Creating passive income is an important part of building wealth. This is how you make your money work for you.
Popular sources of passive income include rental income, royalties, and stock dividends. Among these three, stock dividends are the easiest to create because it doesn’t require a lot of capital, and only minimal effort is needed to start.
Furthermore, while buying common shares of a dividend-paying company is enough to receive passive income, there’s no guarantee how much and when you’ll receive them. Thus, for those looking to receive a more reliable stream of dividends, investing in preferred shares is a better option.
What are preferred shares
Preferred shares are a special class of stocks that have features of a debt instrument because of their fixed dividend payments. It offers a steady stream of dividends, similar to interest income, regardless of the company’s earnings.
Preferred shares are less volatile than common shares due to their stable returns. And its pricing is more dependent on interest rates. That’s why in a market environment like the one we have right now, where yields are low due to falling interest rates, it may be a good investment strategy to diversify into preferred shares.
However, before buying a company’s preferred shares, it’s important to do due diligence and make sure that the company is financially capable of paying its dividends on time. And today, we’re taking a closer look at Megawide and seeing its prospects and outlook as a stock investment.
Megawide Construction Corp
MWIDE is one of the largest infrastructure companies in the Philippines with significant interests in construction, property development, airport and terminal operations, and renewable energy.
Megawide has been a strong government partner for its Public-Private Partnership (PPP) program, starting with the Public School Infrastructure Project, the globally-acclaimed Mactan-Cebu International Airport (MCIA), the first-of-its-kind Paranaque Integrated Terminal Exchange (PITX), and the new Clark International Airport terminal building.
In the infrastructure and construction sector, the government’s ongoing roll-out of major rail infrastructure projects like the Malolos-Clark Railway Project (MCRP), the North-South Commuter Rail Project-South Line, and the Metro Manila subway system project will be catalysts to jumpstart the economy.
Megawide in 2021
During the first nine months of 2021, consolidated revenues grew 27% year-on-year, led by the 47% growth in its construction business, despite its airport assets continuing to be affected by domestic and international travel restrictions. Meanwhile, its land port business delivered lease revenues of P414 million amid the reinstitution of community lockdowns and continued economic challenges.
Megawide’s order book continues to remain healthy at P60.2 billion for the period and the company continues to embark on more ambitious and large-scale infrastructure projects, anchored on one of the largest and most advanced precast facilities in Southeast Asia and lately complemented by German concrete mixing technology that aims to lower raw material costs by 10% and carbon emission by 20-30%.
Megawide also participated in the Japan International Cooperation Agency (JICA)-funded Metro Manila Subway Project and the Asian Development Bank (ADB)-financed North-South Commuter Railway (NSCR) South Line projects bidding to boost its horizontal infrastructure portfolio. It also plans to submit a proposal for the electromechanical and track works package of the Malolos-Clark and Solis-Calamba stretches of the North-South Commuter Rail project.
Moreover, with lessening travel restrictions, Megawide’s subsidiary GMR-Megawide Cebu Airport Corporation, which has been brilliantly and legitimately operating the Mactan-Cebu International Airport (MCIA) for the past six years, can return catering to 70-80% domestic travelers.
Lastly, because of its outstanding track record in infrastructure, Megawide was voted the Most Outstanding Company in the Philippines for the Construction and Engineering Sector in Asiamoney’s recently concluded Outstanding Companies Poll for 2021. Megawide was also voted as the Most Innovative Company of the Year in the 11th Asia CEO Awards and nominated as one of the finalists in IR Magazine’s South East Asia Awards for the Industrials Category.
Megawide Preferred Shares
Recently, Megawide Construction Corp (MWIDE) released its latest preferred shares offering.
Last year, MWIDE successfully raised P4.4 billion from its Series 2 preferred shares offering. The Series 2 comprises of two sub-series, Series 2A preferred (PSE: MWP2A) that pays a quarterly dividend of 4.75 percent per annum and Series 2B preferred (PSE: MWP2B) at 5.75 percent. MWP2A has a redemption period of 2.5 years while MWP2B has a longer redemption period of five years.
