Philippine Phone Distributor Is Markedly Undervalued

GuruFocus.com
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- By Mark Yu

The Philippine investment holding firm Solid Group (PHS:SGI) exhibited value compared to its peers and the broader Philippine index, iShares MSCI Philippines (EPHE).

Valuations

The $54 million mobile phone distributor exhibited marked discount compared to its peers. According to Reuters data, Solid Group had a trailing price-earnings (P/E) ratio of 4.5 times (industry value of 21.7), price-book (P/B) ratio of just 0.28 times (industry value 1.9) and price-sales (P/S) ratio of 0.3 times (industry value of 0.5).


In addition, Solid Group had a trailing dividend yield of 6.76%.

Total returns

The property specialist outperformed the local index tracker in both the short- and long-term time frame. According to Morningstar data, Solid Group had one- and five-year total returns of 21.3% and 9.8% while the local index tracker, iShares MSCI Philippines ETF, had 1.98% and 5.23%.

The Standard & Poor's 500 index, in comparison, outperformed the aforementioned group of equities as it had 24.7% and 14% total returns in the same time frames.

Earnings performance

Solid Group filed its third quarter fiscal 2016 results in November and could be expected to file its full-year results in April. The investment specialist reported a whopping 79.1% sales growth to 4.75 billion Philippine pesos ($94.39 million) and an impressive 75% profit growth to 262.7 million Philippine pesos.

Post-earnings filing, locally listed Solid Group shares traded heavily - three times its previous day's volume - but ended up no change in its share price.

Solid Group

Solid Group is a publicly listed company on the Philippine Stock Exchange and categorized as a holding firm.

Solid Group was originally incorporated as United Paracale Mining Co. in 1933 as a mining company. It was in 1996 it was renamed to Solid Group and its primary purpose was also changed to that of a holding company.

Solid Group had 13 wholly owned subsidiaries as of Dec. 31, 2015.

(Solid Group and Subsidiaries Found in 17-A, Solid Group)

Subsidiaries (highlights)

My Solid Technologies & Devices

My Solid Technologies & Devices was incorporated on April 21, 2009, to engage in the manufacture, sale, distribution, importation of any type of digital communication devices, communication technology, broadband and audio-video equipment, gadgets and accessories as well as undertake product research and development.

SolidGroup Technologies

SolidGroup Technologies was incorporated on Nov. 17, 1989, to engage in the development and implementation of information technology systems and applications.

In 2011, SolidGroup changed its purposely engage, operate, conduct and maintain the business of designing, manufacturing, installing, importing, exporting, marketing, distributing or otherwise dealing in at wholesale and retail prefabricated modular house and office units.

Solid Video

Solid Video was incorporated on Oct. 12, 1984. SVC distributes professional video equipment, accessories and supplies to broadcast networks and other companies.

Solid Manila

Solid Manila was incorporated on June 13, 1983. SMC is engaged in the lease and development of the company's real estate properties. SMC merged with Solid Distributors (2003) and Solid (2012) with SMC as the surviving company.

Zen Towers

Zen Towers was incorporated on July 6, 2005. Zen is engaged in the development and sale of real estate properties. It developed the Zen Tri-Tower condominium located in Ermita, Manila.

Precos

Precos was incorporated on Oct. 31, 1989, to engage in real estate and related businesses.

Kita

Kita was incorporated on Oct. 1, 1994. Kita produced color TV sets under the AIWA brand. In 2010, Kita's revenues principally came from the lease of its properties.

Omni Solid Services

Omni Solid Services (formerly Solid Laguna) was incorporated on May 15, 1995. After several mergers an acquisitions, Omni Solid Services ended up with business operations that provide warehousing and logistics services to third parties.

Solid Electronics

Solid Electronics was incorporated on Aug. 9, 1982. SEC operates the repair and service centers for Sony (SNE) brands of audio and video consumer electronics equipment and MyPhone digital devices.

Brilliant Reach Limited

Brilliant Reach Limited was incorporated on March 12, 2003, in the British Virgin Islands and acquired by the company on July 31, 2003. The subsidiary handles and manages the placement of Solid Group's investible funds in foreign currency fixed income financial assets and other investments.

Solid Broadband

Solid Broadband was incorporated on Sept. 22, 2000, to offer broadband services. On May 11, 2012, Solid Broadband entered into an agreement with Skycable Corp. for the sale/assignment and purchase of its wired and satellite assets and broadband/internet subscriber base.

Segments

Solid Group had four business segments: Digital mobile devices services, Property and building services, Technical support and solutions, and Investment and others.

(17-A and 17-Q Filings, Solid Group)

Digital mobile devices services

Digital mobile devices services are involved in the sale of mobile phones and devices.

In 2015, sales in Solid Group's digital mobile devices exhibited sales loss of 12% down to 3.6 billion Philippine pesos from 4.1 billion Philippine pesos in 2014. Digital mobile device sales contributed the largest in sales - 51% of total Solid Group sales in 2015 - excluding any reconciliations. In the same year, the segment delivered losses of 69.4 million Philippine pesos compared to a 156.5 million Philippine pesos loss in 2014.

