Share analysis: DMCI Holdings – Construction & power

THE COMPANY: Incorporated in 1995 to consolidate the Consunji family’s businesses, DMCI Holdings (DMC) is a holding company engaged in construction, real estate, water services, mining (coal and nickel) and power generation. DMC has five operating subsidiaries: D.M. Consunji (DMCI), DMCI Project Developers, Semirara Mining Corporation (Semirara Coal Corporation), DMCI Mining Corporation and DMCI Power Corporation; and two affiliates – DMCI-MPIC Water Company and Private Infra Development Corporation.

PERFORMANCE: DMC reported consolidated core net income of P5.13bn ($115.4m) for the first half of 2014, nearly unchanged year-on-year (y-o-y) from P5.14bn ($115.7m). The company’s mining activities significantly improved y-o-y, fuelled by larger sales volumes and higher average prices. Coal and nickel mining activities posted income growth of 542% and 708%, respectively. Likewise, DMC’s real estate business increased by 29% thanks to higher sales from completed projects in the year to date.

However, these robust performances were offset by negative income growth at the company’s construction, power and water subsidiaries. Extended power outages at the Calaca power plant brought down net income of the power business by 94% y-o-y, while lower reported completion revenue from new projects resulted in an 11% decline in construction income. Headline net income also decreased, by 62% y-o-y, as the company recognised a one-time gain from the partial sale of its water business in 2013.

GROWTH DRIVERS: Robust economic growth has provided conglomerates with the opportunity to expand and diversify into the most promising sectors, such as mining, infrastructure, gaming and tourism, and power and utilities. Their diversification strategy also stems from the fact that there are declining growth opportunities in their traditional lines of business, which they already dominate. Going forward, engaging in these high-growth sectors bodes well for financial performance as well as shareholders.

With over 40 public-private partnership (PPP) projects left to be tendered and the persistent need to boost power capacity in the country, more Philippine conglomerates are expected to get involved in these activities, as they have the cash flows and financial flexibility to take on capital intensive investments. Projects in the pipeline include the construction and/or rehabilitation of new or existing roads, ports, water and power utilities, hospitals and transportation, including rapid bus transit and elevated trains.

LOOKING AHEAD: DMC is reportedly bidding on the LRT 2 PPP project alongside other conglomerates. The winner would operate the existing 13.8-km LRT-2 line from Recto Avenue to the Depot at Santolan Street along Marcos Highway for 10 years, with a possible five-year extension. Furthermore, through its subsidiary DMCI, the company aims to get involved in construction and engineering for government PPPs.

Through Semirara’s wholly owned subsidiary, Southwest Luzon Power Generation Corporation, DMC is expanding its existing 600-MW Calaca coal-fired power plant in Batangas. The expansion will be carried out in two phases, with the construction of two 150-MW units during the first phase and two 350-MW units in the second phase. This will bring the total expansion of capacity to 1000 MW.

The operation of the plant’s first 150-MW unit, which was originally scheduled to begin by December 2014, has been postponed until June 2015. In spite of these delays, Semirara’s medium-term outlook remains bullish, as it is one of the few power generation companies in the Philippines that stand to benefit from the expected power supply shortage in the Luzon area in the coming years.

In terms of its construction business, DMC’s order book as of end-June 2014 stood at around P20bn ($450m). Projects in the DMC pipeline include work on the San Miguel Corporation’s NAIA Expressway project, TPLEX Section 2, the NAIA Terminal 1 rehabilitation and two power plant projects in Batangas.