Financial Adviser: 5 Reasons Why Wilcon Depot is Up by Over…

 

 

There were only five companies that went public in the last two years at the Philippine Stock Exchange. Most of them did not do well due to the volatile market environment.

 

In fact, three of the last five initial public offering (IPO) stocks are currently trading below their offering prices by an average of 13 percent.

 

These stocks are DM Wenceslao (PSE: DMW), which is down by negative 17 percent; Chelsea Logistics (PSE: C), negative 39 percent; and Cebu Landmasters ( PSE:CLI), negative four percent.

 

While Eagle Cement (PSE: EAGLE) has managed to stay above its IPO price at seven percent gain, the biggest winner of them all is Wilcon Depot (PSE:WLCON), whose IPO price has increased by 336 percent since its listing two years ago.

 

Interestingly, the consistent share price appreciation of WLCON highlighted its superior performance over the PSE Index, which has increased only by 1.8 percent from its level two years ago.

 

At the current share price of WLCON, the stock is trading just 2.2 percent shy of its all-time high price of Php17.38 per share. With global uncertainties continuing to hound the local market, will the stock be able to keep its upward momentum?

 

What are the compelling fundamentals of the company that will sustain the stock to trade at higher multiples in the long-term? What makes WLCON an attractive refuge among investors during this time of market volatility?

 

Here are the five things every investor needs to know about WLCON and why it may be the safest non-PSE Index stock to own today:

 

 

1| Booming construction activities to support sales growth

The Bangko Sentral ng Pilipinas (BSP) recently cut the reserve requirements of banks by one percentage point to increase monetary liquidity in the system.

 

The reserve requirement is one of the tools used by the Central Bank to increase or decrease money supply in the economy.

 

A lower reserve requirement means that banks will reserve less idle funds with the Central Bank, lowering its cost that translate to lower interest rates.

 

The BSP has recently announced that it plans to reduce reserve requirements of banks, which currently stands at 18 percent to a single digit up to 2023.

 

With interest rates expected to fall, investment in construction activities should continue to go up in the next few years. For the first three months of the year, construction spending grew by five percent.

 

Private construction, which accounts for 82 percent of total construction spending, grew by 8.6 percent.

 

Wilcon Depot (PSE: WLCON), being the leading home construction supplies retailer, should benefit from this growth.

 

Historically, WLCON’s sales contribute about six percent of total construction investments and have significant 20 percent correlation with industry growth.

 

 

2| Rising sales and margins to sustain earnings expansion

WLCON operates a total of 51 stores, 43 of which are in depot store format with an average net selling space of 8,700 square meters, contributing about 96 percent of the total sales.

 

The other eight stores are in a smaller format known as “Wilcon Home Essentials,” which has an average net selling space of 2,800 square meters.

 

Over the past five years, WLCON’s sales have been growing by an average of 12 percent per year from P11.8 billion in 2013 to P21 billion in 2018.

 

This has translated to a massive increase in the company’s earnings growth of 50 percent per year.

 

This year, WLCON reported its net income for the first three months grew by 18 percent to P483 million from P409 million in the same period last year on the back of strong revenue growth.

 

Total sales grew by 21.8 percent from P4.7 billion last year to P5.7 billion as the company opened more stores while comparable same stores sales increased by eight percent.

 

It is also interesting to note that WLCON’s gross profit has been improving from 21 percent in 2013 to 32 percent this year due to the increase in sales of the company’s higher-margin in-house brands.

 

With the expected increase in construction spending in the years to come as the economy grows, WLCON’s sales and earnings should continue to thrive.

 

3| Increasing operating cash flows to enhance earnings quality

Earnings are important drivers of share prices. Investors use historical earnings as a basis to project how stocks are likely to be valued in the coming months.

 

But not all earnings share the same quality. Some companies apply creative techniques to show positive earnings results.

 

The operating cash flow, which is often called the lifeblood of a company, is sometimes seen as a safer alternative to net income because there is less room for manipulation by management.

 

A company must produce adequate cash flows from operations to be able to finance its expansion activities. Historically, companies with high operating cash flows tend enjoy a premium in their stock prices.

 

WLCON’s operating cash flow has been growing in the past five years from a negative cash flow of Php279 million in 2013 to a positive Php1.9 billion in 2018.

 

The average operating cash flows to net income ratio of WLCON over the past five years is slightly over 1.0x.

 

Expected growth in sales and higher margins in the coming years should boost further boost cash flows and enhance WLCON’s earnings quality.

 

 

4| Growing returns on equity to strengthen financial stability

Return on equity measures a company’s profitability by computing how much profit is generated for every peso invested by shareholders. The higher the return on equity, the better the investment should be.

 

WLCON’s average return on equity has grown from 2.46 percent in 2014 to 14.6 percent in 2018. Average returns have peaked at 29 percent in 2016 before the company went public.

 

Improving net income margins should support further rise in average returns on equity. Higher returns mean higher valuation for shareholders.

 

Prudent financial management also lowered WLCON’s debt-to-equity ratio from 5.0x in 2014 to 0.32x in 2018.

 

Lower debt-to-equity ratio doesn’t only mean lower financial risk for the company but greater leverage to expand in the future.

 

 

5| Promising share price growth potential

The stock of WLCON may look expensive at a current share price of P17 per share considering the stock has more than tripled its value from its IPO price two years ago.

 

But note that the net income of WLCON prior to IPO at P887 million also doubled to P1.8 billion last year.

 

If the first quarter earnings growth of 18 percent is any guide, net income this year should hit P2.2 billion, which represents almost three times its income in 2016.

 

Remember that market expectations determine the value of a stock.

 

If the market expects WLCON’s earnings to grow higher with less uncertainty and greater financial flexibility compared to other stocks in the PSE, there is no reason why the stock should not trade at a huge premium.

 

 

*****

 

 

Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice hong@businesssense.com.ph or follow him on Twitter @henryong888