The Effect of Stock Repurchases on the Financial Statements of the Top 3

Real Estate Companies on the Philippines Property Sector

A Research Proposal
Presented to
Dr. Jacqueline Morta
Faculty, Business Management Department
De La Salle University-Dasmarias

In Partial fulfillment of the requirements in

MGAC408 (Management Research)

Agarin, Kimberly Sweetzel

Caramanzana, Camille
Vicedo, Zhaira Mae

BSM41

July 2015

CHAPTER 1
THE PROBLEM AND ITS BACKGROUND

Introduction
The Philippines is unexpectedly good today. Despite the impact of natural
calamities annually, the Philippines economy continues to grow, though at a slower
pace than before. The Philippines economy has undergone a remarkable transition
from a pussycat into a tiger economy over the last decade. Prior to this, the Philippines
had for several decades been performing poorly, with weak growth, low inward
investment and a very uncompetitive business environment aggravated by high levels of
corruption. (Rajiv Biswas, January 30, 2015). Nevertheless, for the recent years it
shows a rapid growth and it was mentioned by Heydarian (2014) that the Philippines is
one of the fastest growing economies in the world and remarkably rivalling other fellow
Asian countries in terms of growth rate. He also said that for the first time in the
Philippines history it managed to have an investment grade status from the worlds
credit rating agencies in 2013 and it also received an above investment grade from
Standard & Poors Rating Services. One of the biggest industries in the Philippines is
the real estate industry and it is one of the top contributors in the Philippines economy.
Real estate industry has total become the next big thing in the Philippines. Since
Benigno Aquino III took over as the countrys president, he has instituted anti-corruption
and good governance campaign which has wowed different foreign investors and
caused a lot of consumer confidence to surge. According to a report by the Global
Property Guide, land values continue to appreciate giving the real estate developers in

the country a booming success that is changing the skyline not only of the metropolitan
region but the of the provincial cities as well. But despite so much price appreciation,
the Philippines has not yet recovered from the crash after the 1997 Asian Financial
Crisis. In the current price terms, both rental rates and property values are back above
the 1997 levels. However, residential property prices in the first quarter of 2014 are still
39.9 % below pre-Asian Financial Crisis in real, inflation adjusted terms.
The Philippine real estate sector is expecting another robust year with gains seen
across the traditionally strong office and retail segments apart from emerging areas like
casino, gaming and hotels. The real estate segment is also expected to benefit from
continued economic growth given that the Philippines is driven by heavy consumer
spending. According to Noel Cario, President of Chamber of Real Estate and Builders
Association (CREBA), he expects the Philippine real estate industry to grow further
because of the upcoming ASEAN integration and the regions increasing role in global
economy. Property players should at the same time work together to unlock strategic
approaches to keep the domestic property sector afloat as multinational players enter
the already stiff competition in the countrys real estate market.
The Philippines economic freedom score is 62.2, making its economy the 76th
freest in the 2015 Index. Its score has increased by 2.1 points since last year, with
notable improvements in financial freedom, freedom from corruption, and labor freedom
outweighing declines in business freedom and the management of public spending. The
Philippines ranks thirteenth out of 42 countries in the AsiaPacific region and its overall
score is above the world and regional averages. (Heritage.org, 2015). Due to the

current condition of the Philippines economy, it is now very attractive for investment and
many investors not only within the country but worldwide would be willing to invest in
different businesses here in the Philippines. This good news is a great business
opportunities among different companies in the Philippines. It is a challenge for the
business sectors because of the high competition among themselves, they have to
prove that their company is worthy for investment. Companies should think ways how to
attract investors and one of the methods is a stock repurchases for listed companies.
According to Investopedia, a stock or share repurchases have a significant positive
impact to investors portfolio.
Stock Repurchase is a transaction in which a firm buys back shares of its own
stock, thereby decreasing shares outstanding, increasing EPS, and, often, increasing
the stock price (Brigham & Houston, 2013).
Companies resort to repurchase programs when they feel that their stock is
undervalued in the open market. Across the globe, stock repurchases are also often
used as a tax-efficient method to put cash into shareholders' hands, rather than pay
dividends. Companies also sometimes use shares acquired from a buyback program to
provide a "bonus" to incentive compensation plans for employees. Rather than receive
cash, recipients receive an asset that might appreciate in value faster than cash saved
in a bank account. Other usual motives for stock repurchase are to protect the company
against a takeover threat or build up shares that can later be offered as a block at a
higher price to new strategic investors.

