What's brewing at the Cebu Country Club?

Even before the Notice of Special Membership Meeting was published in the local newspapers last Wednesday, I had been getting queries by phone and in person on my opinion of the Cebu Country Club's plan to double the number of shares to 1600 from the present 800 shares, and to use the proceeds, to rebuild the clubhouse/ renovate the golf course to the tune of a few hundred million.

I had presumed I was asked, being a voting member of the Club. Some queries however, were concerned about the viability of the investment to the club and to its members and to the potential new investors. I was out of town for a few days, and when I opened my email Thursday evening, there were already a lot of chatter on this CCC issue among the members, so it seems this is an interesting topic to a lot of people.

To the non-voting members who are asked to attend, to those who asked me but were not clear about my answer or I had not answered, I will do my best to put this in perspective. To others, especially my former students in UP in financial and investment management years ago, take this as part of your continuing education. As an opinion writer of The Freeman, I have and I give a studied opinion.

The issue is whether it is good for CCC, its current members, and the potential members to issue more shares to rebuild the clubhouse/renovate the golf course. At the outset, the issuance of more shares will automatically dilute the value of the CCC shares since there are now more shares owning the net assets of the club. This is simple math in that the denominator doubled, so the per share value will be halved. This could be mitigated by the timing of the issuance of the additional shares, but eventually, the net asset value per share, at that point in time, will still be halved when all the additional shares are issued. The same dilution will affect the potential investor, so he should consider this in evaluating the asking price of the new shares. The potential price appreciation of the CCC shares will depend on the profitability of the CCC after it has rebuilt the clubhouse and renovated the golf course. If the CCC will raise P800 million, to get a 10 percent rate of return on this money, it should make P80 million net cash inflow per year, after expenses and after taxes for the next ten (10) years at least. This will make the shares appreciate since a comparable preferred shares of San Miguel Corp. or Double Dragon will get you a 7 percent yield per annum.

We now have to ask, does the CCC have the track record or the potential to earn this amount of net cash flow, especially because the national and local taxes will be increased with the new fixed assets that will be in place? And the CCC is not the only golf course in Cebu, nor is it the only venue for functions and events.

To the existing and potential CCC shareholders, if your current monthly cash flow is ten times your living expenses and your net worth is enough to cover the needs of your great grandchildren, you can afford the dilution and possible depreciation in share value, and need not bother yourself with an investment decision. Otherwise, you will have to consider that, if the CCC cannot deliver the profits and cash flow envisioned, the losses will erode even the capital appreciation of the real estate properties of the CCC. Then the value of the eroded net assets divided by the number of shares will lower the value per share.

To the club management, as had been suggested, a lot of pencil pushing/ analysis have to be done if the projected revenues and cash flow can be achieved, given the limitation of time and space in the usage of the golf course, (a maximum of 5000 rounds of golf per month), and the competition posed by the hotels, restaurants and other venues on food and beverage revenues.

Maybe a gradual renovation of the clubhouse and golf course can be done using a mix of internally generated funds and debt financing.

Recently, I picked up in a bookstore an old bestseller, "The Richest Man in Babylon" which sold over 2 million copies when it first came out years ago, and I bought 11 copies, because I remember this as the best introductory book on investment management, and I wanted to give copies to my children and some friends. Among other things that you will find in this book, is the concept of "cost of capital." Capital is not free but has a cost because you are foregoing the yield of an alternative investment; this is the cost of your capital. If I recall it right, this was also discussed in the book that former governor of Central Bank Jimmy Laya, co-written with his Stanford professor on the cost of capital. Another idea in this book is the concept of "core competence," which means we should be doing what we do best and ask competent advice on matters beyond us.

It is decision time for the CCC shareholders on the February 17 meeting at the CCC and for the CCC officers. I am wondering why the CCC is still calling for a special membership meeting on this issue if this have been approved by the voting members. Someone opined that it must be because it is legally contestable if a major decision, such as this issue can be decided only by the voting members, as even the non-voting members have a valid interest that may be prejudiced or damaged. This concern should be addressed to the lawyers.