Ayala Corp. (PHS:AL), the 540 billion Philippine peso ($10.67 billion) conglomerate and one of the largest and oldest publicly listed companies in the Philippines, has yet to show any slowdown. It registered impressive 19.8% year-over-year revenue growth in the quarter to 63.23 billion pesos and 19.9% profit growth to 6.93 billion pesos (11% margin vs. 10.9% in first-quarter 2016).
Ayala still showed impressive profitability despite having its overall expenses rise by 20% to 49.1 billion pesos and taxes by 17.8% to 2.54 billion pesos in the same time period.
“We are pleased to see our businesses sustain their positive performance in the first quarter. As a group, we continue to search for value-accretive opportunities not only to create new sources of financial growth but also to remain relevant to our stakeholders. As our core businesses maintain their growth trajectories, we are encouraged by the progress of our emerging businesses. In particular, our power, infrastructure and industrial technologies units are pursuing strategic opportunities to scale up and over time bring significant value to our portfolio.” – Ayala President and CEO Fernando Zobel de Ayala
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Valuations
Ayala is overvalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 21.1 times vs. the industry median of 13.2 times, a price-book (P/B) ratio of 2.26 times vs. 1.09 times and a price-sales (P/S) ratio of 2.7 times vs. 2.95 times.
The company also had a trailing dividend yield of 0.72% with a 14% payout ratio.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 2.3 times and 20 times.
Total returns
Ayala 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 13.97% (annualized) and 17.52% vs. the index’s 11.34% and 4.4%.
Ayala ADRÂ (AYALY, Financial) shares, meanwhile, have outperformed the broader Standard & Poor's 500 index so far this year, generating 29.7% total gains vs. the index’s 9.6%.
Ayala
According to filings, Ayala is the holding company of one of the oldest and largest business groups in the Philippines that traces its history back to the establishment of the Casa Roxas business house in 1834 (~183 years ago).
Ayala is the fifth-largest publicly listed company in the Philippines in terms of market capitalization.
As of December 2016, Ayala is 48.96% owned by Mermac Inc., 10.17% owned by Mitsubishi Corp. (TSE:8058, Financial) and the rest by the public (2).
According to filings, the co-vice chairmen of Mermac, Jaime Augusto Zobel de Ayala and Fernando Zobel de Ayala, are the chairman/CEO and president/chief operating officer. The board of directors has the power to decide how Ayala shares held by Mermac are to be voted.
The company is organized as a holding company holding equity interests in subsidiaries, associates and joint ventures that compose the Ayala Group.
Ayala is one of the most significant business groups in the Philippines. The group was initially primarily focused on real estate, banking and insurance.
In recent years, Ayala’s business activities continued to develop to include: (a) real estate, (b) financial services, (c) telecommunications, (d) water infrastructure, (e) electronics manufacturing, (f) power generation, (g) transport infrastructure, (h) automotive, (i) international real estate, (j) health care and (k) education.
In 2016, a new initiative was launched by the conglomerate – the establishment of industrial technologies group that will integrate the electronics manufacturing, automotive and potential investments in complementary industrial technologies (3).
For management purposes, Ayala has organized into eight business units: Parent Company, Real Estate and Hotels, Financial Services and Insurance, Telecommunications, Water Infrastructure, Industrial Technologies (electronics manufacturing and automotive), Power Generation and Others (IT/BPO).
Parent Company
Parent Company represents operations of the parent company including its financing entities such as AC International Finance Ltd., AYC Finance Ltd., British Islands Inc. Purefoods International Ltd. and Michigan Holdings Inc. All these companies are wholly owned by Ayala.
In the recent quarter, revenue* in the parent company fell 29% year over year to 184 million pesos (0.3% of total unadjusted revenue) and delivered a profit loss of 1.51 billion pesos vs. 1.39 billion pesos in losses in the same period last year.
The parent company has not provided any profits at all in the past three fiscal years and has provided accumulative losses of 17.2 billion pesos instead.
Real Estate and Hotels
This division is involved in planning and development of large-scale fully integrated mixed-used communities that become thriving economic centers in their respective regions.
