Expansion Into Tourism And High-End Real Estate Will Strengthen Future Prospects

Key Takeaways

• Focus on upper-middle to high-end real estate supports strong profit margins by targeting less price-sensitive consumers.
  
• Growing hotel, office, and mall spaces leverage tourism and economic trends, boosting recurring revenue and occupancy rates.
  
• Exposure to foreign currency fluctuations, rising interest rates, and regional economic risks could lead to financial instability and affect short-term revenue growth.

Catalysts

Engages in the development, sale, and leasing of real estate properties in the Philippines.

• Megaworld's expansion and development of new townships, including both tourism-related and integrated lifestyle communities, are expected to drive future revenue growth through increased real estate sales and rental income.
  
• The company's strategic focus on high-demand segments, such as upper-middle to high-end real estate developments, is likely to support strong gross profit margins and improved earnings by targeting wealthier consumers who are less price-sensitive.
  
• The planned addition of significant gross leasable area in office and mall spaces by 2026 is poised to enhance recurring income streams and contribute to revenue growth, driven by increased occupancy rates and rental income.
  
• The hotel segment's rapid growth, fueled by tourism resurgence and MICE activities, is expected to positively impact revenue, while continued expansion in tourism hubs aims to capitalize on rising demand for accommodations.
  
• Megaworld's commitment to sustainability and social responsibility, including initiatives such as the Good Food Farm, positions the company to attract socially-conscious investors and consumers, potentially enhancing brand value and driving long-term growth in revenues and earnings.

Megaworld Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Megaworld's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.0% today to 24.6% in 3 years time.
• Analysts expect earnings to reach ₱22.0 billion (and earnings per share of ₱0.71) by about April 2028, up from ₱18.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, up from 3.1x today. This future PE is greater than the current PE for the PH Real Estate industry at 5.3x.
• Analysts expect the number of shares outstanding to grow by 4.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.09%, as per the Simply Wall St company report.

Megaworld Future Earnings Per Share Growth

Risks

• Megaworld's significant foreign currency exposure (40% of gross debt) could lead to financial volatility due to exchange rate fluctuations, potentially impacting net income.
  
• High proportion (64%) of floating rate debt could subject Megaworld to rising interest rates, which may increase interest expenses and reduce net margins.
  
• The company's large inventory and focus on back-end loaded project launches may lead to slower revenue realization, affecting short-term revenue growth.
  
• The reliance on BPO tenants and the potential impact of the POGO decline could undermine office rental income stability.
  
• Heavy geographical concentration, with 58% of sales in Metro Manila, may expose Megaworld to region-specific economic downturns, which could affect revenue generated from real estate sales.

Valuation

• The analysts have a consensus price target of ₱2.46 for Megaworld based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₱3.47, and the most bearish reporting a price target of just ₱1.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₱89.4 billion, earnings will come to ₱22.0 billion, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 19.1%.
• Given the current share price of ₱1.78, the analyst price target of ₱2.46 is 27.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.