Philippines-based Rockwell Land Corp. (PHS:ROCK, Financial), a 10.8 billion Philippine pesos ($213.35 million) real estate firm, reported impressive revenue growth of 52% to 3.07 billion pesos and 51.8% profit growth to 516 million pesos in the first quarter.
The company had 16.8% margin profitability compared to 16.9% in the first quarter of fiscal 2016.
Valuations
Rockwell is undervalued compared to its peers and its book value. According to Reuters, the company had a trailing price-earnings (P/E) ratio of 5.5 times vs. the sector figure of 30.2 times, a price-book (P/B) ratio of 0.68 times vs. the industry figure of 1.51 times and a price-sales (P/S) ratio of 0.87 times vs. the industry figure 4.1 times.
The company also had trailing dividend yield of 3.05%.
Total returns
Rockwell has underperformed the broader local market, by iShares MSCI Philippines ETF (ARCA:EPHE, Financial), so far this year with 12.8% total gains compared to the ETF’s 15.14% gains (Morningstar).
Rockwell Land
According to filings, Rockwell is a premiere property developer for residential and commercial projects that cater to the high-end and upper midmarkets.
Rockwell was founded in 1975 as First Philippine Realty and Development Corp., which was later changed to Rockwell Land Corp. in 1995.
Rockwell is primarily engaged in the residential development of high-rise condominiums as well as retail and office leasing.
In 2013, Rockwell offered horizontal and midrise residential development projects not only in metropolitan Manila but in Cebu City as well (1) and began its first venture in the Hotel and Leisure segment with the launch of Aruga Serviced Apartments within the Rockwell Center in Makati City.
As of December 2016, 86.58% of Rockwell was owned by First Philippine Holdings Corp. (PHS:FPH, Financial) – a 40.2 billion pesos investment holding firm.
Rockwell Land’s operations are divided into three segments: Residential Development, Commercial Development and Hotel Operations.
Residential Development
Residential Development is engaged in the development, selling and property management of all residential projects of the group. It also includes the operations of the Rockwell Club.
In the first quarter, revenue in residential development grew 59% to 2.6 billion pesos (85.5% of total company sales) and delivered an EBITDA margin of 22% compared to 24.5% in the same period last year.
This whopping growth came from the sale of condominium units including accretion from interest, according to Rockwell. In addition, the residential’s higher profitability (EBITDA) was derived from more booking and completion from Rockwell’s Proscenium projects (3).
Commercial Development
Commercial Development is engaged in the sale, leasing and other related operations in the course of the management of commercial buildings or spaces used for retail and office leasing including cinema operations.
Commercial buildings in the segment’s portfolio include the Power Plant Mall and 8 Rockwell in Makati City, Santolan Town Plaza in San Juan, Metro Manila, Rockwell Business Center in Ortigas, Pasig and RBC Sheridan in Mandaluyong, Metro Manila. Other retail spaces are found at several of the high-rise condominiums developed by the group.
Revenue in the first quarter for the division grew 22.5% to 343 million pesos (11% of total sales) and delivered an EBITDA margin of 84.8% (most profitable segment) compared to 83.9% in the first quarter of 2016.
According to filings, revenue was mainly driven by higher occupancy of its 8 Rockwell office.
In review, Rockwell’s commercial segment can be further subdivided into three parts: Retail, Cinema and Office operations.
For the recent quarter, Retail operations include retail leasing, interest income and other mall revenues. The subdivision generated revenues of 224 million pesos, accounting for 7% of total revenues.
The Cinema operations include cinema ticket and snack bar sales and other cinema revenues. The subdivision generated 6.2% growth on a year-over-year basis to 59 million pesos which is 2% of total revenues.
Office operations, which include office leasing, sale of office and other office revenues, generated 25.5% growth on a year-over-year basis to 60 million pesos which is equivalent to 2% of the total revenues.
Hotel Operations
Hotel Operations is engaged in leasing of serviced apartments and management of hotel and resort operations. The division’s hotel portfolio includes serviced apartments located in Edades Towers and Garden Villas, The Grove and Joya Lofts and Towers.
