- By Mark Yu
The ?193 billion ($3.8 billion) Makati city-based engineering and construction firm provided its first quarter 2017 results in May. DMCI Holdings Inc. (DMC) registered 27% year over year revenue growth to ?17.19 billion and an impressive 21.8% profit growth to ?3.7 billion (21.5% margin vs. 22.4% the year-prior period).
Despite higher expenses (15% year over year) and costs of sales (8.9%), DMCI still registered good levels of profitability.
"2017 will be a better year for us. We expect double-digit growth from our energy and real estate companies and modest growth from construction and nickel mining," said DMCI Chair and President Isidro Consunji in a release.
Valuations
DMCI traded at slight discount compared to its peers. According to GuruFocus data, the company had trailing P/E ratio of 14.6 times vs. industry median of 15.75 times, P/B ratio of 2.65 times vs. 1.3 times, and P/S ratio of 2.76 times vs. 0.68 times.
The company also had a trailing dividend yield 1.65% with 0% payout ratio (Reuters)
Average 2017 revenue and earnings-per-share estimates indicated forward multiples 2.6 times and 13 times.
Total returns
DMC has underperformed the broader local Philippine index, iShares MSCI Philippines ETF (EPHE), in the past five years and provided better return so far this year with 8.42% annualized and 16.29%, respectively, vs. the index's 11.34% and 4.4%, according to Morningstar.
DMCI Holdings
According to filings, DMCI Holdings or DMCI was incorporated on March 8, 1995, as a holding company to consolidate all construction business, construction component companies and related interests of the Consunji Family.
The current DMCI's founder David Consunji (95 years old) is the Philippines' seventh richest person with net worth of $3.5 billion, according to Forbes. David's son, Isidro, is the current chairman of the board, president and CEO of the company.
In addition, the Isidro-led private company Dacon Corp. is the largest DMCI shareholder with 51.5% ownership. DFC Holdings, another private company that is chaired by Isidro, owned another 17.9% of DMCI.
DMCI is a publicly listed firm with subsidiaries or affiliates engaged in the businesses of construction, real estate, coal mining, nickel mining, power generation and water distribution. Its revenues and net income are being generated and consolidated from its subsidiaries.
Except for coal and nickel segments, revenues of DMCI were primarily derived from sales within the Philippines. Foreign sales from coal segment accounted for 59% of gross coal sales in 2016 and 100% of the company's nickel sales are exported.
DMC has expanded its business organization to include five major subsidiaries: D.M. Consunji Inc., DMCI Project Developers Inc., Semirara Mining and Power Corporation, DMCI Power Corp. and DMCI Mining Corp.
In addition, DMCI has an indirect ownership in Maynilad Water Services Inc. through a 27% stake in Maynilad Water Holding Company Inc., which owns 93% of the water concessionaire.
Semirara Mining and Power Corp.
Semirara Mining and Power Corp. was established in 1980 and is engaged in the exploration, mining, development and sales of coal resources on Semirara Island in Caluya, Antique.
Currently, Semirara is 56% owned by DMC. Semirara is the largest coal producer in the Philippines, accounting for more than 90% of the country's total coal production, and the only power generation company in the country that owns and mines its own fuel source (coal).
In the recent quarter, revenue in Semirara rose 85% year over year to ?10.35 billion (60% of total DMC sales) and generated profit after noncontrolling interest margin of 24% (most profitable in all segments) vs. 29% in the year prior period.
According to filings, the significant growth in Semirara was due to the 24% increase in coal sales volume and further boosted by a 41% upturn in average coal prices. In addition, its power plant generation has improved 39% from previous year.
D.M. Consunji
D. M. Consunji, a wholly owned subsidiary, is engaged in general construction services. It is also engaged in various construction component businesses such as the production and trading of concrete products and electrical and foundation works.
D. M. Consunji was incorporated and founded in 1954, and is currently one of the leading engineering and construction firms in the country. It operates in four key construction segments: building, energy, infrastructure and utilities (1).