Nine months into fiscal 2016, digital devices sales grew 93% in sales to 3.82 billion Philippine pesos and contributed 80% in total sales compared to the year-earlier period. The device business, interestingly, delivered profits in the recent period of 107.7 million Philippine pesos compared to losses of 74.83 million Philippine pesos in the year-earlier period.

Property and building services

Property and building services are involved in the leasing, development and sale of industrial and other real estate properties, sale of prefabricated modular houses and hotel operations.

In 2015, property and building services sales grew an amazing 653% to 2.14 billion Philippine pesos and contributed 32% in total Solid Group sales - excluding any reconciliation. Profits rose to 690.84 million Philippine pesos compared to losses of 81.8 million Philippine pesos in 2014.

Solid Group noted that the significant amount of property sales came principally from its Golden Hill project in Nanning, China.

Nine months into 2016, sales in the property segment drop by 0.9% to 226.5 million Philippine pesos and contributed 5% to total company sales for the period. The property business delivered profits of 63.3 million Philippine pesos compared to 153.83 million Philippine pesos the year earlier.

Technical support and solutions

Technical support and solutions is presently engaged in the business of sale of professional audio and video equipment, after sales services, warehousing and distribution.

In 2015, technical support business grew 25% and contributed 11% or 756.2 million Philippine pesos in total Solid Group sales - excluding any reconciliation. The segment had a profit margin of 5% compared to 7% in 2014.

For its 2016 operations, technical support business grew an impressive 70% for its recent nine months of operations. The segment sales contributed 14% or 669 million Philippine pesos to total company sales compared to 392.6 million Philippine pesos in the year-earlier period.

Solid Group was not clear when or how the impressive sales increase occurred. Technical support business sales previously had a two-year sales growth average of 28%.

The segment also delivered profits of 85.4 million Philippine pesos compared to 25.2 million Philippine pesos the year prior.

Investment and others

Investment and others include investment holding companies, and those included in the business of financing and credit extension.

Investment and others sales grew 28% in sales in 2015 and delivered a profit margin of 14% for that year. The segment contributed 2% of total company sales in 2015.

Nine months into fiscal 2016, segment sales fell by 9% and delivered a profit margin of 4% compared to 15% the year earlier. In review, investment and others had profits of 3.28 million Philippine pesos compared to 14.4 million Philippine pesos the year prior.

In the past five years, Solid Group had sales and profit growth and profit margin averages of 19%, 16% and 9% (1).

Cash, debt and book value

As of September, Solid Group had 3.33 billion Philippine pesos in cash and cash equivalents including financial assets at fair value. The holding firm also had 109.2 million short-term debt - having a debt-equity ratio of 0.01 compared to 0.03 times a year prior.

Solid Group did not carry any goodwill or intangibles and had assets amounting to 11.2 billion Philippine pesos. The holding firm had a book value of 9.6 billion Philippine pesos compared to 9.2 billion Philippine pesos the year earlier.

Cash flow

(17-Q, Solid Group)

Nine months into fiscal 2016, Solid Group experienced a 31% drop in its cash flow from operations to 657 million Philippine pesos. The drop was noticeable despite the firm's impressive profit growth for the period.

As observed, Solid Group experienced cash outflows concerning its financial assets, investments in subsidiaries, receivables, payables and customer deposits compared to the year-earlier period.

Capital expenditures were 124 million Philippine pesos leaving the firm with 532.7 million Philippine pesos in free cash flow compared to 897.4 million Philippine pesos in 2015. Three-quarters into fiscal 2016, Solid Group allocated 34% or 182.2 million of its free cash flow in dividend payouts.

For the period, Solid Group did not take any debts and allocated 160 million in debt repayments including interest.

(17-Q and 17-A Filings, Solid Group)

In the past three fiscal years, Solid Group recorded negative free cash flow while still being able to deliver dividend payouts.

Conclusion

Solid Group appeared to demonstrate solid sales and profit growth in its recent nine months of operations. The holding firm also exhibited solid balance sheet standing as per its recent quarterly filing.

Despite being able to hold steady its dividend payouts, Solid Group exhibited quite unreliable positive free cash flow figures in recent years.

The firm also had quite a fluctuation in its business sales and profits figures in recent years including an outstanding 6,213% climb in real estate sales recorded in 2015 as explained earlier. The group's significant revenue generator - Digital Mobile Services - also failed to deliver consistent positive profitability in recent years except for the recent nine months of operations.

Given that Solid Group exhibited an attractive set of valuations that are indicative of a good low-risk investment, more conservative investors should demand more (consistent) profitability in both Digital Mobile and Property sales business of the group in the ensuing years.

(Solid Group Share Price vs. S&P 500 and EPHE ETFs, Financial Times)

Having Solid Group trade at par with its book value, the company's shares will have a suggestive 257% upside to 5.3 pesos a share. Asking for a 50% margin of safety will still provide a near 80% upside to 2.6 pesos a share from the current share price.

In summary, Solid Group is a speculative buy with a 3 peso share price target.

Notes

  1. Morningstar data.

Disclosure: I am long PHS:SGI.

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