Turnaround saga - The C&P Homes (P2.90) story
Good stories begin with a nice prologue.
A few weeks ago, I mentioned that C&P Homes is one restructuring story that the market has ignored. It's share price has since rallied to around P3.05 despite the recent market sell-down. However, I still believe that the story will not end at these levels. There will be more chapters to the C&P Homes saga. The good thing is, the market has not factored these in yet and thus it gives us another chance to accumulate the stock. Here's how I see the chapters will unfold:
Rehabilitation. Last week, C&P Homes announced that 90% of its Floating Rate Currency Rates Notes (FRCN) creditors have accepted the terms of its debt buy-back offer. A total of US$126.0m worth of debt were bought back at US$47.0m plus 750.0m new C&P Homes shares. Effectively, the creditors were paid C&P Homes shares valued at P8.00. The exercise extinguished US$79.0m worth of debt. This should translate to an incremental P0.80/share gain in its book value. On top of the P3,600.0m debt that was swapped for equity last year, the estimated book value of C&P Homes is equivalent to P1.63 per share.
My investment premise is to buy when the writings are (clearly) on the wall. This minimizes a lot of risk. If the FRCN creditors are willing to value C&P Homes shares at P8.00, there is every reason to believe that the value will one day be achieved. Note that in 2001, PLDT (TEL - P2,360.0), offered to swap the debt of Piltel (PLTL - P7.00) at P1,775.0 per PLDT share. At that time PLDT was trading at around P500.0. So I guess, the creditors are usually in the know of whats happening in the company. I don't think they are "stupid" to accept a "no-win situation" deal.
Recapitalization. The next step is to see how the recapitalization chapter unfolds. C&P Homes announced that it will launch P5.0bn worth of new projects in the next 2 years. The company has negligible cash-flows at this stage, I am pretty sure a fund raising activity is in the works. How it will be done remains a mystery. However, its clear that this will be done.
Assuming, my premise is correct, I do not think that an offering will be done at this point. I guess the values are just too low at these levels for any offering to materialize. This brings me to my next chapter - revaluation.
In 1997, C&P Homes traded at an adjusted price of P160.0 per share. Its market capitalization then was around P73.7bn, roughly equivalent to its Net Asset Value (NAV). Taking into account the 90%, dilution from the debt reduction exercise, the P160 is (now) equivalent to P16.0.
So at P2.90, we are essentially paying a "mere" 18% of its 1997 NAV. Since property values have bottomed at 40-50% below the 1997 prices, we can safely assume that its current NAV is around P7.20 - P8.00 per share. So, in effect, we are still paying a huge discount to its adjusted NAV.
So, how far will the share price of C&P Homes go? That's for the market to write the succeeding chapters. However, whats clear is that there is little risk in investing in the company at this stage. Who knows, maybe C&P Homes will follow the Benpres (BPC - P3.55) storyline. If that happens, the creditors will be laughing all the way to the bank.
A few weeks ago, I mentioned that C&P Homes is one restructuring story that the market has ignored. It's share price has since rallied to around P3.05 despite the recent market sell-down. However, I still believe that the story will not end at these levels. There will be more chapters to the C&P Homes saga. The good thing is, the market has not factored these in yet and thus it gives us another chance to accumulate the stock. Here's how I see the chapters will unfold:
Rehabilitation. Last week, C&P Homes announced that 90% of its Floating Rate Currency Rates Notes (FRCN) creditors have accepted the terms of its debt buy-back offer. A total of US$126.0m worth of debt were bought back at US$47.0m plus 750.0m new C&P Homes shares. Effectively, the creditors were paid C&P Homes shares valued at P8.00. The exercise extinguished US$79.0m worth of debt. This should translate to an incremental P0.80/share gain in its book value. On top of the P3,600.0m debt that was swapped for equity last year, the estimated book value of C&P Homes is equivalent to P1.63 per share.
My investment premise is to buy when the writings are (clearly) on the wall. This minimizes a lot of risk. If the FRCN creditors are willing to value C&P Homes shares at P8.00, there is every reason to believe that the value will one day be achieved. Note that in 2001, PLDT (TEL - P2,360.0), offered to swap the debt of Piltel (PLTL - P7.00) at P1,775.0 per PLDT share. At that time PLDT was trading at around P500.0. So I guess, the creditors are usually in the know of whats happening in the company. I don't think they are "stupid" to accept a "no-win situation" deal.
Recapitalization. The next step is to see how the recapitalization chapter unfolds. C&P Homes announced that it will launch P5.0bn worth of new projects in the next 2 years. The company has negligible cash-flows at this stage, I am pretty sure a fund raising activity is in the works. How it will be done remains a mystery. However, its clear that this will be done.
Assuming, my premise is correct, I do not think that an offering will be done at this point. I guess the values are just too low at these levels for any offering to materialize. This brings me to my next chapter - revaluation.
In 1997, C&P Homes traded at an adjusted price of P160.0 per share. Its market capitalization then was around P73.7bn, roughly equivalent to its Net Asset Value (NAV). Taking into account the 90%, dilution from the debt reduction exercise, the P160 is (now) equivalent to P16.0.
So at P2.90, we are essentially paying a "mere" 18% of its 1997 NAV. Since property values have bottomed at 40-50% below the 1997 prices, we can safely assume that its current NAV is around P7.20 - P8.00 per share. So, in effect, we are still paying a huge discount to its adjusted NAV.
So, how far will the share price of C&P Homes go? That's for the market to write the succeeding chapters. However, whats clear is that there is little risk in investing in the company at this stage. Who knows, maybe C&P Homes will follow the Benpres (BPC - P3.55) storyline. If that happens, the creditors will be laughing all the way to the bank.
posted by jack galt at
12:18 PM
2 Comments:
Hi Jack,
Just 2 comments.
First, the NAV of CMP has most likely declined sharply (~70%-80%) from 10 years ago. You already mentioned the drop in property values. Add to this the fact that a lot of CMP's properties (the good ones actually) were dacioned to pay off debts apart from the FRNs. Recall also that in 1997, NAV estimates were very aggressive being largely meant to support aggressive price targets of brokerage houses then. Furthermore, a lot of the properties CMP landbanked in the gung-ho 1990's were actually CARP-designated agricultural lands that CANNOT be used for residential development. In essence, these CARP-covered assets are worthless to CMP.
Second, creditors often have no choice but to accept the terms laid out to them by defaulting borrowers. Might as well get something instead of nothing is their motto. In the case of PLDT, it wasn't that the creditors actually believed the company was worth 1,775 per share when it was only doing 500. It was really because they were willing to accept 30 cents on the dollar on the Piltel debt they were holding. It was dumb luck on their part that TEL climbed all the way to 3,000.
IMO, CMP is just an election play. Kudos to them for being able to buy back the FRNs but they could have done this a long, long time ago. Announcing it so close to election time is simply too fishy for this jaded investor.
By
platypus, at 10:22 AM
Hi platypus,
Thanks for your comments. I do hope you can visit my blog site again and share your views with my readers.
Jack G.
By
jack galt, at 10:58 PM
Post a Comment
<< Home