According to Picardo (2013), stock repurchase has a biggest impact in per-share

measures of profitability and cash flow such as earnings per share (EPS) and cash flow
per share (CFPS). EPS calculations use a weighted average of the shares outstanding
over a period of time, rather than just the number of shares outstanding at a particular
point. Second, the average price at which the shares are repurchased may vary
significantly from the shares' actual market price. These simplifications understate the
magnified effect that consistent repurchases have on shareholder value. Companies
that consistently buy back their shares can grow EPS at a substantially faster rate than
would be possible through operational improvements alone. This rapid EPS growth is
often recognized by investors, who may be willing to pay a premium for such stocks,
resulting in their P/E multiple expanding over time.
In addition, share repurchase has an obvious effect on a companys income
statement, since it reduces its outstanding shares. But it also impacts other financial
statements such as Balance Sheet, Statement of Cash Flow in the Financing Activities,
Statement of Changes in Equity and Statement of Retained Earnings. On the other
hand, it is also has a significant positive impact on an investor's portfolio.

Background of the Study

Ayala Corporation is a holding company. The Company segments are Parent
Company, which includes operations of the Company, financing entities and start-up
companies; Real estate and hotels, which plans and develops residential and

commercial communities; Financial services and insurance, including universal banking

operations, leasing and Internet banking; Telecommunications, which provides a range
of communication services; Water distribution and wastewater services, which acts as a
contactor to manage fixed and movable assets to provide water delivery, sewerage and
sanitation; Electronics, which provide electronics manufacturing services; Information
technology and BPO services, which offer venture capital for technology businesses
and emerging markets; Automotive, which offers passenger cars and commercial
vehicles; International, which invests in overseas property companies and projects, and
Others, which provide air-chartered services, agri-business and other operating
companies.
On the year 2010, Ayala Corporation has approved the doubling of its shares
buyback program to P5 billion as part of efforts to boost capital structure. It is approved
to scale up the shares repurchase program that was first approved in September 2007
with a budget of P2.5 billion. Ayala is consistent in enhancing capital structure while
maintaining the ability to make meaningful investments.
SM Prime Holdings Inc. (SMPH) is one of the largest integrated property
developers in Southeast Asia offering innovative and sustainable lifestyle cities with the
development of malls, residences, offices, hotels and convention centers. It is at the
same time the largest property developer in the Philippines in terms of asset and
income base as of the end of 2013. SMPH went beyond mall development and
management. The residential business component comes from its subsidiary, SM
Development Corporation (SMDC) that sells affordable condominium units. On the other

hand, Commercial Property Group (CPG), another SMPH subsidiary which is engaged
in the development and leasing of office buildings in Metro Manila as well as the
operations and other land holdings in the Mall of Asia Arena (MOA Arena). SMPH was
incorporated in the Philippines in 1994 which started as a mall developer and operator
and grew to be the biggest retail sopping developer and operator in the Philippines with
49 malls in and outside Metro Manila and 5 shopping malls in China, totalling 7 million
square meters of Gross Floor Area (GFA).
Last November 2014, SMPH has sold 1.06 billion shares in treasury at Php 17
apiece which is discounted by 5% from its closing price of Php 17.88 for total proceeds
of Php 18.02 billion. According to Jeffrey Lim, the Executive Vice President of SMPH,
the said sale of treasury shares will be used to finance capital expenditures, generate
corporate purposes, and potential acquisitions including the deal in OCLP Holdings Inc.
(GMA News, November 27, 2014)
Megaworld Corporation is top three (3) in the real estate companies in the
Philippines. The corporation, together with subsidiaries, develops, markets, and leases
real estate properties in the Philippines. They develop community townships that
integrate residential, commercial, educational /training, leisure and entertainment
components. The real estate includes of residential condominium units, subdivision lots,
and townhouses, as well as office projects and retail spaces. They also leases office
and retail offices, manages hotel operations and provides project design, construction,
and property management services as well as engages in cinema, business process
outsourcing, educational, facilities provider, and maintenance activities. The company