These activities include development and sale of residential, leisure and commercial lots and the development and leasing of retail and office space and land in these communities; construction and sale of residential condominiums and office buildings; development of industrial and business parks; development and sale of high-end, upper middle-income and affordable and economic housing; strategic land bank management; hotel, cinema and theater operations; and construction and property management.
In first-quarter 2017, revenue in real estate and hotels jumped 17% to 31.6 billion pesos (50% of total unadjusted company sales) and had a profit margin of 20% which was the same level of profitability in first-quarter 2016.
Financial Services and Insurance
This division involves commercial banking operations with expanded banking license.
According to filings, these operations include diverse services such as deposit taking and cash management (savings and time deposits in local and foreign currencies, payment services, card products, fund transfers, international trade settlement and remittances from overseas workers); lending (corporate, consumer, mortgage, leasing and agri-business loans); asset management (portfolo management, unit funds, trust administration and estate planning); securities brokerage (online stock trading); foreign exchange and capital markets investments (securities dealing); corporate services (corporate finance, consulting services); investment banking (trust and investment services); fully integrated bancassurance operations (life, nonlife, preneed and reinsurance services); and other services (internet banking, foreign exchange and safety deposit facilities).
In the recent quarter, revenue for Financial Services and Insurance grew 25.6% year over year to 3 billion pesos (4.8% of total unadjusted sales) and had margins of 100% (same as the prior-year period).
In the past two fiscal years, revenue growth in the division averaged 12.3% and profit margin averaged 101.7%.
Telecommunications
This segment is a provider of digital wireless communications services using a fully digital network; domestic and international long distance communication services or carrier services; broadband internet and wireline voice and data communication services; also licensed to establish, install, operate and maintain a nationwide local exchange carrier (LEC) service, particularly integrated local telephone service with public pay phone facilities and public calling stations, and to render and provide international and domestic carrier and leased line services.
In recent years, operations include developing, designing, administering, managing and operating software applications and systems, including systems designed for the operations of bill payment and money remittance, payment facilities through various telecommunications systems operated by telecommunications carriers in the Philippines and throughout the world and to supply software and hardware facilities for such purposes.
In the recent quarter, revenue in Ayala’s telecommunications business dropped by 11.8% year over year to 1.17 billion pesos (1.8% of total unadjusted sales) and had margins of 100% (same as in first-quarter 2016).
Like that of the financial services business, the telecommunications division exhibited remarkable profitability for Ayala. In review, telecommunications logged an average revenue growth of 9.5% and 100% profit margin in the past two fiscal years.
Water Infrastructure
This division operates as a contractor to manage, operate, repair, decommission and refurbish all fixed and moveable assets (except certain retained assets) required to provide water delivery, sewage and sanitation, distribution services, pipeworks, used water management and management services.
In 2016, a new business initiative was undertaken in which Ayala will exclusively provide water and used water services and facilities to all property development projects of major real estate companies.
In the recent quarter, revenue in the water business grew 10.9% year over year to 5.93 billion pesos (9.3% of total unadjusted sales) and delivered margins of 22.3% vs. 25.2% in the same period last year.
According to Ayala, Manila Water (its subsidiary) continues to ramp up its expansion initiatives geographically and across its products and services (6).
Industrial Technologies (electronics manufacturing and automotive)
This segment houses Ayala’s existing and future assets in industrial technology.
The newly established segment is intended to capitalize on automotive and industrial opportunities by entering new businesses, fostering synergies within Ayala and building on the strengths of its existing business units – IMI and AC Industrial/Automotive (4).
As the segment is newly established, year-over-year comparison cannot be made. Nonetheless, two-year revenue growth and profit margin averages for electronics manufacturing were 2.2% and 3.6%, while they were 24.5% and 0.2% for the automotive segment, according to recent annual filings.
According to filings, Ayala’s subsidiaries AC Industrials and Integrated Micro-Electronics (PHS:IMI) have made strategic acquisition(s) this year, seeking more growth in both the electronics and automotive businesses. In April, IMI announced the acquisition of an 80% stake in U.K.-based STI Enterprises Ltd., subject to closing conditions and regulatory approval.
