Analysis

Megaworld Corporation (MEG) saw little recovery in first quarter (1Q21), as earnings were still down on a year-on-year (y/y) basis and flat quarter-on-quarter (q/q). There remained a drag in real estate sales and rental income during the period, since the pandemic still weighed heavily on its operations.

For one, limited construction activity is likely hindering the firm from really ramping up its launches (target: P60 billion for 2021E). Demand for real estate is still projected to be strong in provincial areas, and take-up is already starting to improve (sales reservations: +15.79% q/q and +0.97% y/y to P20.71 billion in 1Q21). The pandemic also remains an issue, as we assume MEG’s spending will remain conservative until the economy recovers.

On the recurring aspect, MEG is holding off on office expansions this year, but leasing income from the segment will likely remain stable on the back of healthy rental escalations in its established townships (i.e. Iloilo and Davao). On the flipside, the firm’s leasing income from malls is expected to remain muted. It also looks like MEG has a more positive outlook on its office segment than retail, seeing as it plans to convert 9k sqm of retail space into office this year.

Do note, however, that total rental income accounted for just a quarter of the firm’s consolidated revenues pre-pandemic. In 1Q21, this spiked to 30%. This is expected to be the case in the coming years, as the retail sector isn’t forecasted to improve at least until late 2022

Recommendation

We are reinforcing our Target Price for MEG at P3.90 per share. Our BUY recommendation still holds.

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