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Mark Yu
Mark Yu
Articles (382)  | Author's Website |

Seeking Value in the Philippines: Century Properties Group

Declining business growth results in undervalued property shares

Century Properties Group (PHS:CPG), the 5.9 billion Philippine peso ($120 million) real estate company, reported 0.6% revenue growth to 1.96 billion pesos and a 6.2% drop in profits to 293 million pesos in the first quarter.

That is a 15% margin compared to 16% in the same period last year.

Its costs and expenses rose by 120 million pesos, or 7.9%, thus resulting in lower overall profits for its shareholders.

Valuations

Century Properties Group is undervalued compared to its peers and its own book value. According to Reuters data, the firm had a trailing price-earnings (P/E) ratio of 8.4 times vs. the sector figure of 30.2 times, a price-book (P/B) ratio of 0.38 times vs. the industry’s 1.5 times and a price-sales (P/S) ratio of 1.09 times vs. the industry’s 4.1 times.

The company also had a trailing dividend yield of 1.28% with no payout ratio.

Total returns

Century Properties Group has underperformed the broader local market, by iShares MSCI Philippines exchange traded fund (ETF), so far this year with returning 4.06% total losses to its shareholders compared to the ETF’s 15.14% gains (Morningstar).

Century Properties Group

According to filings, Century Properties Group is one of the leading real estate companies in the Philippines with a 30-year track record.

The company is primarily engaged in the development, marketing and sale of mid- and high-rise condominiums and single detached homes, leasing of retail and office space and property management.

Century Properties has five principal wholly owned subsidiaries  Century City Development Corp., Century Limitless Corp., Century Communities Corp., Century Properties Management Inc. and Century Properties Hotel and Leisure Inc.

Through its subsidiaries, Century Properties develops, markets and sells residential, office, medical and retail properties in the Philippines and manages residential and commercial properties in the Philippines. The company has finished several projects in recent years.

(Annual filing)

In addition, Century Properties Group’s land bank for future development consists of properties in Quezon City, Mandaluyong City, San Vicente, Palawan, Batulao, Batangas and Tanza Cavite that cover a total site area of 276 hectares.

Also, the company, through subsidiary Century Properties Management, also engages in a wide range of property management services, from facilities management and auction services to lease and secondary sales.

Century Properties Group also launched its first hotel development in 2015 through a strategic partnership with AccorHotels (XPAR:AC)(LTS:0H59) and will be called Novotel Suites Manila at Acqua in Mandaluyong City.

Also in 2015 the company announced that it had signed a memorandum of agreement to acquire 56 hectares of property to develop a beachfront lifestyle destination development in the municipality of San Vicente in Palawan (a hot tourist destination in the Philippines).

In 2016 Century Properties partnered with Mitsubishi Corp. (TSE:8058) to develop horizontal housing units that target first-time homebuyers. In line with its Century 2020 blueprint, Century Properties is proceeding with its diversification into affordable housing to tap the first homebuyer market in high growth areas in the peripheries of Metro Manila. According to filings, the company has secured a 26-hectare property in Tanza, Cavite to develop around 3,000 homes for its initial project.

Century Properties has three segments: real estate development, leasing and property management.

Real estate development

This segment represents sales generated from high-end, upper middle-income and affordable residential lots and units and lease of residential developments under partnership agreements.

In the first quarter revenue from the largest revenue generator (87.2% of total unadjusted revenue) fell by 15% to 1.23 billion pesos and recorded a profit margin of 15% compared to 20% in the same period last year.

According to Century Properties, the decrease in real estate sales is attributable to a significant portion of revenue recognized in 2016 and prior years from completed projects as well as fewer presales and less new project launches.

In review, though, fiscal 2016 also experienced a heavy 35.9% revenue decline as well when compared to fiscal 2015 operations and gave the same aforementioned explanation.

Leasing

This division represents Century Properties’ retail mall and hospital leasing business.

In the recent quarter, revenue grew 8.9% to 81.9 million pesos (5.8% of total unadjusted revenue) and delivered a profit margin of 109% compared to 12.3% the same period last year.

As it turned out, the leasing business generated more profits from its interest and other income. In general, the company explained that its overall increase in interest income was due primarily to noncash accretion of unamortized discounts during the period.

Property management

This division facilities management of Century Properties’ residential and corporate developments and other third-party projects, including the provision of technical and related consultancy services.

In the recent quarter, revenue in property management grew 41.7% to 81.9 million 18.7% margin compared to 0.9% margin in the same period last year.

According to the company, the increase in revenue was due to the leasing escalation rate for certain tenants.

Sales and profits

On average, Century Properties had three-year sales decline an average of 16.3%, profit decline average of 27% and profit margin average of 16.7% (Morningstar).

Cash, debt and book value

As of March Century Properties Group had 2.4 billion pesos in cash and cash equivalents and 15.4 billion pesos in debt with debt-equity ratio of 0.98 times compared to 0.88 times in the same period last year. It added 2.3 billion pesos in debt over the past 12 months while having added 683.7 million pesos in equity in the same time period thus resulting in a more leveraged balance sheet. Meanwhile, total shares outstanding have remained the same.

In addition, the firm grew its book value by 4.6% to 15.6 billion pesos. Also, no intangible or goodwill assets were identified in Century Properties Group.

Cash flow

In the recent quarter, Century Properties Group generated 267.5 million pesos in cash outflow from its operations, this compares to 285 million pesos in outflows the same period last year. As observed, the firm failed to generate any positive cash flow from operations in the past half decade except in fiscal 2016 when it had 176 million cash flows.

Capital expenditures were 16.3 million pesos still leaving negative free cash flow on a year-over-year basis. Nonetheless, the company allocated 298.4 million in debt repayments, net any debt issuance for the period.

Conclusion

Century Properties demonstrated weak business growth in the recent quarter. Clearly, the real estate firm struggled to show any improvement in its largest revenue generator (87%) that is real estate development coming off another poor performance in fiscal 2016.

The company, nonetheless, generated good growth figures in other lines of its business, leasing and property management. Investors should probably want to see the firm’s long-term project, affordable housing, generate better growth in the coming years.

In addition, Century Properties carried a more leveraged balance sheet compared to its year-prior operations while also having exhibited weak cash flow generation.

Asking a 40% margin from the company’s book value would indicate a value of 9.4 billion pesos, or 1.59 pesos per share, thus representing a possible 59% upside upon realization compared to its market price of 0.51 cents a share (at the time of writing).

In summary, Century Properties is a buy with a target price of 1.3 pesos per share.

Disclosure: I do not have shares in any of the companies mentioned.

About the author:

Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

Attempts to dissect company filings per day. Dislikes goodwill and intangible assets.

For quicker reading--jump ahead to an article's conclusion.

One company (review) a day keeps the speculation (hopefully) away.

Would typically invest $500 to $3000 of own money per buy recommendation.

"The only source of knowledge is experience"

"I have no special talent. I am only passionately curious." Albert Einstein

"To strive, to seek, to find, and not to yield." Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." Warren Buffett

Visit Mark Yu's Website


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