D.M. WENCESLAO AND ASSOCIATES INCORPORATED INITIAL
PUBLIC OFFERING CASE STUDY SOLUTION & ANALYSIS
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SYNOPSIS
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On June 11, 2018, Jake Veluz, a portfolio manager at the Trust and Investments Group of BDO Unibank,
Inc. (BDO), had to decide whether to invest in the initial public offering (IPO) of D.M. Wenceslao and
Associates Incorporated (DMW), a Philippine-based integrated property developer. The IPO price of DMW
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had been reduced from ₱22.901 to ₱12.00 during the offer period due to deteriorating stock market
conditions.2 The Philippine Stock Exchange (PSE) had declined from a record high of 9,058 on January 20,
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2018, to 7,740 on June 10, 2018.3 DMW had significant landholdings in Metro Manila. There was a
substantial concentration risk because most of the company’s land was in a single location. Further, the
company faced long-term competitive pressures from projects under development nearby. However, DMW
lu
also had good prospects in terms of the future growth and capital appreciation of its real estate rentals and
developments within Aseana City, in addition to the potential expansion of its construction business. Veluz
So
had to prepare an internal memorandum explaining the merits, risks, and fair valuation associated with a
possible investment in DMW’s IPO in the context of weak stock market conditions.
OBJECTIVES
• assess the attractiveness of the real estate industry in the Philippines;
• describe market conditions and explain the various features of an IPO, including the use of primary and
secondary shares and the overallotment option;
The Case Solution Starts From page 4
,ASSIGNMENT QUESTIONS
1. Assess the attractiveness of the real estate industry in the Philippines.
2. Why did the owners of DMW pursue an IPO? Describe the market conditions, and explain the various
features of the IPO, including the use of primary and secondary shares and the overallotment option.
3. Evaluate the merits of investing in DMW’s IPO based on an analysis of the company’s strengths,
weaknesses, strategy, risks, prospects, and valuation.
4. Estimate the fair value price of DMW’s stock by applying the DCF method and the CAPM as well as
by determining the market valuation of its unallocated land. Compare the fair value price to the IPO
price to help decide whether to buy the stock.
5. Use the comparable firm multiples method to estimate DMW’s price, and compare it to the IPO price.
6. Should Veluz invest in DMW’s IPO? Explain your reasoning.
ANALYSIS
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1. Assess the attractiveness of the real estate industry in the Philippines.
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Threat of New Entrants (Medium)
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The real estate market is considered to be a unique market, with a high risk/reward profile. New players
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entering the market need to adhere to numerous government regulations. Additionally, the brand equity of
a property developer involved in building condominiums has a significant impact on a condominium
project’s success, which further increases the entry barriers to the industry. Companies seeking to pursue
lu
real estate projects also need significant capital. However, established companies with good brand equity
can launch real estate business units to enter the growing real estate industry. Overall, the threat of new
entrants is rated as medium in the real estate industry in the Philippines.
