BUY. FY17 core income ahead of estimates. Megaworld Corporation TUE 10 APR 2018

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1 Megaworld Corporation FY17 core income ahead of estimates FY17 recurring income up 26.4%. MEG disclosed that FY17 net income reached Php12.77 Bil, 12.7% higher than that of FY16. However, this included a Php1.56 Bil impairment loss on certain shares classified under AFS securities. Excluding this non-recurring charge, MEG s net income would have been Php14.22 Bil which is 26.4% higher than a year ago. Growth was driven by the 20.55% growth in operating profit or EBIT and also lower forex, which dropped from Php1.2 Bil in 2016 to Php56.8 Mil in MEG s income excluding the impairment charge exceeded both COL and consensus estimates on higher than expected realized gross profit and lower than expected forex losses. Real estate segment performs better than expected on strong demand. MEG s real estate business was stronger than expected in FY17. Real estate sales grew 5.3% to Php28.9 Bil while realized gross profit grew 12.8% to Php13.2 Bil, both exceeding COL estimates by 5.4% and 9.6% respectively. Strong demand is also shown in MEG s strong consolidated take-up sales which grew 20.6% to Php105 Bil. This year MEG is targeting Php110 Bil in take-up sales which will be buoyed by Php60 Bil worth of project launches. This is more than 50% higher than the Php39 Bil worth of projects they launched in 2017 and this demonstrates their positive outlook on the industry. Outlook positive for leasing business, pre-commitments healthy. MEG s leasing business remained strong and performed as expected in FY17. Rental revenues grew 18.16% to Php11.83 Bil, meeting COL estimates. MEG said there is strong demand for their office projects even with the uncertainties surrounding the BPO sector. Of the 480,000sqm office spaces that MEG has launched so far (for completion), 162,000sqm has been pre-committed from the BPO sector, most of which are companies that have existing operations in the Philippines. Maintain BUY with FV estimate of Php6.15. We maintain a BUY rating on MEG with a fair value estimate of Php6.15. Our fair value estimate is based on a 25% discount to our NAV estimate of Php8.21. We believe that at MEG s current price of Php4.53, valuations are very attractive. Aside from trading at a significant discount to NAV, at Php4.52, MEG is trading at only 9.82X FY18E P/E. We don t think that the significant discount to NAV and depressed P/E multiple are warranted given that more than 50% of MEG s operating income is derived from its investment properties, making it the third largest landlord (in terms of income contribution) next to SMPH and RLC. MEG is currently trading below the industry average 2018 P/E of 15.45X and industry median of 11.39X. FORECAST SUMMARY Year to December 31 (Php Mil) F 2018F 2019F Real Estate Revenues 34,072 38,466 40,326 42,213 45,506 48,991 % change y/y Operating income 11,284 14,718 16,472 18,128 20,356 22,718 % change y/y EBIT Margin (%) Net Profit 21,220 10,215 11,332 12,883 14,399 16,020 % change y/y Net Profit Margin (%) Core Net Profit 8,404 11,179 12,431 13,383 14,899 16,520 % change y/y Net Profit Margin (%) Core EPS (in Php) % change y/y RELATIVE VALUE P/E(X) ROE(%) Dividend Yield (%) *Source: MEG, COL estimates BUY TICKER: MEG FAIR VALUE: 6.15 CURRENT PRICE: 4.52 UPSIDE: SHARE PRICE MOVEMENT Jan Feb Mar Apr-18 MEG PSEi ABSOLUTE PERFORMANCE 1M 3M YTD MEG PSEi MARKET DATA Market Cap 145,722.30Mil Outstanding Shares 32,239.45Mil 52 Wk Range Mo Ave Daily T/O Mil RICHARD LAÑEDA, CFA SENIOR RESEARCH MANAGER richard.laneda@colfinancial.com Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the COL Financial website as these may be subject to tampering or unauthorized alterations.

