8990 Holdings to sacrifice growth for cash flow

This 2017 is a year for leading mass housing developer 8990 Holdings to sacrifice growth for cash generation as interest rates rise while the regulatory environment turns tougher.

Nonetheless, 8990 Holdings expects profitability to be better this year compared to the flat performance last year. It expects to chalk up at least P4 billion to as much as P5.4 billion in net profit depending on how fast new housing projects could be rolled out.

This translates to a net profit growth guidance of at least 5 percent to as high as 41.7 percent from last year’s net profit level of P3.81 billion, 8990 Holdings president Januario Jesus Gregorio Atencio said in a recent press briefing.

Last year, several project delays – in turn attributed to slower processing of business permits and licenses as the country transitioned to a new administration – resulted in a modest net profit growth of 2 percent to P3.81 billion. Gross sales rose by a meager 1 percent to P9.41 billion.

This year, even if some new projects get delayed, Atencio said 8990 Holdings could still expect at least P10 billion in gross sales from existing inventory, which in turn would yield a net profit of P4 billion.

As the new administration is still in the process of “stabilizing” itself and with so many positions in the housing industry still vacant, Atencio said there was some caution in the issuance of permits. The “new normal” is now to take two years for any new project to take off instead of one year. Among others, he said there were now more permit and licensing procedures as well as stricter environmental compliance.

In Davao, for instance, developers are now required to get clearance from the Water Resource Task Force, Floodway Mitigating Zone Task Force alongside additional land usage certificate. In Iloilo, developers are now required to get a certificate from the provincial assessor that land is classified as residential by the local government. In Cebu, they are now required to undertake a traffic study as well as a detailed drainage study as part of environmental compliance.

But if 8990 Holdings could launch new projects as intended, thereby increasing its inventory, Atencio said the company could generate P13.5 billion in gross revenues. Assuming a 40 percent net income margin, this is seen translating to P5.4 billion in net profit this year, the upper end of 8990 Holdings’ full year guidance.

This year, Atencio said 8990 Holdings’ board was wary of rising interest rates. As such, he said 8990 Holdings was willing to sacrifice growth for cash generation, which means focusing less on in-house contract-to-sell (CTS) in-financing and instead making the organization more efficient and working harder so that buyers could go directly to housing financing agencies like Home Development Mutual Fund (HDMF) or PagIBIG fund.

8990 Holdings expects about P6 billion of new housing sales this year to be funded directly by HDMF take-out. Total HDMF take-out, including older accounts, is expected to reach P9.5 billion this year.

Except for a strategic property eyed in Cavite, 8990 Holdings also intends to pause on its landbanking activities. Last year, the company bought 191 hectares of raw land valued at P5 billion, bringing its total landbank to P655.15 hectares to date. This landbank would suffice for now, Atencio said.
The company also expects to generate P3 billion from securitization or sale of securities backed by housing receivables. Around P3 billion is targeted to be raised from the sale of mature CTS accounts to financial institutions wanting to expand their housing portfolio.

Finally, 8990 Holdings also expects to raise P5 billion from the sale of preferred shares this year.

Atencio said 8990 Holdings was expecting local interest rates to rise by as much as 3 percentage points this year, which means that its borrowing cost- currently at 3 percent – could double.

“Given the need to focus on strengthening the company’s balance sheet, in the wake of increasing interest rates, and a tougher permits and licensing environment, the goal for 2017 is cash generation to pare down short-term and medium-term debt,” he said.

This year, 8990 Holdings expects to launch 11 new housing projects, eight of which consisted of projects originally lined up last year but pushed back due to delays in getting permits and licenses. This year, it will launch 60,765 new housing units.

Last year, delays in eight projects in Iloilo, Cebu, Bacolod and Davao cost 8990 Holdings P2.4 billion in foregone revenues.