So
Threat of Substitutes (Medium)
The Case Solution Starts From page 4
, EXHIBIT -2: DISCOUNTED CASH FLOW (IN MILLION ₱, EXCEPT NUMBER OF SHARES)
Discounted Cash Flow 2018F 2019F 2020F 2021F 2022F
Revenues
Rentals
Land 988.4 1,062.5 1,142.2 1,227.8 1,319.9
Building 461.9 496.6 533.8 573.9 616.9
Others 169.7 182.5 196.2 210.9 226.7
1,620.0 1,741.5 1,872.1 2,012.6 2,163.5
Construction contracts 218.1 235.3 253.9 273.9
Total Revenues 1,838.1 1,976.8 2,126.0 2,286.5
Cost of Revenues
Rentals 233.4 250.9 269.8
Construction contracts 179.2
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Total Cost 449.0
Gross Income (Loss) 1,837.5
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General and administrative expenses 617.8
Selling expenses
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Total Expenses
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The Case Solution Starts From page 4
PUBLIC OFFERING CASE STUDY SOLUTION & ANALYSIS
e
pl
SYNOPSIS
m
Sa
On June 11, 2018, Jake Veluz, a portfolio manager at the Trust and Investments Group of BDO Unibank,
Inc. (BDO), had to decide whether to invest in the initial public offering (IPO) of D.M. Wenceslao and
Associates Incorporated (DMW), a Philippine-based integrated property developer. The IPO price of DMW
n
had been reduced from ₱22.901 to ₱12.00 during the offer period due to deteriorating stock market
conditions.2 The Philippine Stock Exchange (PSE) had declined from a record high of 9,058 on January 20,
tio
2018, to 7,740 on June 10, 2018.3 DMW had significant landholdings in Metro Manila. There was a
substantial concentration risk because most of the company’s land was in a single location. Further, the
company faced long-term competitive pressures from projects under development nearby. However, DMW
lu
also had good prospects in terms of the future growth and capital appreciation of its real estate rentals and
developments within Aseana City, in addition to the potential expansion of its construction business. Veluz
So
had to prepare an internal memorandum explaining the merits, risks, and fair valuation associated with a
possible investment in DMW’s IPO in the context of weak stock market conditions.
OBJECTIVES
• assess the attractiveness of the real estate industry in the Philippines;
• describe market conditions and explain the various features of an IPO, including the use of primary and
secondary shares and the overallotment option;
The Case Solution Starts From page 4
,ASSIGNMENT QUESTIONS
1. Assess the attractiveness of the real estate industry in the Philippines.
2. Why did the owners of DMW pursue an IPO? Describe the market conditions, and explain the various
features of the IPO, including the use of primary and secondary shares and the overallotment option.
3. Evaluate the merits of investing in DMW’s IPO based on an analysis of the company’s strengths,
weaknesses, strategy, risks, prospects, and valuation.
4. Estimate the fair value price of DMW’s stock by applying the DCF method and the CAPM as well as
by determining the market valuation of its unallocated land. Compare the fair value price to the IPO
price to help decide whether to buy the stock.
5. Use the comparable firm multiples method to estimate DMW’s price, and compare it to the IPO price.
6. Should Veluz invest in DMW’s IPO? Explain your reasoning.
ANALYSIS
e
1. Assess the attractiveness of the real estate industry in the Philippines.
pl
m
Sa
Threat of New Entrants (Medium)
n
The real estate market is considered to be a unique market, with a high risk/reward profile. New players
tio
entering the market need to adhere to numerous government regulations. Additionally, the brand equity of
a property developer involved in building condominiums has a significant impact on a condominium
project’s success, which further increases the entry barriers to the industry. Companies seeking to pursue
lu
real estate projects also need significant capital. However, established companies with good brand equity
can launch real estate business units to enter the growing real estate industry. Overall, the threat of new
entrants is rated as medium in the real estate industry in the Philippines.
So
Threat of Substitutes (Medium)
The Case Solution Starts From page 4
, EXHIBIT -2: DISCOUNTED CASH FLOW (IN MILLION ₱, EXCEPT NUMBER OF SHARES)
Discounted Cash Flow 2018F 2019F 2020F 2021F 2022F
Revenues
Rentals
Land 988.4 1,062.5 1,142.2 1,227.8 1,319.9
Building 461.9 496.6 533.8 573.9 616.9
Others 169.7 182.5 196.2 210.9 226.7
1,620.0 1,741.5 1,872.1 2,012.6 2,163.5
Construction contracts 218.1 235.3 253.9 273.9
Total Revenues 1,838.1 1,976.8 2,126.0 2,286.5
Cost of Revenues
Rentals 233.4 250.9 269.8
Construction contracts 179.2
e
Total Cost 449.0
Gross Income (Loss) 1,837.5
pl
General and administrative expenses 617.8
Selling expenses
m
Total Expenses
Sa
n
tio
lu
So
The Case Solution Starts From page 4
