Investors seem to have this interesting, long-standing love-hate relationship with the stock of real estate company Megaworld Corp. (MEG). At times, MEG is the stock market’s darling with investors rushing towards it with expectations of short-term 100% or 200% return, but when it falls from grace, investors also abandon it like a house on fire.
Recent proof is the stock’s dizzying price range in the last one year. Its 52-week high was a whopping P6.54 per share last July 2019 — at a time of the real estate sector’s rosy prospects due to the rise of Philippine Offshore Gaming Operators (POGOs) in the country — but is also in stark contrast with its 52-week low of a measly P1.86 per share last March 2020, when the Philippine government implemented a lockdown, better known as Enhanced Community Quarantine (ECQ), as a way to address the COVID-19 pandemic.
What are the company’s long-term prospects? Is MEG a good stock to buy right now? Here are useful analysis from various stockbroker partners of PinoyInvestor.com, a stock reports subscription service in the Philippines.
Land values could decline due to COVID-19 pessimism
A report recently released by property consultant Colliers International Philippines showed that land values in Metro Manila could see a decline from 5% to 15% by the end of the year 2020 as rents and selling prices take a dive due to the COVID-19 pandemic.
For the residential segment in the Philippines, Colliers see a 15% decline in value and a 5.5% decline in rental prices in major business districts such as Ayala, Makati and The Fort BGC in Taguig. This is brought about by market pessimism due to reduced consumer confidence and an expected rise in unemployment. For the office segment, vacancies could swell up to 5.5%, according to Colliers, with gradual recovery coming in only by 2021 and 2022.
As such, property companies such as Megaworld Corp. (MEG) will likely feel the impact, especially since MEG’s business is heavily reliant on residential sales and office space leases.
Real Estate stocks direct losers from COVID-19
With the newly signed law “Bayanihan to Heal as One Act”, mall operators such as MEG, SM, Robinsons, and Ayala Land had to comply with the government’s directive to offer a grace period for the payment of rental fees charged to commercial tenants during the periods covered by the ECQ.
Analysis of MEG’s revenue structure shows that rental revenues from their Lifestyle Malls account for 38% of total leasing revenues. Two months of these deferred revenues amount to roughly P800 Million, surely a huge chunk of the company’s revenues. These are not totally lost revenues, though, since these were merely deferred. But expect uncollectible receivables from tenants that might decide to close down or might request for concessions or renegotiations.
In addition, Megaworld Corp. has exposure in the tourism sector via its Boracay hotels, wherein 50% of clients are Chinese nationals. Since the beginning of the coronavirus outbreak, their hotels have experienced significant number of booking cancellations. Hotels contribute roughly 3% to MEG’s total revenues.
MEG is not the only property company suffering because of COVID-19. SM Investments Corp. (SM), for instance, warned that its affiliate SM Retail would likely see softer revenues during the first half of the year due to closures of SM’s malls and an expectation of heavy fallout in foot traffic even after the ECQ is lifted. Towards the third quarter, SM’s leasing revenues will also unlikely recover, even if malls have already reopened, since tenant sales are still expected to dip due to lower in-store foot traffic as people avoid crowded places.
Its mall operator subsidiary SM Prime Holdings (SMPH), meanwhile, said that its malls in China still continued operations in the past months and they expect minimal impact since the malls are located far from Wuhan, the COVID-19 epicenter which had a months-long hard lockdown. SMPH’s malls in China contribute 6% of the company’s total revenues. SMPH also runs hotels in the Philippines which were impacted by booking cancellations due to the ECQ but the hotels segment currently account for less than 4% of SMPH’s total revenues.
Meanwhile, Robinsons Land Corp.(RLC) sees a major dip in their mall leasing and hotel segment revenues this year. Still, given that its hotels segment account for less than 4% of revenues, the overall impact of this segment could be minimal. RLC also currently has a residential condominium project in Chengdu province, but since this is located 1,163 kilometers away from Wuhan, impact is also likely insignificant.
