PHILIPPINE PROPERTY FIRM OFFERS EXPOSURE TO CALL-CENTER BOOM
By James Hookway
Staff Reporter of THE WALL STREET JOURNAL
October 13, 2004 

MANILA, Philippines -- Want to get in on the Philippines' call-center boom even though no local outsourcing companies are listed? Some analysts say the easiest way is to invest in property developer Megaworld .

Here's the reasoning: Share investors impressed with the outsourcing industry's rapid growth have few options for cashing in on it. Many of the biggest call centers operating in the Philippines are American-owned. And local companies are only just thinking about going public.

Enter Megaworld, developer of Manila's biggest cyberpark and landlord to one-quarter of the outsourcing companies working in the Philippines. Ed Bancod, head of research at the Manila office of BNP Paribas Peregrine Securities, says "it's the most direct of the indirect ways to get some exposure to the industry."

Megaworld made a dark-horse bet on the outsourcing and back-office business back in 1999 when it developed the Eastwood City Cyberpark in Manila's northern suburbs. Its chairman and chief executive, Andrew Tan, applied for and received the kind of government tax incentives usually given to the Philippines' industrial export-processing zones.

Big tenants such as IBM soon moved their back-office operations there. A train of other companies providing payroll and account services, animation houses and call centers followed. "Foresight and the right strategy have turned Megaworld into a major industry player," Mr. Bancod says.

The key component of Megaworld's success isn't so much the rental income, although this accounted for about 24% of total revenue in 2003. It's the critical mass of call centers and other back-office businesses at Eastwood City, which has enabled Megaworld to fully develop the project. The cyberpark is surrounded by residential condominiums, and the area has become a popular shopping and night-life destination, helping Megaworld get added income from real-estate sales.

In a recent report, CLSA Asia-Pacific Markets said Megaworld's "affordable to medium-cost" housing subsidiary Empire East also is positioned to cater to call-center agents' housing needs with high-rise developments in Manila and house and lot packages in the southern Luzon areas of Cavite and Laguna. Cavite and Laguna provinces, which border the metropolitan Manila area, are becoming popular places for commuters to live.

Both CLSA and BNP Paribas call Megaworld's stock a buy. BNP Paribas has a 12-month target price of 1.46 pesos, or about three U.S. cents, on the company, and Mr. Bancod says he might lift that target. The shares shed 4.7% yesterday to close at 1.22 pesos.

Megaworld stock also is reasonably attractive on a price-to-earnings basis, some analysts say. BNP Paribas calculates the company has a P/E ratio of 15 times estimated 2004 earnings of 674 million pesos, compared with a ratio of 21.5 times for rival developer Ayala Land.

Megaworld hopes to replicate its Eastwood City project on two other Metro Manila sites: one near the central business district and the other close to the international airport. Combined, these two projects are roughly twice the size of Eastwood City, which has contributed 75% of Megaworld's real-estate sales during the past few years.

"We're increasingly convinced that Megaworld has the potential to become a much bigger company five or seven years down the road," Mr. Bancod says.

However, competitors have been getting in on the act. Ayala Land is developing a building specifically for Nasdaq-listed call-center firm PeopleSupport in the central business district and is scouting other locations.

CLSA estimates that by next year, Megaworld will accommodate 15% of call-center and outsourcing businesses in the Philippines, with Ayala Land servicing 8%.

The call-center boom has pushed office rents up across the board, not just at developments such as Eastwood City. The cost of prime office space in Manila's business districts climbed an annual 5.8% in the second quarter, according to real-estate valuers CB Richard Ellis.

Ayala Land, which also operates shopping malls in such areas, is seeing an increase in business from the growing number of call-center employees in the city.

CLSA calculates that the aggregate annual disposable income from call-center workers totaled $75 million in 2003, and expects this will increase to about $330 million by 2006.

Shopping mall developer SM Prime Holdings is another likely beneficiary of this new-found spending power. BNP Paribas, which expects SM Prime's stock to outperform the market, has a target price of eight pesos a share over the next 12 months. The shares closed unchanged yesterday at 6.70 pesos.

The Philippine Stock Exchange is still waiting for a call-center company to be listed. The most likely candidate is eTelecare International, a leading local call center with operations in the Philippines and the U.S.

The company could list some shares in Manila later this year "by way of introduction" -- a quirky local rule introduced in 2003 that enables companies to first list a limited quantity of shares and later make a full public offering.

BNP Paribas has estimated that eTelecare could be worth at least $120 million when it lists. "And if the industry's expected growth materializes, eTelecare could easily turn into a $300 million to $400 million company in two to three years," the brokerage firm said.

A successful listing by eTelecare "will most certainly encourage others to come into the market as well," BNP Paribas predicts.

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