2 FY17 recurring income up 26.4% MEG disclosed that FY17 net income reached Php12.77 Bil, 12.7% higher than that of FY16. However, this included a Php1.56 Bil impairment loss on certain shares classified under AFS securities. Excluding this non-recurring charge, MEG s net income would have been Php14.22 Bil which is 26.4% higher than a year ago. Growth was driven by the 20.55% growth in operating profit or EBIT and also lower forex, which dropped from Php1.2 Bil in 2016 to Php56.8 Mil in MEG s income excluding the impairment charge exceeded both COL and consensus estimates on higher than expected realized gross profit and lower than expected forex losses. Exhibit 1. Earnings summary % of full year estimate FY16 FY17 % change in Php Bil COL Consensus Real estate sales 27,451 28, % 105.4% Realized gross profit 11,717 13, % 109.6% Rental revenues 10,012 11, % 100.0% EBITDA 15,695 20, % 103.7% EBIT 15,695 18, % 103.8% Net income 11,332 12, % 99.14% Recurring income 11,250 14, % 110.4% 112.8% Source: MEG, COL estimates, Bloomberg Real estate segment performs better than expected on strong demand MEG s real estate business was very stronger than expected in FY17. Real estate sales grew 5.3% to Php28.9 Bil while realized gross profit grew 12.8% to Php13.2 Bil, both exceeding COL estimates by 5.4% and 9.6% respectively. Demand for MEG properties was higher than expected and sales of projects with higher completion levels led to lower than expected deferred gross profit, which led to the higher than expected realized gross profit for the year. Strong demand is also shown in MEG s strong consolidated take-up sales which grew 20.6% to Php105 Bil. This year MEG is targeting Php110 Bil in take-up sales which will be buoyed by Php60 Bil worth of project launches. This is more than 50% higher than the Php39 Bil worth of projects they launched in 2017 and this demonstrates their positive outlook on the industry. Outlook positive for leasing business, pre-commitments healthy MEG s leasing business remained strong and performed as expected in FY17. Rental revenues grew 18.16% to Php11.83 Bil, meeting COL estimates. This was driven higher gross leasable space which 20.5% to1.6 Mil sqm. MEG remains bullish on the outlook of its leasing business. MEG is still targeting 2 Mil GLA by 2020 (1.5 Mil sqm for office, 500k sqm for retail) and this should translate to around 20 BIl in rental revenues by COL Financial Group, Inc. 2

3 Exhibit 2. Leasing business breakdown y/y growth Office gross revenues (Php Bil) % Office GLA ('000 sqm) 851 1, % Retail gross revenues (Php Bil) % Retail GLA ('000 sqm) % Source: MEG MEG said there is strong demand for their office projects even with the uncertainties surrounding the BPO sector. The uncertainty surrounding the benefits under PEZA has put a cloud of uncertainty for potential new entrants but the expansion of existing operators has continued. Of the 480,000sqm office spaces that MEG has launched so far (for completion), 162,000sqm has been pre-committed from the BPO sector, most of which are companies that have existing operations in the Philippines. MEG is also capitalizing on the strong demand from Philippine offshore gaming operators or POGO. According to management, spaces leased out to POGOs could reach 200,000sqm by yearend from around 100,000 sqm in Exhibit 3. Pre-commitment rates of future office projects GLA launched GLA taken up lease-out rate 2018E 200,000 50, % 2019E 130,000 52, % 2020E 150,000 60, % 480, , % Source: MEG Maintain BUY with FV estimate of Php6.15 We maintain a BUY rating on MEG with a fair value estimate of Php6.15. Our fair value estimate is based on a 25% discount to our NAV estimate of Php8.21. We believe that at MEG s current price of Php4.53, valuations are very attractive. Aside from trading at a significant discount to NAV, at Php4.52, MEG is trading at only 9.82X FY18E P/E. We don t think that the significant discount to NAV and depressed P/E multiple are warranted given that more than 50% of MEG s operating income is derived from its investment properties, making it the third largest landlord (in terms of income contribution) next to SMPH and RLC. MEG is currently trading below the industry average 2018 P/E of 15.45X and industry median of 11.39X. COL Financial Group, Inc. 3