was founded in 1989 and their main office is in Makati City, the Philippines. Megaworld
Corporation is a subsidiary of Alliance Global Group, Inc. (Bloomberg Business).
In annual report of Megaworld last 2013 they mentioned that during 2008, the
companys board of directors approved the repurchase of shares of up to two (2) billion
pesos worth of common shares in the open market at prevailing market prices. The
funds used for the repurchases were taken from internally-generated funds. It was also
stated in their annual report that their treasury shares are indicated at the cost of reacquiring such shares and are deducted from equity attributable to the companys
equity holders until the shares are cancelled, reissued or disposed of.
Investopedia explains that financial statement analysis is the process of
reviewing and evaluating a company's financial statements such as the balance sheet
or profit and loss statement, thereby gaining an understanding of the financial health of
the company and enabling more effective decision making. It is also an evaluative
method of determining the past, current and projected performance of a company.
Several techniques are commonly used as part of financial statement analysis including
horizontal analysis, which compares two or more years of financial data in both dollar
and percentage form; vertical analysis, where each category of accounts on the balance
sheet is shown as a percentage of the total account; and ratio analysis, which calculates
statistical relationships between data.
Based on the gathered information, the researchers would like to study about the
effects of stock repurchases to Ayala Corporation, SM Prime Holdings Inc. and
Megaworld Corporation which are the top three (3) real estate companies in the

Philippines Property Sector by analyzing their financial statements using different

measurements of ratio analysis such as Return on Asset, Return on Equity, Earnings
per Share, Price/Earnings ratio, Book Value per Share, Market/Book ratio, Debt-toEquity ratio, Dividend Pay-out ratio and Weighted Average Cost of Capital.

Conceptual Framework
Dependent Variable

Companies Financial Statement Analysis before and after stock repurchases in terms of the following:
Return Independent
on Asset
Variable
Return on Equity
Earnings per Share
Price/Earnings ratio
Book Value per Share
Market/Book ratio
Debt-to-Equity ratio
Dividend Pay-out ratio
Weighted
Average
Cost of Capital
Stock
Repurchases
Free Cash Flow of the Firm
Free Cash Flow of the Equity

Many companies have been repurchasing their stock in recent years. In result,
more than 600 major corporations repurchased significant amounts of their own stock.
There are three (3) factors or cause that result to stock repurchases of the company.
First, where the company has cash available for the distribution to its stockholders, and
it distributes this cash by repurchasing shares rather than by paying cash dividends.
Second, where the company concludes that its capital structure is too heavily weighted
with equity, and it sells debt and uses the proceeds to repurchase its stocks. Lastly,
where the firm has issued options to emoloyees, and it uses open market repurchases
to obtain stock for use when the options are exercised. Thus, other companies
repurchased more shares than issued since 1985. A company that has been
repurchased its own stocks may have changes on its financial statement analysis. Stock
repurchases may have effects on the company's value by analyzing the financial
statement using financial ratios such as Return on Asset, Return on Equity, Earnings
per Share, Price/Earnings ratio, Book Value per Share, Market/Book ratio, Debt-toEquity ratio, Dividend Pay-out ratio, Free Cash Flow of the Firm, Free Cash Flow of the
Equity and Weighted Average Cost of Capital.

