Solid Group, Inc. (PSE: SGI)

The Company’s main source of revenue is its sale of mobile phone, broadcast/professional equipment & accessories, and prefabricated modular houses which contributed 76% of total revenues in 2011. Below is the breakdown of SGI’s sales account:

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The Company sells the mobile phone brand Myphone. Myphone is distributed by a wholly owned subsidiary Mytel Mobility Solutions, Inc. (Mytel) through 260 independent dealer networks. Effective The Company exhibited double digit growth since its venture in Myphone distribution on August 2007.

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An interesting development in the Company is the restructuring of its corporate structure to focus on real estate business and sale of mobile phones under the brand name Myphone. On May 11, 2012, SGI sold the assets of its wholly owned subsidiary Solid Broadband Corporation (SBC) for a consideration of P 1 billion cash to Skycable Corporation. [1]

The Company’s real estate investments include the Golden Hill Project, a property within the ASEAN Commercial Park in Nanning City, Guangxi Province, PRC. The Company, through Fil-Dragon, pre-sold the multi-storey residential and commercial condominium of Golden Hill Project. The Company received P29 million and P686.3 million in 2010 and 2011 respectively in the pre-sale.

Comments:

SGI’s attraction is from the following:

  1. Ability to take advantage of the Philippines’ strong domestic consumption
  2. Strong balance sheet.

SGI is well positioned to take advantage of the Philippines’ strong domestic consumption. Other than SGI’s MyPhone brand, SGI is capable of exploiting the low cost housing in the Philippines under the MyHouse brand. Similar to myPhone, myHouse is a product designed to appeal to the masses.

SGI’s MyHouse brand is a modular housing technology that can be set-up for as fast as 30 days. MyHouse has the following models:

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SGI has a very strong balance sheet. Other than the fact that SGI’s 12 billion assets in the 3rd quarter of 2012 is 25% cash, SGI has a debt to equity ratio of .39x which means that debt is only 39% of SGI’s capital. However, closer scrutiny of the quality of these debts will bring more insights to an investor.

SGI has these notable liabilities:

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The nature of SGI’s customer deposits are cash received from pre-selling their condominium project in Nanning City, Guangxi Province, PRC. The bulk of SGI’s deferred tax liabilities arise from the unrealized gain from investment properties. Deferred tax liabilities will only be paid if SGI will sell the investment properties and the customer deposit will be reclassified as revenues as the construction of the condominium project in China progresses.

These liabilities are called “float.” These are liabilities that have negligible chance that a third party will require SGI to pay on demand. That said, SGI’s “true” liability is only 1,508,308,604 or a debt to equity ratio of .16x which means that SGI has more capacity to raise debt without posing much threat in the company’s liquidity or ability to pay.

Valuation

I expect SGI to report an EPS of P0.62 but normalized earnings should only be at P0.27. I expect SGI’s MyHouse brand will be well accepted by the masses and MyPhone will continue to grow its sales in high double digit growth. Considering SGI’s position to take advantage to the Philippines’ strong domestic consumption, SGI’s position to take advantage of the low-cost housing through myHouse and SGI’s financial capacity to seize these opportunities, SGI’s value should be at 10x its normalized EPS or P2.70.

Catalysts:

  1. Strong sales of SGI’s MyPhone brand.
  2. Reception of SGI’s MyHouse brand might be positive.
  3. Possible entry of SGI in the real estate industry under the low-cost segment.

 

Risks:

SGI’s myHouse may not replicate the success of myPhone.

Sources:

  1. Additional information re: Agreement between Solid Broadband Corporation and Skycable Corporation http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-3906_SGI.pdf
  2. SGI Sec filings

Other data:

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

Case Study: Solid Group, Inc. (PSE: SGI)

The investment thesis is simple: SGI’s one time gain would generate SGI an EPS of above P.51 for 2012 which suggest an intrinsic value of P5.10 [.51 x 10 PE ratio].

SGI sold its subsidiary Solid Broadband Corporation (SBC) to Skycable Corporation for P1 billion cash on May 11, 2012 generating a one-time gain of P450 million and an EPS of .51 on the third quarter of 2012.

A similar case is JG Summit Holdings, Inc. (JGS). JGS sold Digital Telecommunications Philippines, Inc. (DGTL) to Philippine Long Distance Telephone Company (TEL) resulting to a one-time gain of P11 billion and an EPS of P3.19 for the year 2011. Using a price to earnings multiple of 10, JGS intrinsic value should be at P31.90 (P3.19 x 10) at that time.

