Financial Adviser: 5 Reasons Why Sta. Lucia Land Is the Best Performing Property Stock During the Pandemic and How to Profit From It
It’s the best value property play this year.
Falling COVID-19 cases in the capital, gradual lifting of lockdowns and increased vaccine rollout have enabled the stock market to recover recently on renewed investors’ optimism.
The Philippine Stock Exchange (PSE) Index has rallied by as much as 15.1 percent to a high of 7,001 after falling to its lowest this year at 6,080.
Prospects of reopening the economy by year-end are slowly being priced into higher stock prices, as investors anticipate strong earnings recovery next year.
But despite the rise in the market, investors continue to be cautious as risks of a prolonged recession persist.
Based on Monday (June 21)’s closing, the PSE Index is still down by 4.4 percent from its level at the start of the year. The property index, which has also rallied strongly recently, continued to fail with a year-to-date loss of nine percent.
Most of the big property stocks that have traditionally relied on condominium sales and leasing income from mall operations have significantly underperformed the market.
Among the biggest losers in the group are Megaworld (PSE: MEG), which has a year-to-date loss of -24.7 percent, Vista Land (PSE: VLL) with a loss of -21.5 percent; Robinsons Land (PSE: RLC), -16.6 percent; Ayala Land (PSE: ALI), -10.8 percent and SM Prime Holdings (PSE: SMPH), -5.1 percent.
But a property stock like Sta Lucia Land (PSE: SLI), which earns mostly from sale of residential lots, has been performing well with a year-to-date gain of 51.5 percent.
The prolonged pandemic and rise in work-from-home setups have shifted property demand away from the cities to the provinces. The need for bigger public space, fresh air and outdoors have increased demand for suburb properties.
Being one of the largest players in the horizontal land development business, SLI could emerge as the biggest beneficiary of this trend.
With the stock price rising to its 10-year high recently, how high can the stock go? What are the factors that affect the long-term valuation of SLI? How do we evaluate a stock before we invest?
Here are the five reasons why SLI may be the best value property play this year and how you can possibly profit from it:
1| Resilient growth and continued strength amidst the crisis
SLI has been in the business of lot development for residential subdivision and horizontal housing for over 40 years. It has developed more than 200 subdivision establishments including Greenwoods and Acropolis Libis.
In 2007, SLI became a public company when its controlling shareholders acquired listed company Zipporah Realty Holdings via backdoor listing.
Over the years, revenues of SLI, which mainly came from sale of real estate properties, have grown more than 10 times in 11 years, from P603 million in 2008 to P7.8 billion in 2019, with an average growth rate of 26 percent per year.
This growth in revenues translated to a 44 percent annual growth in net income from P31 million in 2008 to P1.7 billion in 2019.
But last year, because of the effects of the COVID-19 pandemic, SLI’s total revenues weakened by 12.2 percent from P7.8 billion in 2019 to P6.9 billion.
The fall in revenues, however, hardly affected earnings as net income declined only by 1.7 percent from P1.74 billion in 2019 to P1.7 billion in 2020 on lower cost of sales and operating costs.
This year, SLI’s total revenues recovered by 2.9 percent for the first three months to P1.36 billion from P1.32 billion in the same period last year, driven by strong real estate sales.
With lower costs, the increase in first quarter revenues resulted to 44 percent increase in net income from P295 million in 2020 to P427 million this year.
Historically, the first quarter net income of SLI represents about 17 percent of its annual income.
If we were to make the actual first quarter net income of SLI of P427 million equivalent to a conservative 20 percent of targeted annual income, the company should easily achieve net income of P2.1 billion, which is 21 percent higher than its 2019 net income.
At P2.1 billion net income target, SLI’s expected Price-to-Earnings (PE) ratio at the current share price will be 11.4 times, which is comparatively low against a prospective earnings growth of 20 percent.
With the market slowly recognizing the potential of SLI, the fundamental outlook of the company should eventually manifest in the share price.
2| Expanding land bank investments to secure future growth
SLI’s business model focuses on selling residential lots to OFW families who buy their projects on in-house financing.
While there is a risk of default in case customers fail to settle their loans due to financial incapacity, the costs of potential losses to SLI are low.
This is because SLI can simply repossess the lot and resell it back to the market unlike housing products, which may lose value from wear and tear if it remains unsold for some time.
As real estate inventories increase, SLI’s revenue potential also increases.
In 2016, SLI generated total revenues from real estate sales of P1.9 billion on inventory of P11.9 billion or sales-to-inventory ratio of 15 percent.
As the company expanded, total inventory grew to P24.9 billion, which enabled SLI to increase its total revenues from real estate sales to P5.4 billion at a faster rate, or sales-to-inventory ratio of 22 percent.
This year, SLI is planning to raise up to P10 billion in fresh capital via a Follow-On Offering (FOO) to boost its real estate inventories and land bank holdings.
