June 19, 2023

DMC

After writing about DMC’s press release with regards to their construction segment 2 weeks ago, they have been disclosing more a week after. The management claimed that growth will be muted this year since coal prices are on the decline. For context, at least 50% to 70% of the overall revenue is from the coal segment for the last 2 years and could go back to its pre-covid levels at 30%. These press releases do seem like a confirmation that DMC is trying to ramp up its other business segments to at least slow down the decline in the overall revenue for 2023. In support of these efforts, DMC insiders have been buying a significant number of shares anywhere between 9.5 PHP/sh and below.

Press Release on the Off-Grid Power Segment

DMC will now proceed on adding renewable energy to its off-grid power arm. This is one of those plans that they mentioned in the recent Annual Stockholder Meeting that was held a month ago. DMC will build a wind power plant on Semirara Island that will be operational in about a year and a half from now. They chose to build a wind power plant rather than a solar power plant due to (1) a higher plant utilization rate, (2) almost the same capital expenditures per MWh, and (3) Semirara island has some of the best wind resources in the Philippines as per conducted research studies.

We’ll have to look at the specifics to estimate how much revenue this project will bring to the table. The wind farm project is said to have a capacity of 8 MW to 12 MW with a 33% utilization rate and hence could produce as much as 34,000 MWh in a year. The average electricity rate in the Philippines ranges from 10 to 11 PHP/kWh and is usually higher in off-grid areas. That being said, DMC’s wind farm project could potentially earn as much as 400 million PHP in annual gross revenue. The actual figures could be lower or higher depending on the demand, electricity rate, availability of the plants, and so on.

The 5-year gross average revenue of DMC’s off-grid power segment is at 5 billion PHP with a 25% annual growth rate. Revenue is expected to further increase upon adding the wind power plant. Investors however temper their expectations since the off-grid power segment contributes only 5% to the overall revenue.

Press Release on the Nickel Mining Segment

DMC has been granted by the ECC (Environmental Compliance Certificate) to mine 2 million WMT (wet metric tons) of nickel ore. DMC however is targeting to ship only 1.5 million WMT for this year. The average selling price is at $49/WMT hence DMC could earn as much as 4 billion PHP assuming that nickel ore prices and the foreign exchange rate remain stable. In the short term, however, nickel ore prices are to decline as per analysts’ expectations.

The nickel mining segment of DMC has a 5-year gross average revenue of 2.5 billion PHP, hence the projected 4 billion PHP revenue for this year is of significant value. Revenue from the nickel mining segment has been increasing at an annual growth rate of 40% in the last 5 years. Similar to the off-grid power segment, investors also temper their expectations since the nickel mining segment contributes only 2.5% to the overall revenue.

Press Release on the Real Estate Segment

DMC bought additional land in Batangas, Bulacan, Laguna, and Pampanga hence increasing their land bank in Luzon to a total of 97 hectares. They plan to use them for leisure, condotel, and township projects in the future. For now, they are going to launch the Solmera Coast project in San Juan Batangas, a leisure condotel that they will sell to investors looking for premium properties, are willing to rent it out and at the same time can be used as their vacation home. DMC will manage the rentals and hence will earn from these investors as well. Other leisure-related projects that are in development are the Japanese-inspired nature park in Laguna and a mountain resort in Benguet.

It is difficult to project how much value these new developments will add to the overall revenue. Having a large land bank will give some sort of certainty that DMC has the resource to participate in future opportunities in the real estate market. DMC is known for being a mid-segment developer that focuses on building and selling homes in the mid-range price bracket. It is not common for them to enter leisure-related projects but eventually did so because they said that they recognized a demand. If true, then it could probably work for them, because after all, Injap Sia’s (Double Dragon) Hotel 101 in Mactan has fully sold out its units to investors, and the business model is the same where the units are being rented out to guests and Double Dragon being the rental manager.

