Financial Adviser: 5 Things to Know About Megawide's Dividend Bonanza and How to Profit from It
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Megawide Construction Corp (PSE: MWIDE) declared last week that it would be paying a special cash dividend of P0.50 per share, representing a dividend yield of 11.9 percent based on the current share price.
The cash dividends, which will be paid out of its unrestricted retained earnings in 2022, shall be payable to all stockholders on record as of March 6, 2023.
If you’re planning to avail of the cash dividend, you need to buy the stock before the ex-dividend date. The ex-dividend date is usually set two business days before the record date. In this case, the ex-date should be March 1, 2023.
This is the first time that MWIDE will be distributing cash dividends since January 2020, when it paid P0.12 per share. MWIDE never declared dividends in the past three years due to the mounting losses it incurred during the pandemic.
In 2020, MWIDE registered a net loss of P398 million from a net income of P859 million in 2019 as total revenues slumped by 35 percent to P12.9 billion from P19.9 billion in the previous year.
MWIDE’s losses continued in 2021 with P342 million net loss due to falling airport revenues and rising finance costs.
MWIDE’s finance costs, which came mostly from its debt used to finance the operation of its airport assets, increased by an average growth of 44 percent per year from only P72.8 million in 2011 to P2.8 billion in 2021.
The decline in MWIDE’s profitability mirrored the fall in its stock price, which lost by 88 percent from a high of P25 per share in 2018 to as low as P2.99 per share in January this year.
Last year, MWIDE took a major step towards regaining its footing when it sold its airport business in Mactan Cebu International Airport to Aboitiz Infracapital, a wholly owned subsidiary of Aboitiz Equity Ventures (PSE: AEV) for P25 billion.
The divestment, which was completed in the last quarter of 2022, will enable MWIDE to strengthen its balance sheet and focus on its core business back to profitability.
Although MWIDE’s stock started to recover last week, its share price is still far from its ideal value created by its recent divestment.
How will the divestment of the airport business help MWIDE recover its value? What are the earnings prospects of the company? How much should the stock market value MWIDE as it realigns its business model for sustainable growth?
Here are the five things every investor should know about how MWIDE’s dividend bonanza is making the stock an excellent value investing play and how to profit from it:
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1| Earnings to recover strongly this year
MWIDE’s nine-month financial results in 2022 would show that its net loss almost doubled to P970 million from P590 million in the same period last year.
But a closer look will tell us that the losses were mainly caused by its airport operations, which ballooned to P1.3 billion as of September last year compared to P1.0 billion in the previous year.
Without the airport business, MWIDE would have reported a net income of P343 million. Although this is lower by 37.2 percent from its net income last year at P547 million, prospects are high that earnings will recover this year.
MWIDE continues to maintain a healthy order book amounting to P58.2 billion as of September last year. Among the major clients that it is currently servicing are Suntrust Home Developers, Inc., Megaworld Corporation, 8990 Holdings, Inc and Double Dragon Properties Corp.
MWIDE has also sealed construction contracts for the CP-104 Manila Subway, Suntrust Home Developers’ Suncity West Side City project, Megaworld’s Newport Link project, the DOTr’s Malolos Clark Railway Phase 1 Project and the modernization of the Carbon Market in Cebu City.
If we annualize MWIDE’s net income based on its actual nine-month results, without the airport business, we should expect its core net income to reach P457 million by end of 2022.
We note that MWIDE’s cash hoard from the proceeds of the sale of its airport company should be able to generate significant interest income.
Based on the buy-out deal where MWIDE will sell its 60 percent stake in the GMR-Megawide Cebu Airport Corporation, the company should have received total proceeds of P15 billion.
Assuming six percent interest rate, we can conservatively estimate MWIDE’s extra cash to contribute at least P600 million to total earnings.
This year, with the prospect of strong passive income plus the recovery of its core business, MWIDE’s net income should be able to turnaround to P1.0 billion level.
2| Lower financial risks from strengthened financial position
The debt-to-equity ratio will tell us the amount of risk associated with the way the capital structure of a company is set up.
The higher the debt-to-equity ratio of a company, the higher the risk that it will default. Lenders and investors tend to favor companies with lower debt-to-equity ratios.
The optimal debt-to-equity ratio varies by industry, but in general, the ratio should not be above a level of 2.0.
A debt-to-equity ratio of 2.0 indicates that the company derives two-thirds of its capital financing from debt and one-third from shareholder equity.
In June 2022, MWIDE’s debt-to-equity ratio was at 2.79, which was way above the benchmark of 2.0, making it financially risky, but with the divestment of the airport business, MWIDE’s total debt declined by 50 percent, leading to lower debt-to-equity ratio of 1.59 times.
If we consider MWIDE’s cash position of P3.9 billion plus its expected proceeds of P15 billion from the divestment, we can expect the company to have a total cash hoard of P18.9 billion.
