Finance Asia, a known publication in Asia, just revealed its annual take on best companies in Asia. In its assessment, it collated several responses from at least 129 portfolio managers and buy-side analysts to produce the list (source).
The publication awarded Ayala Corporation (AYALY, Financial) several top positions and is as follows: best managed company, most committed to corporate governance and best at corporate social responsibility.
Six facts about Ayala Corporation:
- Ayala Corporation is a large Philippine conglomerate that has 180 years of building its businesses under its belt.
- The company claims it has pioneered the real estate, banking, telecommunications, water infrastructure, electronics manufacturing, business process outsourcing and automotive dealership businesses in the Philippines (source).
- The company has investments in the following large Philippine companies: Ayala Land, Bank of the Philippine Islands, Globe Telecom, Manila Water Company, Integrated Micro-Electronics, Live it, Ayala Automotive Holdings, AG Holdings and Ayala Foundation. Combined, these companies contributed roughly more than 150 billion pesos ($3.2 billion) in annual sales in 2014.
- Ayala Corporation is currently the seventh-largest company, in terms of market capitalization, in the Philippines (source).
- Foreign investors can invest in Ayala Corporation through the thinly traded American Depository Receipt (ADR) ticker AYALY.
- iShares Philippines has Ayala Corporation as its seventh-largest position (source).
With Ayala Corporation being named the "best company" in the Philippines by Finance Asia, I wanted to review the company’s financial numbers and see whether this would be an opportunity to purchase its shares.
Ayala Corporation financial numbers
*All financial numbers will be in Philippine peso or Php.
Sales and profits
Sales and profits are on the rise with at least 20% growth in both for the past five years. This is unique; for a 180-year-old company to exhibit such growth is amazing.
Book value and growth
Book value has been steadily growing with a five-year average of 21%.
Free cash flow and growth
Dividends and growth
Ayala Corporation’s free cash flow has rather been very volatile. Despite inconsistencies in its cash flows, Ayala Corporation was able to sustain and grow its dividend by 16% for the past five years. The company has only performed share repurchasing between 2007 and 2011, when it spent roughly 6.6 billion pesos. Share buybacks are not commonly practiced in the Philippines.
Payout ratio
Retained earnings
On the other hand, profits paid out to shareholders have not been that destructive to the company’s climbing retained earnings, which was more than 100 billion Php ($2.3 billion in today’s exchange rate) in 2014.
Debt to equity and shares outstanding
After all the impressive numbers above, this is where Ayala Corporation exhibited some weakness. The company is not in the habit of diluting its shareholders at best by not issuing tons of shares annually but had been ramping up debt since the Great Recession. A D/E ratio of more than 1 seems unsavory for any conservative investor.
As a value investor, I would have wanted Ayala Corporation to lessen its debt through using some of its retained earnings. I like how the company has been able to show its shareholder appreciation through annually increasing its dividends more than 10% on average for the past five years.
Valuations
Ayala Corporation, when compared to its industry in the Philippines or the Standard & Poor's 500 as a whole, is expensive in terms of the traditional price-to-earnings and price-to-book value ratios. At simply 15 times its current earnings and 1.5 times its book value, a conservative valuation, would indicate that on average its current price is overvalued by 33%. The most opportune time to have bought Ayala Corporation shares was when it dropped to the low 600s in late January.
Interestingly, the ADR shares did not correlate well with this dip in late January. One must observe that there is no one trading shares with Ayala Corporation ADRs, except for that spike on Oct. 15 with 400 shares being traded (source).
It may be wise for a Filipino investor, or whoever is capable of investing directly in locally traded Ayala shares, to purchase Ayala only when there is major panic or volatility such as what happened in recent months. Further, it would be prudent for a foreign investor to review other companies listed in the iShares EPHE to decide whether, as a whole, it would be appetizing to invest in.
So far, I was able to dissect the following companies here:
- Philippine Long Distance Telephone Company (PHI, Financial) (third-largest holding in EPHE;Ă‚ source).
- SM Prime Holdings (SMPH, Financial) (fourth-largest holding in EPHE; source).
Happy investing!
Disclosure: I do not have shares in any of the companies or ETFs mentioned above, and do not plan to initiate any positions in them in the following 24 hours.
