Jose Florencio Tongson November 25, 2010 Financial Analysis: Filinvest Land Inc vs Megaworld Corp I.

Summary of the Companies Filinvest Land Inc. Filinvest Land, Inc. (FLI), a subsidiary of Filinvest Development Corporation (FDC), is considered one of Philippines leading real estate developers. Founded by Mr. Andrew Gotianun, Sr, the company started as small financing company of second hand cars. Filinvest later sought expansion by entering the consumer finance industry by partnering with international institutions like Chase Manhattan Bank, Westinghouse Electric Corporation and Ford Philippines. FDC penetrated the real estate business in 1967 by adding the Filinvest Realty Corporation in its group of companies. It specialized on developing residential subdivisions. It changed its name to Filinvest Land Inc on July 12, 1993. FLI was listed on the Philippine Stock Exchange (PSE) and debut its public offering of shares on October 25, 1993. FDC is still the largest shareholder of FLI, owning more than 50% of the companys outstanding common shares. FLIs success has been greatly attributed to providing quality living spaces for middle-income markets. It has developed more than 1,800 hectares of land and provided homes for more than 100,000 families. The company also started expanding its market by tapping the high-income earners all over the archipelago by introducing residential properties that focuses on leisure lifestyle. The Timberland Sports and Nature Club in Quezon City, Laeuna de Taal in Batangas and Kembali Coast in Davao are just a few residential properties targeted on the premium market. It also tapped corporate clients by providing office spaces like the PBCom Tower in Makati, Northgate Cyberzone

in Alabang, and Filinvest Technology Park in Laguna.

From residential homes, mid-rise buildings, condominiums, business parks, to leisure residential lifestyle, Filinvest Land Inc continues to provide quality residential and business locations that caters to the different lifestyles of the modern Filipino1. Megaworld Corporation Megaworld Corporation was founded by Mr. Andrew Tan originally under the name of Megaworld Properties & Holdings, Inc on August 24, 1989. The companys initial business was focused on real estate development, leasing and marketing. It converted to a public company June 15, 1994. It was also on the same year that the company introduced the Empire East Land Holdings, Inc. which focused on providing homes for the emerging middle income

market. One of Empire East Land Holdings initial projects was Laguna Bel Air. On August 19, 1999, the Company changed its name to Megaworld Corporation. Megaworld Corporation is considered one of the countrys largest real estate developers. It was voted among Asias Best Property Companies by the Euromoney Best Asian Companies Awards for 2003, 2004 and 2005. The company focuses on residential and office development properties, corporate space leasing, and hotel management and operations. One of its most successful projects was the development of Eastwood City, which is considered a community that contains both residential, and office spaces, world-class restaurants, shops, services, and entertainment. One of its current projects is the development of Upper Mckinley in Taguig City2. II. Financial Statements Analysis Trending and Common-size analysis Based on the trend and common-size analysis of both Filinvest Land Inc and Megaworld Corp, both companies showed stability and in their financial performances. 2009 ended with a positive note for both FLI and Megaworld as net income increased by 8% and 7% respectively. One notable change was FLIs cash and cash equivalents, which increased by an amount of P3,324,254K or a 137% increase from 2008. This maybe considered a sign of improvement in the efficiency of their collection of receivables. (see attached for complete trending and common-size analysis) Gross Margin Percentage Gross Profit Margin Filinvest Land Inc 51.32% Megaworld Corp 36.85%

Although Megaworld posted a greater net income with P4,066,612K against FLIs P2,018,200K, it is not safe to assume that the former outperformed the latter. Gross Margin Percentage shows how much of its total sales are converted to net income. In this case, 51.32% of FLIs sales revenue is converted to net income, which is better against Megaworlds 36.85% Gross Margin Percentage. This means that FLI may have been able to manage its cost of sales and expenses better, giving them a healthier Gross Margin Percentage. Earnings Per Share Earnings Per Share Filinvest Land Inc P0.09 Megaworld Corp P0.18

Earnings per share of a company provides an investor an idea how much will be the return of each common stock. FLI has a lower EPS compared to Megaworld, but this maybe due to various factors like market price per stock, or number of stocks issued of both companies. Return on Total Assets and Common Stockholders Equity Filinvest Land Inc Return on Total Assets Return on Common Stockholder's Equity
4.00% 5.04%

Megaworld Corp 4.76% 8.96%

Return on Total Assets is a tool to measure a companies operating performance. When this is compared with Return on Common Stockholders equity, it shows if financial leverage of the company is working for or against the stockholders. In this case, both FLI and Megaworld has almost the same percentage of Return on Total Assets (4.00% and 4.76%). What are more notable are the companies differences with its Return on Common Stockholders equity. Both companies have a positive financial leverage since both its Return on Common Stockholders equity outweighs its Return on Total Assets. However, Megaworld has a bigger margin of 4.2 % compared to FLIs 1.04%. And since Megaworld has posted a higher net income, its stockholders definitely gets more in return as compared to FLI stockholders. Working Capital and Current Ratio Filinvest Land Inc Working Capital Current Ratio
P31,933,660K