If we deduct this cash from MWIDE’s total debt as of September amounting to P28.5 billion, we will derive a net debt position of only P9.6 billion.
At a net debt of P9.6 billion, MWIDE will have a projected net debt-to-equity ratio of only 0.56, making the company financially strong in times of high interest rates.
Moreover, MWIDE’s lower debt-to-equity ratio will also mean that its annual finance charges will also decline significantly. Without the airport business, MWIDE’s total interest expense for the first nine months last year was P1.0 billion, down by 50 percent from P2.06 billion in 2021.
3| Large war chest to cushion against economic downturns
With the expected cash reserves of P18.9 billion, MWIDE will have the financial muscle to pursue value creating opportunities for the company.
MWIDE can use its cash reserves to take advantage of any unexpected opportunity during this time of global economic recession.
The company is pursuing more big-ticket projects by investing in high-growth infrastructure platforms where it can leverage its engineering and construction expertise.
If MWIDE will reinvest the whole proceeds of P15 billion, the company should generate an annual earnings of at least P1.4 billion per year over the long-term, assuming a conservative return of 9.32 percent, which was MWIDE’s pre-pandemic average return on equity
But if opportunities are limited, MWIDE can return a portion of the proceeds to its shareholders through special cash dividends or stock buy backs.
The cash dividend of P0.50 per share represents only about P1.0 billion or 6.7 percent of the proceeds. Given the size of the extra cash, it is possible that MWIDE may declare another special dividend before the year ends.
If this will be another P0.50 per share, total cash dividend for the year will be P1.00 per share, which should give a prospective large dividend yield of 23.8 percent at current price.
Assuming the total cash dividends to be paid out this year from the extra cash is P2.0 billion, this amount will only represent 13.4 percent.
With a projected P13 billion extra cash based on this assumption, MWIDE can actually afford to distribute the same special dividends next year without affecting its financial position.
4| Trading at deep discount to book value
If we divide MWIDE’s total parent equity of P15.7 billion as of September last year by its shares outstanding of 2.013 billion, we will derive an estimated book value of P7.80 per share.
The current share price of MWIDE at P4.21 represents only 53 percent of its book value or a deep discount of 46 percent.
Now the amount of total assets of the airport business to be divested is P36 billion but it has liabilities of about P30.2 billion, hence the net book value of the airport to be disposed was P5.8 billion.
If the selling price is P25 billion, we can estimate that the total gain from this transaction is P19.2 billion.
Since MWIDE has 60 percent share in the airport business, the estimated gain shall be P11.5 billion.
Although the full booking of this gain will be made until next year when the exchangeable notes are paid with the transfer of the remaining shares, MWIDE in essence will make one-time gain of P11.5 billion.
Note that the gain of P11.5 billion is higher than MWIDE’s current market cap of P8.4 billion. If we divide this gain by its shares outstanding, we should expect an increase in MWIDE’s book value of P5.71 per share.
The current share price of MWIDE at P4.21 per share has not reflected this gain yet, making it grossly undervalued.
If we add this prospective gain to MWIDE’s current book value of P7.80 per share, we should expect a total book value of P13.5 per share.
MWIDE’s current share price of P4.21 represents is only 31 percent of its projected book value or deep discount of 69 percent.
Alternatively, to be conservative, we can price MWIDE based on its historical Price-to-Book Value ratio of 0.55. At this ratio, we should expect MWIDE to appreciate to at least P7.45 per share.
At P7.45 per share, given a cash dividend of P0.50 per share, the dividend yield should fall to 6.7 percent, which aligns with the prevailing interest rate.
5| Trading below intrinsic value
During the Great Depression, Benjamin Graham, known as the father of value investing, developed a valuation method called the “net-net strategy.”
Graham computes the “net-net” value of a stock by deducting the total liabilities of the company from its current assets.
By investing in the “net-net” value of the stock, you would be buying the company for its current assets only, net of all its liabilities and taking its fixed assets for free.
If we apply this method to MWIDE, given the proceeds of P15 billion in in current assets, we can estimate its total current assets by the end of 2022 at P56 billion.
If we deduct MWIDE’s total liabilities, net of the airport business, at P41 billion, we will get net current assets of P15 billion.
By dividing this with total shares outstanding of 2.013 billion, we will get a “net-net” value of P7.57 per share for MWIDE.
MWIDE’s share price of P4.21 offers 44 percent discount to its “net-net” value.
Buying MWIDE at P4.21 or lower means that you are buying only the company’s current assets, net of all its liabilities and taking its fixed operating assets for free.
If the stock appreciates to P7.57 per share as its minimum price, the potential gain will be 79 percent plus dividend yield of 11.8 percent for total return of 90.8 percent.
Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888