According to Reuters, Rockwell’s Aruga property, which consists of approximately 110 serviced apartments in Edades Tower, is included in the Hotel Operations division.
Sales in the first quarter grew 17% to 103 million pesos (3.4% of total sales) and reported an EBITDA margin of 23.3% compared to 20.5% in the first quarter of 2016.
According to filings, higher revenue was brought by Rockwell’s Aruga at The Grove which started its operations in April 2016.
Sales and profits
Rockwell had three-year revenue growth average of 17.5%, profit growth average of 9.16% and profit margin average of 17.9% (Morningstar).
Cash, debt and book value
As of March, Rockwell had 1.5 billion pesos in cash and cash equivalents and 15.5 billion pesos in debt with debt-equity ratio of 0.97 times vs. 0.2 times in the same period last year. The company added 12.7 billion pesos in debt while adding about 1.7 billion pesos in equity, which was mostly through retained earnings.
Rockwell did not report any goodwill and intangible assets in its balance sheet while having its book value grow by 11.8% to 15.9 billion pesos in the recent quarter.
Cash flow
In the recent quarter, Rockwell reported cash flow from operations of 697 million pesos compared to 557 million in cash out flows in the same period last year. As observed, the company had higher cash inflow from its trade and other receivables and restricted cash. In addition, fewer cash outflows were recognized in contractor advances.
Capital expenditures were 18 million pesos leaving Rockwell with 679 million pesos in free cash flow. Nonetheless, the company allocated almost all of this free cash flow, or 639 million pesos, in investment properties and land held for future development. In addition, no dividend payouts were made in the recent quarter.
Rockwell also took in 35 million in loans, net repayments and other liabilities.
In review, Rockwell was able to hand out 616 million pesos in dividend payments accumulatively despite having negative free cash flow in the past two fiscal years. The company also took in 1.96 billion pesos in borrowings in fiscal 2016.
In 2016, the increase in investment properties was mainly due to payments for the construction of Rockwell Business Center Sheridan, Santolan Town Plaza and Mall Expansion projects.
The RBC Sheridan Tower 1, in particular, is a 16-story class A building that is expected to be completed this quarter. On the other hand, Santolan Town Plaza is designed to be a shopping mall in the San Juan, Metro Manila area.
ConclusionÂ
Rockwell demonstrated rock-solid growth in all of its operations in the recent quarter. More importantly, the firm expects continual project developments at least for the next half-decade.
Rockwell’s decision to enter leasing of serviced apartments and management of hotel and resort operations four years ago also has borne fruit as this division has continually grown and delivered relatively steady margins albeit having generated 2.2% of overall sales in the past three fiscal years.
In exchange for this rapid growth, the company has carried a more leveraged balance sheet compared to its year-ago operations having included weak (negative) free cash flow figures in the most recent years.
Nonetheless, applying a 20% margin from its book value still indicated a possible 18% upside to 12.7 billion – in relation to its current market capitalization of 10.8 billion pesos.
In summary, Rockwell is a buy with 2.08 pesos per share target price.
Notes
(1) Company filings
The 32 Sanson Project
Phase 1 (2017)
The company acquired a 3.1 hectare lot in Lahug, Cebu City in 2012 to expand to other strategic urban centers in the Philippines. This is the company’s first venture outside the region of Luzon and Cebu City is one of the most progressive provincial cities in the country. The primarily residential project will have two phases; the 135 units for the first phase and 257 units for the second phase.
The Phase 1 composed of Towers Raffia and Gmelina is a five-story residential development. This project was launched in January 2014 and was turned over to unit owners starting December 2016.
Further expanding the hospitality business, the company plans to open its first beach resort hotel in Cebu. This 4.8-hectare lot is situated along the stretch of well-known beach resorts in Punta Engano, Lapu-Lapu City, Cebu. This is presently undergoing design and planning and is expected to launch by 2022-2023.
Also, Rockwell Land is close to acquiring a beach resort in Cebu province. Rockwell Land President Nestor Padilla earlier said the company had plans to bring its Aruga Hotel brand to Mactan Cebu.
(2) Ownership (Company filings)
(3) Company filing: Proscenium projects.
Disclosure: I am long Rockwell.