For Ayala Land Inc. (ALI), the mall segment will certainly take a hit this year. As for its hotels segment, Chinese nationals account for just 5% of ALI’s hotel client base. Hotel operations account for 4% of ALI’s total revenues.
POGO impact on MEG
Certainly the most talked-about issue with MEG is its exposure to the Philippine Offshore Gaming Operators or POGO industry — that of which most investors have come to realize is both good and bad for property firms.
On the one hand, the revenues that the POGOs have been pumping into the property sector have been allowing for continued record high sales and leasing income. On the other, the operators are leasing at a particularly unstable avenue seeing as the government has put into question multiple times the credibility and sustainability of this industry.
Excluding the COVID-19 issue and focusing on the impact of POGOs alone, POGOs certainly affect the real estate industry but not as disastrous as implied by the sell-down of property stocks. This optimism stems from three (3) justifications:
- Major property developers had already limited their POGO exposure even before the crackdown issue surfaced;
- Special payment terms ensured property lessors were paid advanced revenues worth 12 to 18 months, even if the POGO lessee decides to leave; and
- Other demand drivers are beginning to show promise.
A POGO crackdown which implies complete termination of leases slashes MEG’s Office rental income projection by roughly -8% or around P900 million this 2020, and by -12% or at most P1.5 billion in 2021. Assuming that the estimates of margin expansion are maintained and costs continue to be controlled, this scenario leads to just minimal impact on MEG’s profitability. This scenario cuts MEG’s Net Income estimate by just -2.3% in 2020 and -4.13% in 2021.
It therefore appears that MEG’s POGO issue is relatively overdone. MEG’s share price has severely declined from its 2019 peak but fundamentals have been improving and the stock price recovering since then. This reinforces some investors’ belief that MEG’s dependency on POGOs is relatively small.
Also recently, with the government’s COVID-19 task force decision to allow POGOs to resume partial operations even ahead of some business sectors, there is likely to be good sentiment for the stock in the coming weeks.
Is MEG a good stock to buy?
Brokers’ estimates for a worst-case scenario wherein POGOs vacate their spaces show that the impact on both revenues and net income for 2020 and 2021 appear to be minimal. The direct effect slashed profitability estimates by just the low single digit, thus reinforcing the narrative that the POGO issue is overdone.
Therefore, MEG appears to be a good BUY since at current levels, the stock provides a significant upside. Long-term Target Price for Megaworld Corp. (MEG) by stockbroker Unicapital Securities is currently P5.20 per share.
Investment Risks
Given the prevailing market sentiment, the risk premium for MEG is widened due to the presence of major downside risks such as the continued POGO crackdown and COVID-19 outbreak further impacting the tourism and hotel industry.
MEG’s hotel operations, much like the industry as a whole, has surely benefitted from the influx of tourists in recent years. With that, the imposition of travel bans, visa restrictions, and lockdowns across the globe will weaken the country’s tourism leading to an inevitable crunch in hotel occupancy.
While some say there is a likelihood economies and industries will recover by the second half of 2020, the true economic impact of the coronavirus remains largely unknown. While the direct impact of COVID-19 will primarily be on the manufacturing and consumer sectors, the magnitude of its indirect effect on other industries, such as property and tourism sectors will surely take more time to uncover.
NOTE: Data for this report came from stock brokerage firms First Metro Securities, Regina Capital Development Corp., and Unicapital Securities and published in partnership with PinoyInvestor.com. PinoyInvestor is a Philippine-based stock reports subscription service that provides detailed analysis and recommendations from their partner stockbroker companies on how to profitably trade the Philippine Stock Exchange (PSE). Sign up here to get your free PSE stock reports!
For additional analyses and trading recommendations on the Philippine stock market, check out these useful references from our partner PinoyInvestor:
- PSE Daily Market Outlook
- Weekly Stock Picks and Model Stock Portfolios
- Fundamental Analysis with Stock Price Targets
- Technical Analysis with Stock Price Support and Resistance
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