The real estate segment of DMC plays a crucial role since it contributes an average of 20% to the overall revenue. Unfortunately, the real estate segment revenue is only growing at an average of 4% for the last 5 years. The management excluded the real estate segment as something that would help slow down the decline of the overall revenue for this year. We are still in a high-interest-rate environment and it is difficult to sell properties. There was an uptick in forfeitures and cancellation of real estate contracts for DMC.

DD

In 2016, DD issued preferred shares (DDPR) at 100 PHP/sh with a quarterly dividend payout of 1.62 PHP/sh. The dividend yield is at 6.48% which was attractive back then relative to the interest rate since inflation was low. The preferred shares were supposed to be redeemed after 7 years.

7 years later and now that we’re in 2023, inflation went up hence the interest rate up as well. The dividend rate of DDPR is not at a premium anymore hence investors experienced capital depreciation in the market. Today, DD decided not to redeem the preferred shares and chose to adjust the dividend rate. Just a while ago as of this writing, they declared a quarterly dividend payout of 2.42 PHP/sh or a 9.68% dividend yield at 100 PHP/sh. The next redemption date however is uncertain but for sure they will have to buy back the shares at the IPO price of 100 PHP/sh. DD hasn’t disclosed reasons as to why they have not redeemed the shares but we can only speculate.

For DDPR investors, it’s a mixed-bag feeling. A company that is not capable of redeeming shares is a signal of financial trouble. We can look at PNX preferred shares as an example where their revenues got badly hit hence, they almost defaulted on some of their debt obligations and are not able to pay dividends to preferred shareholders on time. The redemption date of PNX preferred shares is already past the due date and they are not financially capable to buy back the shares hence they had no choice but to increase the dividend rate. The increase in dividend rate sounds attractive to investors but only if they are capable of paying out dividends. The issue with PNX preferred shares is that the company has the right to delay dividend payouts indefinitely.

On the bright side, the sentiment towards DDPR might be treated differently from PNX4/PNX3B since DD and PNX are two different businesses. Similar to PNX, the last 3 years for DD have not been kind as well but DD was fortunate and was able to maintain its revenue and operations. There were no traces of delayed dividend payouts and were able to meet their debt obligations. DD probably decided not to redeem the shares and use the money for something else especially since the economy recently reopened. DD is currently busy expanding their Hotel 101 chain domestically and internationally.

June 5, 2023

DMC

DMC reported a week ago that their construction segment’s order book value has increased from 35.2 billion PHP to 42.4 billion PHP. The increase is due to the awarding of the South Commuter Railway Project, a joint venture with Acciona Construction Philippines. The said project is expected to be completed within 4 to 5 years from now.

This order book value is a gross revenue figure that DMC could potentially earn until 2028. Other projects that are within DMC’s book value are the Metro Manila Subway joint venture project with Nishimatsu, the Dinapigue Causeway Expansion, the Xavier Junior High School Building, the dredging of the YCO Manila Site, and the Hauling of the lagoon in the La Mesa water treatment plant.

These projects give certainty towards the future earnings of DMC in the construction segment but it comes with risks. For instance, problems can happen along the way such as when they lost 7 billion PHP worth of potential revenue in the North-South Commuter Rail Project due to unfavorable challenges on the project. It is also possible that these projects can be delayed due to changes in the scope of work, unrealistic schedules, poor planning, inadequate resources, and unforeseen circumstances such as bad weather or natural disasters.

Looking forward, the management reported that they are eyeing 5 more infrastructure projects under the Marcos administration though these potential projects have not been disclosed. There are 194 infrastructure-related projects under the Marcos administration’s Build-Better-More program which are published on the National Economic and Development Authority website. However only 67 projects are currently approved and most of these are related to transportation, public works, and highways. We do not know which of these projects caught the interest of DMC, but whichever they are, it is something they can confidently complete without compromising good profit margins. DMC has completed a variety of infrastructure projects in the past that are related to roads and highways, bridges, tunnels, railways, airports, seaports, power plants, water treatment plants, buildings, and other structures.