On the date that the financial statements were released JGS’ stock price traced its intrinsic value.

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The reason for this event could be the Market’s confidence JGS management has the capacity to utilize excess cash. The Market believes that the Management can utilize excess cash to add shareholder value.

SGI with its additional cash flow from sale of its subsidiary may utilize the excess cash to take advantage of the weakened peso and participate in the strong domestic spending of the Philippines. SGI’s business model is mainly the importation and sale of mobile phones here in the Philippines.

SGI’s revenue growth is mainly driven by their distribution of the Myphone brand. A business opportunity for SGI’s excess cash is their possible participation in the construction industry through its subsidiary SolidGroup Technologies Corporation (SGTC). SGTC signed an exclusive 3-year Distribution Agreement with Yahgee Modular House Co., Ltd. in 2011 under the MyHouse brand. SGTC will import and sell prefabricated modular house and office units opening the doors for SGI in the construction industry.

Red flags:

Increasing inventory obsolescence:

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Comments:

Red flags are not that red and investment thesis is very plausible with the MyHouse brand starting to introduce their product to the masses by sponsoring shows like Kanta Pilipinas of TV5.

Acknowledgement: This case study is a product of my conversation with a reader, Nosteng.

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

Solid Group, Inc. (PSE: SGI)

Solid Group, Inc. (PSE: SGI)

The Solid Group, Inc. (Company, SGI) is primarily engaged in sale of mobile phonesprefabricated modular house & offices, and real estate. Below are the Company’s subsidiaries:

The Company’s main source of revenue is its sale of mobile phone, broadcast/professional equipment & accessories, and prefabricated modular houses which composed the 76% of the total revenue of 2011. Sale of mobile phone through its subsidiary, My Solid, contributed the most in the Company’s revenue growth. Mobile phone units sold in 2011 jumped to 2 million units from 739,721 units in 2010 or a revenue growth of 94% from P1.4 million in 2010 to P2.9 million in 2011.

The Company sells the mobile phone brand Myphone. Myphone is distributed by a wholly owned subsidiary Mytel Mobility Solutions, Inc. (Mytel) through 260 independent dealer networks. Effective June 1, 2012, My Solid and Mytel will be merged with the former as the surviving entity.

An interesting development in the Company is the restructuring of its corporate structure to focus on real estate business and sale of mobile phones under the brand name Myphone. Except for 2010, the company exhibited double digit growth since its venture in Myphone distribution on 2007.

The Company’s real estate investments include the Golden Hill Project, a property within the ASEAN Commercial Park in Nanning City, Guangxi Province, PRC. The Company, through Fil-Dragon, pre-sold the multi-storey residential and commercial condominium of Golden Hill Project. The Company received P29 million and P686.3 million in 2010 and 2011 respectively in the pre-sale.

The Company, through ZTC, started the construction of Tri Towers condominium building in 2007. The location map of the project is seen below:

Tower 1 was fully completed in 2009 and construction for Tower 2 was started in 2011. The construction of Tower 3 has not yet started.

The Company estimates to spend P650 million capital expenditures for 2012 for real estate and broadband infrastructure. This expenditure shall be lessened as the Company sold the assets of its wholly owned subsidiary Solid Broadband Corporation (SBC) for a consideration of P 1 billion cash on May 11, 2012. The assets are sold to Skycable Corporation. [1] I estimated the company to recognize a gain of 300 million in this transaction since net assets of SBC are recorded in the books of the Company at P667 million as of 2011.

The Company has the following risks on its assets:
1.   Risk of expropriation under the Agrarian Reform Act of its properties in Pililla, Rizal and Pamaldan, Cabanatuan City with a carrying amount of P3.3 and P7.9 million respectively.
2.   A land with a carrying amount of 309 million is subject to claims by third parties.

In 2005, ZTC received notification from Urban Roads Project Office (URPO) of the Department of Public Works and Hughways (DPWH) that the location of the Tri Towers condominium might be affected by the plans of the National Government of the Philippines for the construction of the proposed 2nd Ayala Bridge. However, the URPO stated that it has not yet undertaken the detailed engineering design that will ascertain if the location of the ZTC’s property will be affected by the road’s right-of-way.

Other data:

Sources:

1.   Additional information re: Agreement between Solid Broadband Corporation and Skycable Corporation http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-3906_SGI.pdf

PD. No SGI shares