Statement of the Problem

This study was conducted to determine the effect of stock repurchases on the
financial statements of the top three (3) real estate companies on the Philippines
property sector.
Specifically, the study attempted to answer the following questions:
1. What are the advantages and disadvantages of stock repurchases to the top three (3)
real estate companies on the Philippines property sector?
2. What is the financial statement analysis of the top three (3) real estate companies on
the Philippines property sector before stock repurchases in terms of financial ratios such
as Return on Asset, Return on Equity, Earnings per Share, Price/Earnings ratio, Book
Value per Share, Market/Book ratio, Debt-to-Equity ratio, Dividend Pay-out ratio, Free
Cash Flow of the Firm, Free Cash Flow of the Equity and Weighted Average Cost of
Capital?
3. What is the effect to the Financial Statements of the top three (3) real estate
companies on the Philippines property sector after stock repurchases in terms of
financial ratios such as Return on Asset, Return on Equity, Earnings per Share,
Price/Earnings ratio, Book Value per Share, Market/Book ratio, Debt-to-Equity ratio,
Dividend Pay-out ratio, Free Cash Flow of the Firm, Free Cash Flow of the Equity and
Weighted Average Cost of Capital?
Statement of Hypotheses

To carry out an effective analysis of the Effect of Stock Repurchases on the

Financial Statements of the Top 3 Real Estate Companies on the Philippines Property
Sector, the researchers seek to test the following hypotheses:
H1: The advantages of stock repurchase are increased in shareholder value,
higher stock prices which increases demand and an upward movement in the
stock price, excess cash which the company can use to fund capital expenditures
and acquisitions, price support which provides security for long term investors
during rough times. On the other hand, the disadvantages are manipulation of
earnings, and the company may pay too high on a repurchased stock to the
disadvantage of the remaining stockholders.
H2: There is a significant difference in the financial statements of the Ayala Land
Corporation, SM Prime Holdings Inc. and Megaworld Corporation before and

after repurchase in terms of the following:

Return on Asset
Return on Equity
Earnings per Share
Price/Earnings ratio
Book Value per Share
Market/Book ratio
Debt-to-Equity ratio
Dividend Pay-out ratio
Weighted Average Cost of Capital
Free Cash Flow of the Firm
Free Cash Flow on Equity

Scope and Delimitation

The scope of the study will focus on the effect of stock repurchases on the
financial ratios of Ayala Land, Inc. (ALI), SM Prime Holdings, Inc. (SMPH) and

Megaworld Corporation (MEG), the top three (3) real estate companies in the
Philippines. This will comprise stock repurchases as the independent variable and its
effect to the following ratios of the top three (3) companies: Return on Asset, Return on
Equity, Earnings per Share, Price/Earnings ratio, Book Value per Share, Market/Book
ratio, Debt-to-Equity ratio, Dividend Pay-out ratio, Weighted Average Cost of Capital,
Debt-to-Equity Ratio, Free Cash Flow of the Firm and Free Cash Flow on Equity.
Secondary data will be used in gathering information by the researchers. Financial
Statements from years 2010 to 2014 of Ayala Land, Inc. (ALI), SM Prime Holdings, Inc.
(SMPH) and Megaworld Corporation (MEG) will be gathered from Securities Exchange
Commissions or from the Bloomberg terminal in the De La Salle University Dasmarias.
Financial Statements from years 2010 to 2014 will measure enough the effect of stock
repurchases on financial ratios. Different financial ratios of the top three (3) will be
computed and analyzed based on knowledge in finance. This study will be done for five
months or a semester of school year 2015 to 2016.
The researchers focus its study on the top three (3) real estate companies
because the said companies disclosed the enough information needed in the research.
The researchers want to know how these companies reach their position despite of
close competition today. The researchers also want to study companies frequently
repurchase their stocks for better results. Securities and Exchange Commission and
Bloomberg only offer financial statements up to year 2014. The stocks repurchases
information about the three (3) companies is included in each of their financial
statements. The analysis and the study of the researchers will depend only from the