This year, MWIDE’s series 4 preferred share (PSE: MWP4) will pay a quarterly dividend of 5.3 percent per annum. The rate is slightly lower than MWP2B because its redemption period will be shorter at 3.5 years.
MWIDE plans to use the funding from the preferred share offering to partially finance its long-term infrastructure projects in preparation for post-covid economic recovery.
The company is preparing to expand its development in the PITX with a bus staging area, office, and commercial complex. It also plans to double its pre-cast plant capacity in selected locations in the country to take advantage of the increased demand for prefabricated construction materials.
The company is also eyeing to put up the Cebu Integrated Transport Hub by rehabilitating the existing Carbon Market into a new public market, including construction transport and ferry terminals.
Completion of these projects should complement MWIDE’s construction and engineering revenues with a stronger recurring income base in the future. Plus, given the company’s dividend payment track record in the past, MWIDE should be able to support its financing obligations.
Also, recently Megawide’s CREIT IPO is gaining ground. It has received its pre-effective approval from the SEC and is awaiting approval from the PSE. The company is looking to be listed by Q12022.
Risk and Opportunities
MWIDE has relatively high financial leverage with almost 55 percent of its total assets financed by debt, but the company has managed to stay liquid with a current ratio of 1.38 as of June 2021. As the economy slow reopens in the years ahead as COVID cases fall, we can assume revenues from its construction and airport to recover significantly.
Additionally, given the company’s dividend payment track record in the past, MWIDE should be able to support its financing obligations.
MWP4’s preferred share offer at 5.3 percent is relatively higher than Jollibee’s JFCPA preferred share offering at 3.28 percent, which has a similar redemption period at three years.
If we assume the opportunity cost to be equivalent to the prevailing three-year Philippine bond yield, which has a current rate of 2.636 percent, and let’s say we add a premium of two percent to cover your risk, we can get a total opportunity cost at 4.636 percent.
Because MWP4’s yield at 5.3 percent is much higher than the opportunity cost of 4.636 percent, we can expect its share price to trade at a slight premium.
Thus, considering these and together with the company’s pivot to infrastructure in the construction segment and constant financial and operational efficiency enhancements in the airport business, there’s long-term value creation for investors in Megawide.
Disclosure: This article is written in collaboration with Megawide Corp.
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It is good to see pre-cast concrete technology come to the Philippines. In theory, it should in every way be superior to cast on site operations. In a modern factory setting, each stage of the casting can be monitored for quality control. Samples from each batch of concrete can be taken, stored and analyzed. All welds in reinforcing rod will be inspected, perhaps by computer technology. Some times. important steps like these can be overlook in the field. One or two bad batches of concrete could slip by if the samples are lost or someone neglected to take a sample for later evaluation. A few welds might not be completed when a worker comes back from lunch break.
That said, I have to say how super impressed I was watching the New Calumpit bridge under construction. I lived for a short time on a side road off the General Douglas Mac Arthur national highway very close to the ongoing construction. When it was time for the new beams, a flat section of sidewalk was leveled. A few days past and soon iron workers were welding the skeleton of reinforcing rods together. When the forms were attached, Concrete trucks arrived like a convoy to fill the forms. These beams were huge. If stood on end, it would remind you of looking up the side of a skyscraper. Never ever have I seen anything like this back in the US. For a venture of this size, it would all be done with pre-cast. Total respect for the engineers and workers who made this project happen. It was indeed a sight to behold as these gargantuan beams were lifted and placed on the new footings/ piers waiting for them.
New technology may well fully replace the methods I observed in Calumpit and it is probably for the best. Still, every time I travel north through Calumpit, Apalit and further, I will always remember my walks up the road and observing the progress as the new bridge “grew” over the river.
Hi Fitz! This is a great article, and I am learning about this company and the concept of ‘preferred shares’ for the first time. MWIDE seem like a great investment for the long term (e.g. retirement fund; around 20-25 years from now). I’m thinking of buying stocks of this company as part of my retirement fund; do you think the preferred shares (MWP4) are better suited for that purpose, or should I stick to its common stocks (MWIDE)?
The preferred shares are better for me if it’s for the long-term.