In the recent quarter, revenue in the segment fell 10.7% year over year to ?2.64 billion (15% of total sales) and generated a margin of 6.9% vs. 6.7% in the year-prior period.
According to filings, two major projects were substantially completed as of year-end 2016 resulting in minimal revenue take up for the first three months of 2017. In addition, right of way and utility relocation issues continue to hamper accomplishments on the firm's Skyway Stage 3 Project. In addition, additive change order on one of the projects have yet to be approved.
Nonetheless, DMCI reported a total order book (balance of work) of ?27.1 billion at the end of March 2017, from ?20.1 billion at the close of 2016 (2).
DMCI Homes
DMCI Project Developers is a wholly owned subsidiary incorporated in 1995 initially as a housing division under DMCI.
Subsequently, DMCI Homes was spun off in 1999 to address the surge in demand for urban homes. Since then, DMCI has made high-quality living available to average Filipino families through its innovative designs, proprietary technologies and cost-efficient methodologies.
DMCI Homes' core products include larger-than-usual condominium units with resort-inspired amenities in mid-rise and high-rise developments in Metro Manila, Baguio City and Davao City.
In the recent quarter, revenue in DMCI Homes fell 26% year over year to ?3.2 billion (18.7% of total sales) and the company registered a margin of 18.5% vs. 15% in the same period last year.
According to filings, the revenue drop was due to fewer completed units this year. In addition, DMC adopted a more conservative approach of recognizing real estate revenues by realizing sales only when the unit is fully completed and at least 15% of contract price has been collected.
From January to March 2017, sales and reservations more than doubled from P6.0 billion in 2016 to P13.2 billion this year buoyed by strong demand for residential condominium coming from new launches as well as existing projects (3).
DMCI Power
DMCI Power is a wholly-owned subsidiary of DMCI that was incorporated in 2006 and is engaged in the business of a generation company which designs, constructs, invest in and operate power plants.
DMCI Power provides off-grid power to missionary areas through long-term power supply agreements with local electric cooperatives. It currently operates and maintains bunker-fired power plants and diesel generating sets in parts of Masbate, Oriental Mindoro, Palawan and Sultan Kudarat.
Revenue in the recent quarter jumped 27.6% year over year to ?615 million (3.6% of total sales) and the company had margins of 14% vs. 20% in the same period last year.
DMCI Mining Corp.
DMCI Mining Corp. was incorporated in 2007 to engage in ore and mineral mining and exploration.
It has two nickel mining assets, namely Berong Nickel Corp and Zambales Diversified Metals Corp. The former operates in Berong, Long Point, Moorsom and Ulugan, all in the province of Palawan, while the latter is located in Acoje, Zambales. Both mining companies use open pit technique to extract nickel, chromite and iron laterite.
In the recent quarter, DMCI Mining recorded 232% rise in revenue to ?299 million (1.7% of sales) and profits of ?32 million compared to losses of ?100 million in the same period last year.
According to filings, DMCI Mining turned for the better so far in the recent quarter brought by better shipment volume and higher nickel ore prices.
Nonetheless, DMCI Mining is currently dealing with the Order of Suspension issued against its operating company in Palawan, Berong Nickel Corporation, and the Closure Order issued against Zambales Diversified Metals Corp, its operating company in Zambales.
According to filings, both subsidiaries have already filed an appeal before the Office of the President questioning the Suspension Order and Closure Order, respectively. The country's Department of Environment and Natural Resources issued the orders.
Maynilad Water Services
Maynilad Water Holding Company (formerly DMCI-MPIC Water Co.) is a consortium with Metro Pacific Investments Corporation and Marubeni Philippines Corp., which owns 93% equity at Maynilad Water Services.
DMCI's economic interest in Maynilad decreased to 25% from 41%, after Marubeni acquired 20% of economic interest in Maynilad in February 2013.
Nonetheless, DMC's interest in Maynilad generated 17% of the company's overall profits in the past two fiscal years. In the recent quarter, DMC's profit share in the utility fell by 30% year over year to ?3.7 billion.