financial statements of the companies, from some other articles found on the internet
and from other resources.
Significance of the Study
The study was conducted with the intention of the researchers to give some
important information, to benefit essential ideas and to contribute new found knowledge
to the following:
Stakeholders. This study will help them in decision making whether the decisions will
lead them to profit and other benefits.
Investors. This study will give them information on the company that may affect their
decision on whether to invest or not to a certain company and also to determine their
benefits from stock repurchases.
Company Management. This study will help them as the decision maker or
representative of their respective companies on their future plans and management to
assure that the company is meeting their goals based on their decisions.
Students. This study will help them understand more how a certain decision like buying
back the stocks may affect a companys standing.
Professors. This study will be a sample research that may be helpful to their profession.
To Future Researchers. This study offers them valuable information as background
research data that could be the basis for future developments on the topic. Added data

provided in the future may either support or contradict potential results. This study might
also serve as an introduction for a much larger scale of study.

Definition of Terms
The following terms were conceptually and operationally defined to help the
readers understand the study further:

Book Value per Share

It is a measure used by owners of common shares in a firm to determine the

level of safety associated with each individual share after all debts are paid.
(Investopedia. http://www.investopedia.com/terms/b/bookvaluepercommoon.asp)

Chamber of Real Estate and Builders Associatiom (CREBA)

It is the largest real estate umbrella organization in the Philippines.

Debt to Equity Ratio

It is a measure of a companys financial leverage calculating by dividing its

total liabilities over the stockholders equity. It indicates what proportion of equity and
debt

the

company

is

using

to

finance

its

assets.

(Investopedia.

http://www.investopedia.com/terms/d/debtequityratio.asp)

Dividend Pay-out Ratio

It is the percentage of earnings paid to shareholders in dividends. It is

calculated by dividing yearly dividend per share over earnings per share.
(Investopedia. http://www.investopedia.com/terms/d/dividendpayoutratio.asp)

Earnings per Share

It is the portion of a companys profit allocated to each outstanding share of

common stock. It is also an indicator of a companys profitability. (Investopedia.
http://www.investopedia.com/terms/e/eps.asp)

Free Cash Flow of the Firm (FCFF)

It is a measure of financial performance that expresses the net amount of

cash that is generated for the firm consisting of expenses, taxes, and changes in net

working capital and investment.

(Investopedia.http://www.investopedia.com/terms/f/freecashflowfirm.asp)

Free Cash Flow of the Equity (FCFE)

It measures how much cash can be paid by the equity shareholders of the
company after all expenses, reinvestments and debt repayment. (Investopedia.
http://www.investopedia.com/terms/f/freecashflowtoequity.asp)

Investment Grade Status

It is a rating that indicates that a corporate or municipal bond that has a relatively
low risk of default.
(Investopedia.http://www.investopedia.com/terms/i/investmentgrade.asp)

Investor's Portfolio

It is composed of either stocks, government bonds, corporate bonds, treasury

bills, real estate investment trusts, exchange traded funds, mutual funds and so on.
(Investopedia. http://www.investopedia.com/terms/p/portfolio-investment.asp)

Market/Book Ratio

It measures the market value of a company relative to its book or accounting

value. It is the ratio of a stock markets price to its book value. (Brigham and
Houston, 2013; p. 112)

Price/Earnings ratio

It shows how much investors are willing to pay per peso of reported profits. It
is the ratio of the price per share to earnings per share. (Brigham and Houston,
2013; p. 111)

Return on Asset

An indication how profitable a company is relative to its total assets. It is

calculated by dividing the companys net income over its total assets. (Brigham and
Houston, 2013; p. 109)

Return on Equity

It measures the rate of return on common stockholders investment. It is

calculated by dividing the companys net income to its common equity. (Brigham and
Houston, 2013; p. 110)

Standard and Poor's Rating Services

It is an American Financial Services that publishes financial research and

analysis on stocks and bonds.

Stock Repurchase

It is a program by which a company buys back its own shares from the market
place reducing the number of outstanding shares.
(Wikipedia.https://en.m.wikipedia.org/wiki/Standard_%26_Poor%27s)

Weighted Average Cost of Capital

It is a weighted average of the component cost of debt, preferred stock and

common equity. (Brigham and Houston, 2013; p. 340)