Meanwhile, Ayala’s 67%-owned KTM Asia Motorcycle Manufacturing manufactured its first motorcycle in June and has a facility that could produce at least 20,000 motorcycles annually.
Power Generation
This unit builds a portfolio of power generation assets using renewable and conventional technologies which in turn will operate the business of generating, transmission of, distribution of and supply of electricity, including the provision of related services.
In the quarter, revenue in the power business shot up by 145% year over year to 755 million pesos (1.2% of total unadjusted sales) and delivered margins of 45.4% vs. 67.9% the prior-year period.
According to filings, sustained operating efficiencies of its power assets drove Ayala’s subsidiary AC Energy’s results in the first quarter.
In March, AC energy acquired 100% ownership of Bronzeoak Clean Energy and San Carlos Clean Energy; and as part of an Indonesian consortium, AC Energy completed the acquisition of Chevron Global Energy Inc. and Union Oil Co. of California’s geothermal assets and operations in Indonesia.
Others
This segment includes the transport infrastructure unit (development arm for its transport infrastructure investments) and investments in social infrastructure space with the health care, education and human capital units established in recent years.
This segment also includes the remaining Information Technology and BPO services unit; International unit (investments in overseas property companies and projects); Aviation (air-chartered services); consultancy, agri-business and other operating companies.
Comparison for the segment’s previous year operations is unattainable secondary to recent segment reconfiguration. Nonetheless, "Others" recorded revenue of 1.16 billion pesos and profit margin of 22.5% for the first quarter.
Sales and profits
In the past three years, Ayala registered revenue growth average of 13.3%, profit growth average of 26.7% and profit margin average of 12%.
Cash, debt and book value
As of March, Ayala had 64 billion pesos in cash and cash equivalents and 313.5 billion pesos in debt with debt-equity ratio of 1.32 times vs. 1.31 times in the year prior. Overall debt has risen 32.1 billion pesos year over year while shareholder equity climbed 24.3 billion pesos.
Intangible assets, which comprised just 1% of Ayala’s 941.8 billion pesos assets seemed negligible. The book value has grown by 13.7% year over year to 381 billion pesos.
Cash flow
In the recent quarter, Ayala recorded nearly no change (-0.41%) year over year in its cash flow from operations to 26.4 billion pesos. Capital expenditures were 7.39 billion pesos leaving the conglomerate with 19 billion pesos in free cash flow vs. 21.2 billion pesos in the year-prior period.
Ayala also allocated 17.5 billion pesos in the recent quarter in the following: investment properties, land and improvements, financial assets at fair value through profit or loss and investment in bonds and other securities. Ayala also allocated 12 billion pesos in accounts and notes receivables in the quarter. The company has kept this similar cash flow allocation in recent years (1).
Ayala also took in 15.98 billion pesos in borrowings in the quarter net any repayments while handing out (technically) 23.7% of its free cash flow in shareholder dividend payouts.
In the recent three fiscal years, Ayala accumulatively generated 7.5 billion pesos in free cash flow, 28.95 billion pesos in dividend payouts and 100.52 billion pesos in debt net repayments.
Conclusion
Ayala has been a steady growing giant that could deliver reliable business growth in spite of its numerous divisions. Among its several businesses, one segment, Telecommunications, only suffered a slowdown in recent years. Albeit very profitable, this performance should probably not worry the company’s investors as the division has contributed less than 2.5% of total unadjusted revenue of the conglomerate.
Meanwhile, Ayala’s biggest revenue generator, its real estate business, has continuously delivered high teens growth in recent years including its recent quarter operations and has maintained profitability.
Nonetheless, the giant Philippine company does not seem to care about its already leveraged balance sheet as it gobbled up more in the recent quarter with aims of expanding its businesses –Â speculatively both its power generation, water, and industrial technology divisions. This significant mounting debt could deter most conservative investors.
The company does not have any difficulties in generating consistent cash flow albeit as it engages in several of its businesses it turned out that it became more in debt and unable to provide enough free cash flow to support its dividend payouts alone.
