Megawide Construction (PHS:MWIDE, Financial), the 40.3 billion pesos ($794.29 million) Phillipines-based construction company, reported its first-quarter results in May – 19.3% year-over-year revenue decline to 4.77 billion pesos and also a disappointing 10% drop in profits to 439.98 million pesos (9.2% margin vs. 8.3% in the same period last year).
As observed, reduction in overall operating expenses that led to better margins was still unable to lift profits to match that of last year period.
“The increase in passenger traffic is brought about by new international flights and local routes mounted in 2016. It is also the direct result of the airport segment’s strategy to project MCIA as a gateway to the country’s top tourist destinations and the main hub for Visayas and Mindanao.
“It is a function of the order book and projects in varying stages of construction. This cyclicality is simply part of the industry – Megawide is very much on track to meet its full-year target.
“Our outlook for 2017 remains positive, especially with the continued focus on infrastructure highlighted by the Duterte administration’s Build, Build, Build program." –Â Megawide President Edgar Saavedra
Saavedra also added that construction is expected to ramp up in the second half of the year.
In addition, the Megawide group remains bullish on the growth of the construction industry, which is projected to benefit from robust private sector demand for office, commercial, and residential projects. He added that the group continues to be positive about public-private partnership projects such as airports, rail and the integrated transport system, according to the Megawide president.
Valuations
Megawide is overvalued compared to its peers. According to Reuters data, the company had a trailing price-earnings (P/E) ratio of 34.5 times vs. the industry figure of 22.65 times, a price-book (P/B) ratio of 2.88 times vs. 2.32 times and a price-sales (P/S) ratio of 2.44 times vs. 2.56 times.
The company does not have any trailing dividend yield.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 2.17 times and 28 times.
Total returns
Megawide has outperformed the broader local Philippine index, iShares MSCI Philippines ETF (EPHE, Financial), in the past five years and so far this year with total returns 15.45% (annualized) and 27.3% vs. the index’s 11.34% and 4.4% (Morningstar).
Megawide Construction
Megawide Construction was founded in 1997. The company is engaged in the general construction business. Megawide’s business includes constructing, enlarging, repairing or engaging in any work upon buildings, houses and condominium, roads, plants, bridges, piers, waterworks, railroads and other structures, and to own, use and develop real estate of various kinds (Reuters).
According to filings, 66.7% of Megawide is owned by Citicore Holdings Investment as of December 2016. Citicore is a company incorporated in the Philippines and is engaged in the business of a holding company through buying and holding shares of other companies.
Megawide has several subsidiaries: GMR Megawide Cebu Airport Corporation, Megawatt Clean Energy, Globemerchants, Megawide Land. The company also has associates: Megawide World Citi Consortium and Citicore Megawide Consortium. Lastly, it has joint arrangements: Megawide GISPL Construction Joint Venture and MWM Terminals.
As of the recent quarter, the company had three segments: Construction, Airport and Airport Merchandising operations.
Construction
The Construction segment is engaged in the general construction business, which involves site development, earthworks, structural and civil works, masonry works and architectural finishes, electrical works, plumbing and sanitary works, fire protection works and mechanical works.
In the recent quarter, revenue in Megawide’s construction business fell 24% year over year to 4.39 billion pesos (88% of total revenue) and generated profit margin of 6.9% –Â same level of profitability in the year-prior period.
Megawide's management did not discuss specifically the reason in decline in its construction business, except that it anticipates it would "ramp up" in the second half of 2017.
Further, company filings indicated that the company was able to book new contracts amounting to 2.87 billion pesos, which could help fuel the "ramp up" expectations in the coming quarters.
Airport
The Airport operations segment is engaged in the business of building, rehabilitating, renovating, constructing, developing, operating, and maintaining the Mactan Cebu International Airport, including the commercial assets thereof and various allied business for the operation and maintenance of the airport facility.
Revenue in the Airport division grew 32% year over year to 569.7 million pesos (11.5% of total sales) and generated profit margin of 47.5% (same level in the year-ago period). The segment remains Megawide’s most profitable segment.
The company indicated that international and domestic traffic increased by 42% and 5% from its year-ago period.
Airport Merchandising
This division relates to sale of food and nonfood items within the premises of Mactan Cebu Airport. This division just started commercial operations in March. The division logged revenue of 8.85 million pesos with profits of 1.95 million pesos (22% margin).
Sales and profits
In the past three years, Megawide had revenue growth average of 17.52% and profit growth average of 3.76%.
Cash, debt and book value
As of March, Megawide had 5.57 billion pesos in cash and cash equivalents and 26.61 billion pesos in debt with debt-equity ratio 1.89 times vs. 1.34 times in the year prior period. As observed, overall debt has increased by 3.66 billion pesos while shareholder equity dropped by 3.06 billion pesos year over year.
Of Megawide’s 52.27 billion pesos assets 41%Â were labeled as concession assets or could be assumed as goodwill or intangible asset (1). The book value declined by 2% year over year to 16.76 billion pesos.
Cash flow
In the recent quarter, Megawide’s cash flow from operations dropped by 88.7% year over year to 259.97 million pesos. In addition to lower profits, the company had more cash outflow in the following: associates and joint venture equity, disposals of property, plant and equipment, advances from customers, and cash paid for income taxes (despite lower profits).
Capital expenditures, including allocations to concession assets, were 1.51 billion pesos leaving Megawide with (-)1.25 billion pesos in free cash outflow compared to 1.98 billion pesos in the year-prior period. Despite the outflows, the company allocated another 70.25 million pesos in dividend payouts. In the past two fiscal years, Megawide provided 49% of its free cash flow in share repurchases.
In addition, the company took in 1 billion pesos in borrowings, net any repayments in the recent quarter.
Conclusion
Megawide certainly did not impress any of its investors in the recent quarter when operations fell at double figures, drop of 19.3% in revenue and 10.4% in profits year over year. The management, nonetheless, stated that it just experienced a part of the cycle in the industry and remained positive in the coming quarters brought by Duterte’s 8 trillion pesos #BuildBuildBuild program otherwise known as Dutertenomics (2).
The company’s recent arrangements with other public companies, including Rockwell Land, Fort Bonifacio Development Corp. among others, ensures this positive projection in the coming quarters.
Meanwhile, Megawide’s other segment –Â Airport –Â has consistently generated high revenue growth rates in recent years. The company sees this growth continuing well into succeeding quarters and even expects a surge in 2018 when new routes connecting Cebu to Australia, Europe and more ASEAN countries would promote the second-busiest airport in the Philippines.
Meanwhile, Megawide’s even more leveraged balance sheet consisting of blue sky elements (goodwill and intangible assets) that were nearly half (41%) of its assets may not appeal to most conservative investors. In addition, the company has been a net debt issuer in recent years while having retained positive free cash flow generation in the same period.
Three analysts have a median target price of 22.9 pesos per share vs. 18.84 pesos at the time of writing. Using three-year revenue growth and P/S multiple averages followed by a 25% margin indicated a value of 11.9 pesos per share.
In summary, Megawide is a hold.
Notes
(1) Concession: A service concession arrangement is an arrangement whereby a government or other public sector body contracts with a private operator to develop (or upgrade), operate and maintain the grantor's infrastructure assets such as roads, bridges, tunnels, airports, energy distribution networks, prisons or hospitals. (International Financial Reporting Standards)
(2) Me:
Financing The Philippine Golden Age Of Infrastructure (Department of Budget and Management)
Disclosure: I do not have shares in any of the companies mentioned.
