50 or even higher!

    Best,
    Ben

    Reply
  8. Sorry typo on the last year…should be:

    Year 2020 – 20 malls x 250m = 5 billion
    Share price moves from 18.60 to 23.70
    Additional shares issued = 2.5billion/23.70 = 106million
    PE ratio = 23.7/(5000/(3195 + 106)) = 15.6x

    Share price by 2020 would be 29 pesos

    Reply

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