Megaworld Corp. (MEG), the Philippine builder controlled by billionaire Andrew Tan, plans to spend at least $5 billion in the next decade to develop properties for the nation’s expanding outsource services industry.
The Southeast Asian country’s top office supplier for companies from Accenture Plc (ACN:US) to Convergys Corp. (CVG:US) will develop 10 townships dedicated to business process outsourcing, tapping into demand that’s “barely scratched the surface,” said Jericho Go, a first vice president at Megaworld.
Revenue at BPO companies in the Philippines may climb 61 percent to $25 billion in the next three years, accounting for 10 percent of the global industry, according to the country’s IT & Business Process Association. Megaworld shares have surged more than elevenfold since 1999, outpacing a 212 percent gain in the Philippine Stock Exchange Index, as Tan’s strategy to create self-contained communities around call centers and other outsourcing operations propelled earnings. The company is still valued at a 22 percent discount to the benchmark equity index.
“The Philippines is among the most competitive destinations for BPOs,” Go said in a phone interview yesterday from Cebu. “There are many U.S. and European companies who are seriously considering setting up here.”
The outsourcing industry will employ 1.3 million Filipinos by 2016, compared with 900,000 last year, the IBPAP said. The country’s prime office rents are the lowest in Asia, according to CB Richard Ellis, and the peso’s 9 percent drop against the dollar in the past 12 months has made investing in the Philippines cheaper for overseas companies.
Megaworld will add about 1.5 million square-meters (16.1 million square feet) of office and retail space in 10 years, Go said. The Manila-based company had 600,000 square-meters of offices leased mostly to BPOs at the end of last year, and 170,000 square meters rented to retailers. The shares fell 0.5 percent to 4.13 pesos yesterday, the first drop in five days.
Rental income at Megaworld will amount to 40 percent of total revenue this year and may climb to 60 percent in 2017, according to Alex Pomento, an analyst at Macquarie Group Ltd. Megaworld estimates annual rental revenue will rise to 10 billion pesos ($222 million) within five years and account for half of profits, said John Hao, the company’s director for investor relations.
“Demand will continue to be robust,” said Julius Guevara, head of research at the Philippine unit of Colliers International Plc. “Outsourcing to the Philippines remains attractive because of the lower costs, and the recent weakness of the peso supports this demand.”
Slower economic growth and a weakening property market are potential risks for shares of Philippine developers, according to Macquarie’s Pomento. The firm has an outperform rating on Megaworld, with a 12-month price target of 5.10 pesos.
Land prices in some parts of Manila have jumped 28 percent in the past three years, according to Colliers. The Philippine central bank yesterday ordered lenders to set aside more money as reserves to curb liquidity.
Economists surveyed by Bloomberg estimate Philippine growth may slow to 6.5 percent this year, after the economy expanded 7.2 percent in 2013 and 6.8 percent in 2012, the fastest two-year pace since the 1950s.
“The risk is if the Philippine economy and the real estate industry turns sour,” Pomento said.
Tan’s Eastwood City township, which opened in 1999, was the first in the country to use BPO offices as an anchor for high-density, self-contained mixed-use developments.
Construction of Eastwood began in 1997, when Tan turned a 17-hectare (42-acre) former textile mill along one of Manila’s ring roads into a master-planned community of residential towers, BPO offices and shops. There are now at least 100,000 residents, workers and shoppers in Eastwood at any one time, Go said.
Megaworld is duplicating Eastwood in six other parts of Manila, and building other developments in Lapu Lapu, Iloilo and Davao, cities in central and southern Philippines.
“Tan’s strategy of building homes, offices and retail shops in a single project paid off and it was copied by other developers,” said Jonathan Ravelas, the chief market strategist at BDO Unibank Inc. in Manila.
Megaworld shares have advanced 27 percent this year, the most among major Philippine developers, and trade at 13.2 times projected 12-month earnings. The Philippine Stock Exchange Index is valued at 16.9 times. Ayala Land Inc., the nation’s second-largest BPO landlord, has climbed 15 percent this year and trades at a multiple of 27, while Robinsons Land Corp. has risen 5.5 percent is valued at 14.5 times.
Megaworld has 10 buy and 4 hold ratings from analysts, with an average 12-month price target of 4.48 pesos, according to data compiled by Bloomberg.
“The stock deserves to be re-rated,” said Steve Sevidal, chief investment officer at United Coconut Planters Bank, which manages about $1 billion. “Megaworld has created a solid recurring income base, which is what you want to see in a property company, and it’s positioned very well for growth.”
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