Sales and profits
In the past three years, DMCI registered average revenue growth of 5.1%, profit decline of 13.7%, and profit margin average of 20% (Morningstar).
Cash, debt and book value
As of March, DMCI had ?24.66 billion in cash and cash equivalents and ?40.4 billion in debt with debt-equity ratio 0.57 times vs. 0.6 times in the same period last year. Shareholder equity rose by ?5.8 billion year over year while debt increased by ?687.8 million.
Goodwill elements comprised just below 1% in DMCI's ?166 billion assets, while book value grew 9.6% year over year to ?86.6 billion.
Cash flow
In the recent quarter, DMCI's cash flow rose by 72.5% year over year to ?4.8 billion. In addition to the strong profit growth, the company generated more cash flow from its net unrealized foreign exchange, receivables, and customer advances and deposits.
Capital expenditures were ?2.57 billion leaving DMCI with ?2.3 billion compared to ?1.7 billion in the year prior period. The company did not provide payouts in the recent quarter, while it averaged providing 369% of its free cash flow in dividends in the past three years.
In the quarter, the company also took in ?3.3 billion in borrowings net repayments.
In review, DMCI reduced its overall debt by ?5.6 billion, generated ?19.2 billion in free cash flow, and provided ?19.1 billion in dividend payouts accumulatively in the past three years.
Conclusion
DMCI has a good amount of its business exposed to the coal industry. As the price of coal recovered in the recent quarter, the company registered even stronger overall profitability. Nonetheless, the firm's housing and construction business, which has generated approximately 42% of all sales in the past two fiscal years, has performed poorly in the quarter due to fewer homes made available and delays in projects.
In addition, a significant (roughly 17% of all profits) profit generator investment in a water utility company (Maynilad) has continually exhibited lower profits in recent years.
Meanwhile, DMCI has maintained a strong balance sheet (0.57 times d/e) while having maintained overly generous payouts to its shareholders (69% of which directly or indirectly owned by a Consunji).
Seven analysts have a median price target of ?14 a share vs. ?14.94 at the time of writing. Applying three-year revenue growth and P/S multiple averages followed by a 20% margin indicated a value of ?13.4 a share.
In summary, DMCI is a hold.
Notes
(1) Company filings
Over the years, its pioneering methodologies and expertise have allowed it to complete close to a thousand projects of varying scale and complexity in the Philippines and abroad. From high-rise, commercial and residential buildings, institutional facilities to heavy civil works, elevated and at grade roads, bridges, power plants, industrial plants, water and sewer facilities, DMCI is a major contributor in changing the domestic infrastructure landscape to improve the lives of millions of Filipinos.
(2) Company filings
Awarded projects during the first quarter totaled P9.5 billion which includes Cavite- Laguna Expressway Project, construction of Bued Viaduct and Roadway of Private Infra Dev Corporation, 1x105MW Saranggani Coal Fired Powerplant, Mindoro switching station and transmission line and remedial works of San Roque MPP Spillway of National Power Corporation and the 30ML Aguinaldo Reservoir and Pump Station of Maynilad.
Meanwhile, major ongoing projects in the orderbook include among others, The Skyway Stage 3 (S1 and S2) of Citra Central Expressway Corp. (a unit of San Miguel Corporation), design and construction of stations of LRT Line 2 East (Masinag) Extension, NAIA Expressway of Vertex Tollways Dev. Inc. (a unit of San Miguel Holdings Corporation), Six Senses Resort Phase 2 of Federal Land, Inc. in Pasay City, NCCC Mall of NCCC Group of Companies in Buhangin, Davao City, One Griffinstone Building in Ayala Alabang, City Gate of Ayala Land in the Makati Central Business District, The Viridian, The Royalton and The Imperium of Ortigas & Company, The Arete of the Ateneo de Manila University, and the Paranaque Sewer Network of Maynilad.
(3) Company filings
Top selling projects during the year include Prisma Residences and Oak Harbor Residences, a luxury waterfront property in Bay City Paranaque.
Disclosure: I do not have shares in any of the companies mentioned.
This article first appeared on GuruFocus.