4 Megaworld Corporation (MEG) COMPANY BACKGROUND Megaworld is a leading integrated real estate developer in the Philippines. MEG s core businesses include residential development, commercial centers, offices, and hotels. They pioneered the Live-Work-Play-Learn township concept in the Philippines. Megaworld is also one of the poineers in the BPO office leasing segment and is now one of the top BPO office developer and landlord. OPERATING PROFIT BREAKDOWN 52% 1% 47% Leasing Real estate Hotels INCOME STATEMENT (PHPMIL) Revenues 38,046 43,129 45,220 47,363 50,886 54,611 % Growth 16.4% 13.4% 4.8% 4.7% 7.4% 7.3% EBITDA 13,659 16,412 18,096 20,014 22,502 25,124 % Growth 14.4% 20.2% 10.3% 10.6% 12.4% 11.7% Operating Profit 11,284 14,718 16,472 18,128 20,356 22,718 % Growth 14.0% 30.4% 11.9% 10.1% 12.3% 11.6% Interest Expense (1,487) (1,578) (1,680) (1,754) (1,833) (1,915) Other Income/(Expense) 14, Pretax Income 24,744 13,859 15,202 17,288 19,323 21,498 Tax Expense (335) (360) (378) (429) (480) (534) Net Income 21,220 10,215 11,332 12,883 14,399 16,020 % Growth 136.5% -51.9% 10.9% 13.7% 11.8% 11.3% Core Net Income 8,404 11,179 12,431 13,383 14,899 16,520 % Growth -1.7% 33.0% 11.2% 7.7% 11.3% 10.9% EPS % Growth 114.3% -52.7% 10.9% 13.7% 11.8% 11.3% Core EPS % Growth -10.9% 30.7% 11.2% 7.7% 11.3% 10.9% BALANCE SHEET (IN PHPMIL) Cash & Equivalents 25,143 22,763 16,396 12,408 11,850 12,755 Current portion of Trade Receivables 23,719 22,454 26,996 29,696 30,587 31,504 Real Estate Inventories 56,908 61,467 62,659 65,792 69,082 72,536 Property Development Cost 12,390 14,858 20,105 22,920 26,129 29,787 Other Current Assets 3,930 9,634 14,534 15,257 16,017 16,814 Non-Current portion of Trade Receivables 28,911 32,695 35,675 37,459 39,332 41,298 PPE and Investment Properties 37,630 49,323 64,064 74,256 84,422 94,327 Land and improvements 13,213 18,116 22,079 23,279 24,479 25,679 Advances to landowners and joint ventures 4,824 6,482 4,859 5,820 6,820 7,820 Other Non-Current Assets 14,372 13,894 11,376 11,428 11,481 11,533 Total Assets 221, , , , , ,053 Trade and other payables 10,620 12,069 13,567 14,923 16,416 18,057 ST Current Debtsportion of 7,626 4,245 6,006 7,006 7,026 7,211 Current customers' portion deposits of reserve 5,848 5,880 6,136 6,749 7,424 8,167 Current for property portion development of 7,063 6,438 7,460 7,460 7,460 7,460 deferred income on real 5,340 5,654 5,561 5,428 5,248 5,018 Other Current Liabilities 2,381 12,753 17,059 16,120 17,894 19,662 LT Debts 25,912 48,358 55,178 59,178 65,178 71,178 Non-current of reserve for property development 8,303 9,752 8,846 9,346 9,446 9,546 Non-current portion of deferred income on real 4,518 4,808 5,119 4,986 4,806 4,576 estate sales Deferred tax liabilities - net 8,139 9,637 9,900 9,900 9,900 9,900 Other Non-Current Liabilities 6,492 8,238 15,192 15,544 15,914 16,302 Total Liabilities 92, , , , , ,077 Total Equity 128, , , , , ,478 Total Liabilities & Equity 221, , , , , ,555 BVPS COL Financial Group, Inc. 4