Eleven analysts have a median price target of 910 pesos per share vs. 869.5 pesos at the time of writing. Applying three-year revenue growth and P/S multiple averages followed by a 20% margin indicated a value of 776 pesos.
In summary, Ayala is a hold.
*Revenue in all segments was stated "income" in the company’s segment information income statement discussion followed by operation and tax expenses and net profit. It is safe to assume that this "income" is attributable to the segment’s revenue instead to avoid confusion.
Notes
(1) Company filings (consolidated cash flow statement)
(2) Company filings
The co-vice chairmen of Mermac Inc. (“Mermac”), Jaime Augusto Zobel de Ayala and Fernando Zobel de Ayala, are the chairman/CEO and President/chief operating officer of the company. Jaime Augusto Zobel de Ayala has been named and appointed to exercise the voting power.
The board of directors of Mermac has the power to decide how Ayala shares held by Mermac are to be voted.
(3) Company filings
Ayala’s real estate business is primarily conducted through its subsidiary, Ayala Land Inc. (PHS:ALI, Financial) a diversified real estate company in the Philippines. Its involvement in financial services is through an affiliate, the Bank of the Philippine Islands (PHS:BPI), which form a universal banking group in the Philippines. Ayala’s telecommunications business is carried out through an affiliate, Globe Telecom Inc. (PHS:GLO), a leading telecommunications companies in the Philippines. Ayala’s investments in water infrastructure is under Manila Water Co. Inc. (PHS:MWC). Its international business in electronics manufacturing services is under Integrated Micro-Electronics. Ayala’s automotive dealerships are under AC Industrial Technology Holdings Inc., formerly Ayala Automotive Holdings Corp., while its interests in international real estate assets are held under AG Holdings. Ayala’s recent investments in the power sector are held under AC Energy Holdings Inc. while its first toll road project (the 4-kilometer Daang-Hari connector road to the South Luzon Expressway) is held under the parent company. The company has established AC Infrastructure Holdings Corp. as its vehicle for transport infrastructure related investments. Ayala’s investments in health care are conducted through Ayala Healthcare Holdings while its for-profit education business is operated through Ayala Education Inc..
(4) Company filings
Electronics Manufacturing and Automotive
Electronics manufacturing:Â global provider of automotive and industrial electronics manufacturing services (EMS) and power semiconductor assembly and test services with manufacturing facilities in Asia, Europe, and North America. It serves diversified markets that include those in the automotive, industrial, medical, telecommunications infrastructure, storage device and consumer electronics industries. Committed to cost-effective and innovative customized solutions (from design and product development to manufacturing and order fulfillment), the company's comprehensive capabilities and global manufacturing presence allow it to take on specific outsourcing needs.
Automotive:Â Through this unit, the group engages in the automotive space with the following: minority investments in assembly companies Honda Cars Philippines Inc. and Isuzu Philippines Corp.; ownership in network of Honda and Isuzu dealerships; ownership over Philippine distributorship for Volkswagen (XTER:VOW) vehicles and its network of VW dealerships; and strategic partnership with KTM Europe for a motorcycle manufacturing (for local and export demand); and appointment, thus, ownership of the exclusive distributorship of KTM motorcycle models in the country.
(5) Company filings
Manila Water continues to ramp up its expansion initiatives geographically and across its products and services. In the Philippines, Manila Water Philippine Ventures through Laguna Water will be taking over the water distribution of Calauan town, further expanding its footprint in the province of Laguna. Moreover, Boracay Water started supplying bulk water to the municipality of Malay in the province of Aklan. In Vietnam, Manila Water Asia Pacific completed the negotiations with Tan Hiep, the water supplier of Saigon Water Corp. in the Hoc Mon District of Ho Chi Minh City, for a bulk water operations project. It also won a full water distribution operations contract to serve the central highlands of Gia Lai Province in Vietnam. Manila Water Total Solutions launched in April the 500-milliliter “Healthy Family Mini” purified water.
Disclosure: I do not have shares in any of the companies mentioned.
