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WLCON may be heading for a correction

Year-to-date Wilcon Depot (WLCN) has risen 93.03%. The market has placed a significant premium on WLCON. Its resiliency against the pandemic gave WLCON the premium. Despite the pandemic, WLCON has shown robust results, and the company is aggressively expanding.

At the current price, the market has valued WLCON at 50.85 times earnings. At 30 Pesos a share, it has a dividend yield of 0.4%.

WLCON’s aggressive expansion is now slowly straining its fortress balance sheet. Nine-month cash flow from operations for 2021 is down 50% as compared to 2020. The increase in merchandise inventory requirements due to expansion is eating up the cash flow from operation. While cash from operations declined, lease payments increased.  The cash from operations of 1.2 Billion was just enough to cover the lease payments of 1.1 Billion.

WLCON is now tapping its short-term investments to fund capital expenditures for expansion.

WLCON is planning to continue its expansion plans and open more branches and depots.  WLCON is anticipating that the easing of restrictions will spur more home improvements.

It is a dangerous bet as the easing of restrictions may pivot consumer money from home improvements to leisure.  If the anticipated home improvements spending does not materialize, WLCON may be heading for a significant correction.

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