5 INVESTMENT THESIS: Large landbank in developing areas ensure future growth Megaworld has 22 integrated urban townships in various stages of development that will drive the growth of the company for years to come. These townships cover 3,704 hectares of land across Luzon, Visayas, and Mindanao. Leasing business to grow rapidly Megaworld has a long pipeline of office and retail projects that are scheduled to be completed by This will increase its leasable space from 1.1 Mil sqm in 2016 to 2.1 Mil sqm by This will drive rental income to grow from Php10.3 Bil to Php19 Bil by This will also also increase the contribution of recurring income to the company, thereby improving revenue and earnings quality CASHFLOW STATEMENT (IN PHPMIL) Pretax Income 24,675 13,859 15,199 17,288 19,323 21,498 Depreciation & Amortization 1,300 1,349 1,487 1,782 2,042 2,302 Other Non-Cash Exp (Gains) (13,242) (104) (104) (104) Interest Expense (Income) Decrease (Increase) in Working Cap (9,617) (12,693) (11,785) (9,560) (8,744) (9,381) Operating Cash Flow 1,733 1,650 3,918 5,908 8,823 10,227 Capex (26,124) (18,341) (15,490) (13,174) (13,408) (13,408) Interest and dividends received 1,157 1,137 1,034 1, Decrease (Increase) in other investments 9,957 (766) 1, Investing Cash Flow (15,010) (17,970) (12,998) (12,123) (12,556) (12,584) Proceeds (Payment) Debts 4,819 17,920 7,180 5,000 6,020 6,185 Payment of Cash Dividends (1,247) (1,936) (1,609) (1,295) (1,295) (1,295) Interest Paid (1,665) (2,051) (2,861) (1,477) (1,551) (1,629) Others Financing Cash Flow 2,170 13,941 2,710 2,228 3,174 3,261 Change in Cash (11,108) (2,380) (6,369) (3,988) (558) 905 KEY RATIOS (IN PHPMIL) EBITDA Margin (%) 35.9% 38.1% 40.0% 42.3% 44.2% 46.0% OPM (%) 29.7% 34.1% 36.4% 38.3% 40.0% 41.6% NPM (%) 55.8% 23.7% 25.1% 27.2% 28.3% 29.3% Times Interest Earned (X) Current Ratio (X) Net D/E Ratio (X) Days Receivable Days Inventory Asset T/O (%) 17.2% 17.1% 16.2% 15.9% 15.9% 15.9% ROAE (%) 20.9% 9.0% 9.4% 9.8% 10.0% 10.2% MAJOR CORPORATE DEVELOPMENTS (5-YEARS) Acquisition of 11.8% of Suntrust Properties Inc. 6/10/2013 Acquisition of 22.76% of Global-Estate Resorts Inc. (GERI) 6/21/2013 Acquisition of 11.8% of Suntrust Properties Inc. 6/20/2014 COL Financial Group, Inc. 5

6 Valuation Methodology NAV COMPUTATION Value (PhpMil) Value (Php/Sh) % of GAV % of NAV Valuation Methodology Residential Properties 48, % 18.4% DCF Investment Properties 136, % 51.2% EBITDA Cap rate Land Bank 77, % 29.1% Market value 80.4% stake in Global Estate Resor 17, % 6.6% 50% Discount to NAV est 81.7% stake in Empire East Land 8, % 3.2% Market value 1.84% stake in Travellers 1, % 0.4% DCF Net debt (23,800) % Net Asset Value 265, Less: 25% discount to NAV 66, FV estimate 199, RELATIVE VALUATION P/E EBTIDA growth ROE 2017E 2018E 2017E 2018E 2017E 2018E RLC % 9.9% 9.3% 9.3% ALI % 13.2% 15.4% 15.7% MEG % 11.3% 9.8% 10.0% SMPH % 11.7% 11.2% 11.7% VLL % 11.2% 11.2% 11.3% FLI % 18.4% 8.6% 8.9% Industry Ave % 11.2% Industry Median % 10.7% COL Financial Group, Inc. 6

7 IMPORTANT RATING DEFINITIONS BUY Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to 12 months. HOLD Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve months. SELL We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months. IMPORTANT DISCLAIMER Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be incomplete or condensed. All opinions and estimates constitute the judgment of COL s Equity Research Department as of the date of the report and are subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/ or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade them in ways different from those discussed in this report. COL RESEARCH TEAM APRIL LYNN TAN, CFA VP & HEAD OF RESEARCH april.tan@colfinancial.com CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENG RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com JOHN MARTIN LUCIANO RESEARCH ANALYST john.luciano@colfinancial.com ADRIAN ALEXANDER YU RESEARCH ANALYST adrian.yu@colfinancial.com COL FINANCIAL GROUP, INC D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE, EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY PHILIPPINES 1605 TEL NO FAX NO WEBSITE: COL Financial Group, Inc. 7