Wenceslao to test investor appetite in Philippines

Construction and property developer braves wintry conditions in the Philippines equity market to bring possibly the largest flotation of the year.
Aseana City
Aseana City

DM Wenceslao and Associates, a construction and real estate company, has launched pre-marketing for a $150 million to $200 million initial public offering that could turn out to be the Philippines largest flotation of the year.

The deal is coming at a time when the Philippines Stock Exchange PSEi Index appears to have resumed its losing streak. The market initially turned downwards in April after hitting a year-to-date peak of 8,127.48 and enjoyed only a very brief respite in October when all global equity markets picked up again.

On Monday, it fell 1.8% to close at 6,772.92.

Year-to-date it is down 6.33%, with foreign investors net sellers every month since April.

DM Wenceslao will test their appetite to return to the market since it hopes to place 70% of its IPO with international accounts, according to its registration statement.

The company is hoping its high growth profile will also persuade them to accept a premium valuation compared to both the exchange’s average 16 times forecast 2016 p/e ratio and the property sector’s 18 times average.

Valuation

According to its most recent filing, the company plans to sell up to 429 million shares at a maximum price of Ps44 per share, potentially generating total proceeds of as much as Ps17.47 billion ($370 million).

However, sources close to the deal said the pre-marketed range equates to a market capitalisation of about $1 billion. This is towards the bottom end of a Ps45 billion to Ps62 billion ($950 million to $1.31 billion) fair value range assigned by Citic CLSA, one of the IPO’s joint bookrunners.

This range represents a 30% to 50% discount to net asset value and equates to a p/e ratio of 32 to 43 times forecast 2016 earnings of Ps1.438 billion.

In 2014, the company reported earnings of Ps339 million. In 2015, they are forecast to triple to Ps1.14 billion.  

Gaming proxy

DM Wenceslao is said to be pushing forwards with the deal despite the weak market conditions because it needs to raise fresh capital to fund the development of four of its 10 construction projects.

Capital expenditure is expected to grow 187% to Ps2.4 billion in 2016 from Ps842 million this year, and by a further 180% to Ps6.8 billion in 2017, Citic CLSA estimates.

In addition, the company’s net cash position deteriorated by 44% on a year-on-year basis to Ps1.2 billion in 2014.

The company was founded 50 years ago as a pure construction company. However, it has recently been transformed into a real estate leasing company after the Philippines Reclamation Authority transferred 829,000 square metres of land as part of the Manila Bay area reclamation project.

As a result of the land transfer, DM Wenceslao currently owns roughly 80% of Aseana City, a mixed-use development area partially overlapping Entertainment City, the Philippine’s fast expanding gaming hub.

Over the next five years the company plans to lease 5,000 square kilometres of land per annum.

In 2012, DM Wenceslao generated 71% of its revenues from construction projects and 28% via rental income. This has now turned on its head with property leasing accounting for 75% and construction 19%, a far more stable revenue mix that may appeal to investors.

The company is expecting to generate higher growth than other Philippines property developers because of its proximity to Entertainment City, which is being developed as Asia’s Las Vegas-like gaming and entertainment complex.

Currently, two casinos under Bloomberg Resorts and Belle Corp have started operations while Traveller International Hotel Group and Tiger Resorts’ casinos are set to open in 2017 and 2018 respectively.

On the flip side, it will suffer from any downturn in the country’s gaming business, which is currently the key attraction for tourists to visit the area.

DM Wenceslao is expected to commence the retail offering for its IPO on December 4 and list on December 17, according to the company’s filings to the Philippines stock exchange.

So far this year, the largest IPO has been the Ps3.621 billion offering for Metro Retail Stores completed earlier this month, one cent below its marketed range of Ps4 to Ps4.80.

BPI Capital, Citic CLSA, Deutsche Bank and Maybank are joint global coordinators and bookrunners for the new deal.

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