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:

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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:

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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:

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

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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