Lopez-led company is undervalued
Stock: First Philippine Holdings Corporation (ticker FPH)
First Philippine Holdings has been trading at about half of its book value in recent years, including at the time of writing at 67.60 Php per share.
Book value: in simple terms, book value is a company’s total assets minus total liabilities.
This means that an investor who buys the company’s shares in the stock market is buying it at just 67.60 Php a share compared to the company’s actual book value of 141.60 a share. Obviously, this is a wide and safe margin.
In review of its assets, First Philippine has 14% of its assets identified as intangibles. Conservative investors would typically deduct this from a company’s total assets to get a net book value figure. Applying this to First Philippine would provide a per share figure of 47.62 a share, which is quite below today’s price.
Nonetheless, weighing whether to use net book value or book value as a target price and as a pure investment decision would certainly be careless. Analyzing a company’s recent operations would help improve and direct an investment decision.
**This article consists of the company’s operations and figures. For quicker reading jump ahead to the conclusion part.**
In its recent six months of operations, the 37.4 billion Pasig City-based Philippine conglomerate reported 17% year over year revenue increase to 51.48 billion and a contrasting 28.4% drop in profits to 6.02 billion.
As it turned out, First Philippine recorded 19% higher in costs and expenses and lower profits in other income resulting in lower profitability for its shareholders in the period.
First Philippine trades at a good discount compared to its peers. The company had price-earnings ratio 4.2 times vs. industry average of 21.4 times, 0.5 price-book value vs. 1.7 times, and price-sales ratio 0.4 times vs. 2 times.
The company also has trailing dividend yield of 2.96%.
The company has provided a meager 0.96% total returns so far this year compared to the iShares MSCI Philippines ETF (ticker EPHE) 15.45% (Morningstar).
I consider EPHE as a barometer of the overall Philippine Stock Market’s performance.
First Philippine Holdings
According to filings, First Philippine Holdings (FPH) Corporation was incorporated and registered with the Philippine Securities and Exchange Commission on June 1961.
FPH and its subsidiaries are engaged primarily in, but not limited to, power generation, real estate development, manufacturing, construction, financing and other service industries.
FPH is 46.47%-owned by Lopez Holdings Corporation (Lopez Holdings), a publicly-listed Philippine-based entity.
FPH owns several companies including 66.2% direct ownership of First Gen, 60% of Batangas Cogeneration Corporation, 100% of First Philec, 86.58% of Rockwell Land Corporation, 100% of First Balfour, among others.
FPH conducts the majority of its business activities in four areas:
1 Power generation – power generation subsidiaries under First Gen.
In its recent six months operations, revenue in the power business grew 12.9% year over year to 42.7 billion (81% of unadjusted revenue) and had a profit margin of 11.8% compared to 20% a year earlier.
2 Real estate development – residential and commercial real estate development and leasing of Rockwell Land and First Philippine Realty Corporation (FPRC), and sale of industrial lots and ready-built factories by First Philippine Industrial Park (FPIP) and First Industrial Township (FIT).
Revenue in real estate business grew an impressive 78% to 6.75 billion (13% of unadjusted sales) and generated margins of 17% compared to 18.8% a year earlier.
3 Manufacturing – electrical transformers and other manufacturing subsidiaries under First Philippine Electric Corporation (First Philec).
Revenue in the manufacturing jumped 20.5% year over year to 1.08 billion (2% of unadjusted sales) and generated a margin of 17.7% compared to a negative (loss) margin of 7.5% a year earlier.
4 Construction and other services – investment holdings, oil transporting, construction, geothermal well drilling, securities transfer services, healthcare, and financing.
Revenue in the construction business fell 22.9% year over year to 2.26 billion (4% of unadjusted sales) and generated losses of 417 million compared to profits of 3.86 billion a year earlier.
Sales and profits
In the past three years, First Philippines generated revenue decline average of -0.5%, profit increase average of 61.7%, and profit margin average of 7.3% (Morningstar).
Cash, debt and book value (equity)
As of June, First Philippine had 50.4 billion in cash and cash equivalents and 173.8 billion in debt with debt-equity ratio 2.22 times compared to 2.28 times a year earlier.
Overall debt increased by 7.86 billion year over year while equity rose 5.8 billion to 78.5 billion.
In the first half that ended in June, First Philippine’s cash flow operations rose by 19% to 20.2 billion brought by higher cash flow from its inventories and other currents.
Capital expenditures were 4.06 billion leaving the company with 16.1 billion in free cash flow compared to 10.5 billion a year earlier.
The company also raised 2.71 billion in debt net repayments and other financing activities, while having provided 604 million or just 3.7% of its free cash flow in dividends.
The cash flow summary
In the past three years, First Philippines allocated 69.6 billion in capital expenditures, reduced its debt by 25.2 billion (net any issuances and other financing activities), raised 1.87 billion in share issuances, generated 20.87 billion in free cash flow, and provided 3.54 billion in dividend payouts representing free cash flow payout average of 3.1%.
First Philippine’s significant stakes in various companies in the Philippines essentially builds up a strong fortress around the conglomerate’s business model.
Nonetheless, the company had shown poor performance in its construction business despite the recent #BuildBuildBuild program of the Duterte administration. Still, investors should be relieved since construction (and other businesses) comprise of less significant business for First Philippine.
The company derives most of its business from its power generation business where it has maintained steady business growth, but at the same time suffered lower profitability brought by higher expenses.
Although praise could be provided as First Philippine has focused on reducing its debt in recent years, the company has carried a highly leveraged balance sheet while having provided minimal amount of dividends to shareholders in the same time period.
Meanwhile, multiplying three-year book value growth followed by a 35% margin indicated a per share figure of 96.63 a share compared with 67.55 at the time of writing.
To give credit, First Philippines has increased its dividend payouts in recent years, but further consistent increase as could be obviously supported by the company free cash flow may attract certain more conservative and dividend-seeking investors in the company’s stock.
In summary, First Philippines is a buy with 95 a share target price.
Disclosure: I have shares in First Philippines and plans to accumulate more. As a member of the Alpha Investments Philippines, (active members) of the group also thinks that FPH is undervalued.
Correction 10/2/2017 12:49 PM CST: Majority has been replaced by Active Members in the disclosure statement.