Assuming the company raises the P10 billion successfully, its net debt-to-equity ratio will significantly improve from 0.96 times to only 0.23 times.
The lower debt-to-equity ratio will not only strengthen SLI’s balance sheet, but also improve its profitability through lower interest expenses.
3| “Build, Build, Build” projects during pandemic continue to enhance market value of land assets
The government’s massive infrastructure development projects that took off five years ago continued to benefit SLI’s growth opportunities in the countryside.
As more roads are constructed in the provincial areas, SLI did not only enjoy higher demand for their residential projects but also increased the market value of its land holdings.
SLI’s total land bank and real estate inventory of 45 hectares comprise about 50 percent of its total assets. An increase in the valuation of its land holdings will increase the value of its shareholder equity
In 2017, an independent study conducted by Santos Knight Frank, an international real estate research consultancy group, valued SLI’s property holdings at P32.8 billion, more than twice the actual costs invested by the company at P16 billion.
In a recent independent appraisal conducted in 2019, this time, by Colliers International, SLI’s property holdings were valued at P62.5 billion against book value cost of P20.7 billion.
If we were to conservatively use the appraised value of SLI’s property holdings from 2019 at current balance sheet, we can derive a net asset value of P49.5 billion or P6.03 per share.
At a net asset value of P6.03 per share, the current share price of the stock at P3.00 per share offers a huge 50 percent discount or a potential upside of 100 percent.
Although, historically, actual share price of a stock seldom trades at par with its net asset value (NAV), the large discount simply tells us that the SLI, being grossly undervalued, has room to appreciate further.
Over the long-term, the market value of SLI’s land holdings should further increase once all the government’s infrastructure projects are completed.
4| Long-term intrinsic value of the stock provides high margin of safety
The great legendary investor Warren Buffett once said that he prefers businesses that he can predict how they’re going to look like in 10 to 15 years.
Buffett believes that companies that can grow consistently with a fair degree of certainty can deliver superior returns in the long-term.
If we assume that SLI’s net income will only grow 10 percent, as against its historical compounded growth average of 40 percent for the last 12 years, we can estimate that its net income for 2021 will be P1.8 billion.
If we add this to the company’s stockholders’ equity from 2020, we can derive SLI’s book value at P19 billion by the end of 2021.
Following Buffett’s principle, if we continue to assume that SLI’s net income will grow only by 10 percent until the 10th year by 2030, its compounded estimated net income would be P4.4 billion.
If we add this income to its stockholders’ equity, SLI’s future book value by end of 2030 would be P47.2 billion.
Applying the stock’s historical Price-to-Book Value (PBV) of 1.5 times, we can estimate SLI’s share price 10 years from now at P8.63 per share.
Because this estimated value is in the future, we need to bring the price to its present value.
Using SLI’s cost of equity of 4.95 percent, which is derived from the prevailing 10-year Philippine bond yield of 3.71 percent plus risk premium, we can compute the stock’s future price to the present price target at P5.32 per share.
At P5.32 per share, the current share price of the stock at P3.00 per share offers 43 percent discount to its estimated value.
5| Ability to create shareholder value justifies higher price premium
It has been said that a company creates value for its shareholders when it generates a return on invested capital (ROIC) that is higher than its weighted average cost of capital (WACC).
The higher the residual spread between a company’s ROIC over its WACC, the higher the share price of the stock should be as reflected in its high Enterprise Value (EV) to Invested Capital (IC) ratio.
In theory, the ratio of ROIC-to-WACC should be equal to EV-to-IC ratio so that when a stock’s ROIC-to-WACC is higher than its EV-to-IC ratio, it means that the stock is undervalued, and vice versa.
If we apply this theoretical valuation to SLI, we will find that the stock has ROIC of 11.9 percent against its WACC of only 5.4 percent, which yields a spread of 6.5 percent.
An ROIC higher than the cost of capital means the company is healthy and growing, while an ROIC lower than the cost of capital suggests the company is unsustainable and destroying value.
SLI’s positive spread of 6.5 percent actually makes the stock one of the few value creators in the property sector, where the average spread is negative 1.6 percent.
If we take the ratio of SLI’s ROIC-to-WACC, we will derive a multiple of 2.2 times.
At current share price of SLI, we can project the stock’s Enterprise Value at P40 billion. If we compare this against the company’s invested capital, we derive an EV-to-IC ratio of 1.41 times.
Because SLI’s ROIC-to-WACC at 2.2 times is higher than its EV-to-IC ratio of 1.41 times, it means that the stock is undervalued by the market.
If we equate SLI’s EV-to-IC ratio to its ROIC-to-WACC ratio at 2.2 times, we should theoretically derive a fair value price for the stock at P5.73 per share.
At a price of P5.73 per share, the current share of SLI at P3.00 again offers a huge discount of 47.6 percent.
By Henry Ong, esquiremag.ph