For the last 5 years, DMC’s construction segment revenue has been increasing at an average rate of 9% year-on-year.  The construction segment has been contributing at an average rate of 20% in the overall revenue within 5 years. Now that we are expecting the coal segment revenue to taper this year due to lower coal prices, DMC expects that revenue from power, water, and construction will at least help slow down the decline in the overall revenue. For context, the coal segment has been contributing at least 50% to 70% of the net income for the past 2 years when coal prices have been soaring. Now that coal prices are in a downtrend, it could be that the coal segment revenue contribution could fall below 50% and possibly go back to as low as 30% which is the usual average during the pre-pandemic.

SCC

A week ago, SCC disclosed that they are going to expand their coal exports to Japan. They are diversifying to other Asian markets to reduce their reliance on China as their main customer. The demand from China plunged by 50%, but even so, China still accounts for 72% of the coal exports.  The rest of the coal exports are divided among South Korea at 20%, Japan at 5%, and Brunei at 3%.

We need to understand why SCC has limited to only exporting 30% of their coal this 2023. SCC is the largest coal player in the domestic market but not in the Asian market. Almost all countries in Asia that require coal either source it from Australia, Indonesia, and Russia due to coal quality and competitive pricing. In the Asian market, China is the world’s largest consumer of coal and they source a bulk of it from Australia. Looking back in 2020, the Chinese government imposed a coal import ban on Australia, hence, they had to source coal from other countries such as the Philippines. These were the times when SCC exported 50% of its coal and most of it went to China. The Australian coal ban however has already been lifted hence China is now back to sourcing the majority of its coal from Australia. Due to the Ukraine-Russia war, China is now prioritizing coal imports from Russia for obvious political reasons. To make matters worse, there is a decline in China’s industrial output hence the demand for coal is low.

With the above-said discussion, chances for SCC to make a profit in the Asian market are slim. It is difficult to find a replacement for China or be as competitive as Australia and Indonesia. It was probably a good call to sell 70% of the coal in the domestic market while looking for opportunities in the Asian market. Analysts expect SCC to further cut down their coal export if demand from China continues to go down in the foreseeable future.

MREIT

We are already close to ending the first half of 2023 and investors have been waiting for the next set of asset infusions. Kevin Tan, the president and CEO of MREIT has not been very vocal lately. Fortunately, MREIT disclosed a week ago that they signed a memorandum of agreement with MEG for a possible acquisition of 7 office assets this 3rd quarter of the year. The new assets are said to have generated 1.2 billion PHP of rental income a year ago with an average occupancy rate of 94%. Once infused, the gross leasable space of MREIT will increase from 325,000 square meters to 475,500 square meters. 

This sound like good news but risk-averse investors remain cautious buying MREIT shares not until more details are disclosed. Buying shares based on the news has never resulted in something good in the REIT market. For instance, FILRT and DDMPR made press releases concerning significant asset infusion for the last 2 years and unfortunately, not many of the plans materialized until today. Meanwhile, the asset infusion of AREIT and MREIT a year ago has been delayed for at least 6 months due to slow SEC approval. That said, some investors regret buying shares early since they could have used their money elsewhere and avoided the market volatility.

It is difficult to project how much the dividend income of MREIT will increase after the said asset infusion. The 1.2 billion PHP rental income of the identified assets is at least 40% of MREIT’s current rental income, hence investors remain positive that there will be a significant increase in the dividend income. We can only speculate a 10% increase in dividend income because, after all, that’s the annual rate of return that MREIT have committed to their shareholders until 2024 as per previous disclosures. 

Looking back 2 years ago, after MREIT’s post-IPO, they had a mission to achieve 500k square meters of gross leasable space by the end of 2024. Assuming that the above-said infusion materializes, then only 24.5k square meters of gross leasable space is left to infuse next year. Investors wonder what’s next for MREIT after 2024.