The first IPO this year is DoubleDragon Properties, Inc with the symbol, “DD”.
There is high demand of the shares probably because of the so-called “co-marketing” where emphasis on joint venture of popular owners of big companies in the Philippines, like Mr. Tony Tan Caktiong of JFC and Henry Sy of SM, are also partners of DoubleDragon Properties, Inc.
Despite the popularity of the IPO, the first in 2014 and perceived as literally cheap, I believe the stock will pullback anytime soon.
There is no guarantee that over-subscription of the shares, which is similar to $RWM and other stocks which were listed in 2013, (with five times oversubscription with over 100 investors and partnership between tycoon Andrew Tan-led Alliance Global Group Inc. and the Genting group) will do well in the listing date.
There are 5 reasons why this stock will pullback below P2/share in 1 year probably not on listing date.
1. High P/E with unmet expectation on net income 2014
As shown in the summary of financial performance from 2011-2013 courtesy of Colfinancial and DD:
For year 2014, we cannot expect an outright increase of net income for retail leasing since there are only few months left for construction of these community malls and recently acquired, 50% of Piccadilly Circus Landing, Inc., which will develop the Umbria Commercial Center.
Unmet expectation of net income for 2014 could be one reason to pullback its stock price below Php 2/share. I believe investors will “factor-in” the net income in 2014 based on realistic P/E of the stock relative to valuation on other property companies, which are also performing well.
Remember that market is so efficient that a slight decrease of income or factors affecting the global markets may also reflect its stock price 😉
Assuming a 32% high growth net income in 2014 for purposes of justifying the high P/E of the stock, P/E 2014F is still high at 27.693.
It seems to me that the only comparison for property stock DD is only ALI. We are not talking here whether 2 pesos is cheaper than 28 pesos 🙂
Does $DD Management decide to price-in the net income growth of the stock price at Php 2/share on the high growth of the stock? or the press is just manipulating the investors mindset that buying DD is similar to buying JFC 😉
2. The stock is perceived as similar to JFC and SM but this is a property company not a consumer stock
Many analysts are forecasting that the property sectors will slowdown in the next 3 years. DoubleDragon is not the only one constructing community malls but we all know that $DD is very visible in the media.
As property company with P/E of 36.54, as compared to other property companies, the valuation is too high already in terms of financial ratios. What is the economic moat of this stock – its high growth prospects? provincial retail leasing? Other property companies are also growing with undervalued price below Php 2/share. Probably, the owners are anticipating, in a worst case scenario, the stock will be ranging the same with other property stocks between 1.5 to 1.8.
Based on the existing information, with P/E of 36.54, net income of Php 122M and market capitalization of 4.46B, below is the fair value range:
However, if we can make reference on average P/E of 19.2 for property companies, the fair value of the stock is only Php 1.52 per share as per below reference:
4. Competitive Environment
We are aware that property business in the Philippines is very much competitive. There are hundreds of property companies which are not publicly listed but also doing well because of overseas market share. The same holds true in other publicly listed companies. Contributing factors of their market share come from overseas and BPO market.
Considering the inflation and future high-interest rate environment, income of property companies may be affected especially the start of the slowdown of construction growth as written in the previous post, “Update on Real Estate Sales in the Philippines.” Other property companies are also into leasing business with stable operating cash flow.
In this scenario, high P/E stock is the first one to be affected, adjusting its stock price towards its intrinsic value is a high possibility especially if the company could not maintain investors’ expectation. DD stock price will surely go back to its intrinsic value over time.
5. Overvalued growth stock based on DD Price to Book Value Ratio (P/BV)
DoubleDragon is overvalued in terms of price-to-book value ratio. Relative valuation indicates (although this is not the only basis) that if the property company has high P/BV, the stock should have high ROE.
Usually, in overvalued growth stock, a combination of low ROE and high P/B ratios is normal. If a company’s ROE is growing, its P/B ratio should be doing the same. The above table shows that $DD has 7.25 P/BV, the highest among property stocks. Probably, the owners decided to factor-in the Php 2/sh, to justify the high ROE of 23% in 2013, which is too high as compared to other established property companies.
A good reference with regards to detailed discussion that DD is overvalued stock can also be found in the blog of Renzie, “Double Dragon Prospectus at a Glance.”
ADDENDUM ON 8 April 2014:
With the current sentiment of the market on DoubleDragon Properties, if I were to buy $DD shares, to keep the stock for 2 years until 2015 based on the following assumptions: The above previous FV estimate is only applicable for 2014.
1. $DD can can complete 25 community malls within 2 years until 2015.
2. Lease at Ph700 per square meter
3. Average P/E is 19.2
4. Net Profit Margin is 30% in 2015
My FV estimate 2015 (above valuation is only 2014) is P3.62/share. In order to have higher upside/ higher margin of safety (at least 15%), it is better to wait for pullback and buy $DD shares below P3.01/share provided that this stock will be kept for long term.
Note: This is not bashing on DD but in my own discussion. I fail to mention that DD valuation has big impact if the Company’s vision on net income of P4.8B in 2020 will be achieved/materialized after 6 years. By then, the current price is too cheap!
Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of capital. The information provided in the website is only an opinion of the author and does not constitute as legal advice, research or recommendation to buy or sell any securities.