6.09

Megaworld Corp P32,893294K 4.03

Working capital shows whether a company is in shape to pay its debts on its short-term creditors. It does not necessary mean that a larger working capital is better in every situation since it will eventually be financed by long-term debt and equity. Since both companies are in a multi-million real estate industry, it is understandable that both have a hefty amount in its working capital. Current ratio represents a companys ability to pay its current liabilities. As a general rule, a healthy current ratio is said to be at least 2, however this still depends on the industry. Notice that both FLI and Megaworld has a very high current ratio (6.09 and 4.03). This is because most real-estate development companies incur significantly higher non-current liabilities, like long-term bonds and payables compared to current liabilities. Acid-test Ratio, Inventory Turnover and Average Sale Period

Filinvest Land Inc Acid-Test Ratio Inventory Turnover Average Sale Period
2.42

0.08
4,447 Days

Megaworld Corp 3.13 1.37 226 Days

Similar to the Current Ratio, the Acid-Test Ratio measures the ability of the company to pay its short-term debts without having to rely on its inventory. Although FLI had a better current ratio standing, Megaworld now fairs better in terms of its Acid-test Ratio. This primarily due to FLIs very high real-estate inventory, amounting to more than P20,000,000K. This enormous amount of inventory also explains its low Inventory Turnover rate (0.08), and extremely long Average Sale Period (4,447 Days). This is very alarming, even for a realestate company because it shows signs that the company has been investing on properties more than it can regularly sell. And since a large investment remains on their inventory, it stays stagnant, which means a lot of better investment opportunities has been lost. Accounts Receivable Turnover and Average Collection Period Accounts Receivable Turnover Average Collection Period Filinvest Land Inc 0.48 762 Days Megaworld Corp 1.03 355 Days

Two important ratios especially for companies who rely heavily on credit sales are Accounts Receivable Turnover and Average Collection Period. Both ratios are used to measure how quickly credit sales are converted to cash. Megaworld has a better position in terms of Accounts receivable turnover with 1.03, against FLIs 0.48. Consequently, the Average Collection Period of Megaworld is only at 355 Days, while FLI is at 762 Days. Analysis of both these ratios may indicate that Megaworld has a more efficient credit sale collection process than FLI. Also, bare in mind that longer collection periods increases the chances of incurring increased uncollectible accounts. Times Interest Earned and Debt-to-Equity Ratio Times Interest Earned Debt-to-Equity Ratio Filinvest Land Inc 9.40 0.50 Megaworld Corp 3.47 0.71

Time Interest Earned measures the companys ability to make payments to its long-term creditors. As a rule of thumb, a Times Interest Earned ratio of 2 or more is considered sufficient to pay its long-term creditors. Both FLI and

Megaworld exceeds this number, although clearly it shows that the former outperforms the latter, with 9.40 and 3.47, respectively. Debt-to-Equity ratio shows the proportion of debt over its equity. Different levels of this ratio pose concerns for both creditors and stockholders of a company. Stockholders would promote a higher debt to gain advantage of a positive financial leverage, while creditors would rally for a higher equity and lower debt, to protect them from risks. The best way to approach Debt-toEquity is to have a reasonable balance, depending on the situation. In this case, both FLI and Megaworld seems to have a good balance of its Total Liabilities over Stockholders Equity with 0.5 and 0.71, respectively. III. Conclusion After careful scrutiny of the financial statements of both Filinvest Land Inc and Megaworld Corporation, it shows that both companies are in good shape. Using the trend and common-size analysis, both companies showed no alarming changes in their financial statement accounts, and even showed increased net income of more than 7% from its previous year. Although both have their own pros and cons, Megaworld has shown a better managerial performance through a number of reasons. Megaworld posed almost twice the net income performance in terms of amount, but with a lower gross margin percentage compared to FLI. Credit Sales collection is better with Megaworld as show by their lower Average Collection Period. But above all, Megaworld has a better inventory management compared to Filinvest, who has a very high and questionable volume of inventory of real estates.

References: 1. Filinvest Land Inc. (2009). Investor Relations - Company Background. Retrieved from http://www.filinvestland.com/investor.aspx?id=3 2. Megaworld Corporation (2009). Megaworld Annual Report to SEC ended 2009. Retrieved from http://www.megaworldcorp.com/investorrelations/disclosures.html