Buying D.M. Wenceslao? Some tips
Are you deciding whether to subscribe to D.M. Wenceslao & Associate’s (DMW) initial public offering (IPO)? The following could help you decide.
DMW is a property developer and contractor. It owns around 57 hectares of land in Aseana City, a very attractive location. It is situated close to two of the most significant recreational and entertainment districts in Metro Manila—Pagcor’s Entertainment City and the SM Group’s Mall of Asia—putting it in an excellent position to capitalize on the growing leisure and tourist traffic in the area.
Aseana City is also one of the most attractive locations to build offices. According to Leechiu Property Consultants, 26 percent of supply added to the office sector in 2017 came from the Manila Bay Area, one of the most preferred locations of Philippine Offshore Gaming Operators (Pogos).
Accessibility is expected to improve given several infrastructure projects, including the Southwest Integrated Bus Terminal Exchange Station and the LRT Line 1 extension project.
Thus, capital appreciation potential is significant. According to Leechiu Property Consultants, the price of properties in the Manila Bay area has increased to P250,000/sqm in 2017 from P125,000/sqm in 2014, for a compounded annual growth rate of 26 percent.
Currently, DMW is heavily reliant on land leases and lot sales for profits. However, these activities are not the most efficient uses of its property as land leases provide low yields while lot sales deplete its landbank rapidly and is not sustainable.
Nevertheless, DMW’s IPO will help unlock the value of its landbank. Using part of the P7.6 billion in IPO proceeds, DMW plans to construct six office buildings and three residential buildings. The six office buildings will increase its gross leasable area from 59,000 sqm as of end 2017 to 261,432 sqm by end 2022, and potentially boost building rental revenues from P450 million in 2017 to P3.8 billion in 2023. The said amount is more than three times the P1 billion in revenues generated from land sales in 2017, allowing DMW to completely end its practice of selling land without hurting profits. Meanwhile, the sales of residential units will allow DMW to better capitalize on the strong demand for properties in the area. Aside from Pixel Residences, which was sold out seven months after it was launched, DMW plans to launch two more residential buildings with a total saleable area of 75,200 sqm.
DMW also plans to buy 50 percent of shares it does not own in a joint venture company that owns six hectares of land beside City of Dreams Manila. This should further increase DMW’s landbank.
At its IPO price of P12 per share, DWM is offering its shares at a deep 66-percent discount to its estimated net asset value (NAV) of P121.1 billion or P35.40 per share. Aside from poor market conditions, shares were priced cheaply most likely due to DMW’s heavy reliance on land leases and lot sales for bulk of its profits. Whether or not the discount will narrow going forward depends largely on the successful execution of DMW’s plan to expand.
Still, the risk seems small given DMW’s huge attractive landbank and access to funding. Aside from the proceeds of its IPO, DMW still has much room to increase debts as the company only had P2.48 billion worth of loans and a very low net debt-to-equity ratio of 0.12x as of end 2017. Even without the new office buildings, DMW already generated P1.3 billion in operating profits from leasing activities in 2017 (while it only incurred P72 million in finance costs), putting it in an excellent position to leverage up if needed.
One of the main risks facing DMW is concentration risk as much of its value comes from its landbank in Aseana City. It has landbank in other areas, albeit very small.
The proposed land reclamation project of SM Prime in Pasay and Parañaque is also a risk as the increased supply of land in the Manila Bay area could limit the capital appreciation potential of Aseana City. However, SM Prime’s project still has not received the go signal from the government. It would take at least seven years for the land reclamation project to be completed, giving DMW ample time to develop its landbank in Aseana City.
The deadline to subscribe to DMW’s IPO is Friday, June 22 (although the deadline for subscription through COL Financial is earlier, on June 19).
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