Metro Pacific Investments Corporation-2010 Performance Review Part 2



For the 1st part of this, click the link "Metro Pacific Investments Corporation-2010 Performance Review Part 1"

Profitability:
ROE  = 4.40%
Average ROE for 5 years = 4.0%
OCF/Equity = 21.73% (operating cash flow to equity ratio)
Net Profit Margin = 28.61%

At first look, MPI seems less profitable since its Return of Equity is only 4.40% (ROE of 15% is good). However, as mentioned in the Business Performance Review in Part 1, MPI have massively accumulating new assets these past few year thus increasing its asset fast while resulting to lower net income (ROE = net income /equities....where equities = assets-liabilites). The operating cash flow to equity ratio speaks the profitability of the company as it shows 21.73%.


Growth:
Annual Net Income Growth Rate = 57.33% (2007 to 2010)

Disregarding the starting year, the annual net income is growing fast mainly due to acquisitions. More growth are expected in the future with the upcoming projects. Also, the company are planning to actively participate in the Public-Private Partnership Program for the improvement of the infrastructure in the Philippines. Note that the NLEx is a model for successful PPP which MPI is involved.




Risk and Debt:
DE Ratio = 101%
Current Ratio = 0.8

Just like most companies which are growing fast by acquisitions, leveraging is required to provide the necessary fund. This resulted to high debt as shown in its DE Ratio (DE Ratio below 100% is good). On the other hand, MPI have improved a lot is leverage level by lowering its DE Ratio from 734% in 2006 up to this level (101%).

Liquidity risk is also high for the said company since its current ratio is only 0.8 (current asset to current liabilities ratio of 1.5 or higher is considered healthy). This should be addressed soon by the management.

Dividend:
Dividend Yield = 2.57%

Other Factors: The effect of Bond Swap
Recently, MPI made an announcement about the conversion of MPHI bonds into 2,030M MPI common shares. This is a 10% dilution to the current outstanding shares (20,160 M shares). However, this is the conversion of  P6.6 Billion worth of bonds not additional shares. It has a positive effect of reducing the debt and future interest expenses of the company...assuming that the bond's interest rate is at 10%, this bond if not converted is equal to P7.26 Billion (debt +10% interest) only after 1 year and this will be higher in the succeeding years. However, if converted to shares, at a current price of P3.67 per share, the total value is P7.45 Billion. Therefore converting this bond is more beneficial to the company as a whole in the medium term.

Valuation:
PE Ratio = 26.21
PB Ratio = 1.13
Intrinsic Value = 9.3
Current Price = 3.67
Upside = 152.86%

(click to zoom)



Using discounted cash flow analysis, intrinsic value is calculated based on 2010 Annual Report. Cash Flow is projected to grow at a conservative rate of 12% and discounted at 15% worst case, minimum risk interest rate (based on historical Philippine 91-day T-Bills rate plus margin of safety).

Conclusion:
Despite the recent uproar about the possible dilution of shares, MPI is still a good buy given its potential for high growth and lucrative possible stocks appreciation.










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