This aviation services company is enjoying the clear skies piloted by pent-up consumer demand post-pandemic lockdowns.

However, its huge rebound seems to be underwhelming when looking at as-reported returns, which does not reflect its TRUE earning power.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Newsletter:
Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus
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Ever since regular travel returned, consumers have been engaging in “revenge spending” after a period of restraint. This pent-up demand was evident with the 8.3% year-on-year growth of personal consumption in 2022, when looking at the household final consumption expenditure.

Tourism, among other industries, greatly benefited from revenge spending. The total share of the sector in the gross domestic product (“GDP”) of the Philippines was 6.2% or PHP 1.38 trillion in 2022.

The Tourism Direct Gross Value Added (“TDGVA”), which is the indicator used to measure domestic tourism, increased 36.9% in 2022 from PHP 1 trillion in 2021.

In addition, gross value added from the air transportation sector reached PHP 78.9 billion in 2022, almost triple from PHP 28.33 billion the prior year.

Even though these numbers are still relatively lower than pre-pandemic TDGVA of PHP 2.48 trillion in 2019, we can say that tourism could see greater revenues for the coming years.

These metrics signal a brighter outlook for companies engaging in the tourism sector, specifically with the airline industry. This includes MacroAsia Corporation (MAC:PHL).

MacroAsia’s primary businesses are aviation-related support services which includes in-flight catering, ground-handling, and aircraft maintenance. For 2021, the company recorded a net loss of PHP 150.9 million as its catering segment revenues declined 38% from PHP 950 million to PHP 592 million.

This is due to the low meal count served from 4.5 million in 2020 to 2.9 million in 2021 as demand for air travel plummeted when travel restrictions were enforced globally.

However, MacroAsia had an overwhelming reversal when its net income soared 151% to PHP 461.4 million in 2022. Catering revenues significantly improved to PHP 2.3 billion or a 286% increase from the prior year, with 15 million meals served.

Other services such as ground-handling rose 93% to PHP 2 billion from PHP 1 billion in 2021 as the number of flights handled for the year nearly doubled from 70,457 to 134,262 flights in 2022.

Despite the huge year for its aviation related services, MacroAsia stated that it needs to grow its non-aviation related businesses such as its water operations. The segment’s revenues contributed 11% to its total income and grew 86% from PHP 277 million in 2021 to PHP 515 million in 2022.

Along with its water operations, the company also intends to revive its mining business as it plans to spend around $12.9 million for its Palawan nickel mine. The business is estimated to generate around $57 million per year from the projected 660,000 dry metric tons of ore production.

Overall, we can expect that MacroAsia will see continued growth in its aviation related services as the share of the tourism sector to GDP is projected to increase 7%-8% for 2023. Along with this, its water and mining operations should provide it with a balanced portfolio of business for the future.

MacroAsia’s earning power is stronger than you think

MacroAsia’s rebound from the effects of the pandemic seems to be underwhelming when looking at as-reported returns of barely 1%.

In reality, the company achieved higher Uniform returns of almost 2%, a much larger recovery from more negative returns in the previous years.

One of the said distortions stems from how Philippine Financial Reporting Standards (PFRS) classifies MacroAsia’s non-operating long-term investments.

Composed mostly of long-term financial securities and non-controlling ownership interests, these are not considered to be core to the company’s operations since the firm has no management influence on either of these.

As such, removing non-operating long-term investments from the balance sheet and with the other adjustments Valens makes, MacroAsia’s Uniform earning power has actually been 2x its as-reported ROA.

Specifically, in 2022, the company recorded non-operating long-term investments at PHP 2.7 billion. Removing non-operating long-term investments from the balance sheet, along with many other necessary adjustments made by Valens, leads to a PHP 7.5 billion Uniform Net Assets and a 2% Uniform ROA, versus 1% as-reported ROA.

MacroAsia has a more efficient business than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. For more than two decades, as-reported metrics have understated MacroAsia’s asset efficiency, a key driver of profitability.

Moreover, as-reported asset turnover has reached a peak of 0.5x during the last five years. In comparison, Uniform turns have reached a high of 0.9x over the same time period, making MacroAsia appear to be a less efficient business than real economic metrics highlight.

SUMMARY and MacroAsia Corporation Tearsheet

As our Uniform Accounting tearsheet for MacroAsia Corporation (MAC:PHL) highlights, the company trades at a Uniform P/E of 95.2x, above the global corporate average of 18.4x and its historical P/E of 72.2x.

High P/Es require high EPS growth to sustain them. In the case of MacroAsia, the company has recently shown a 92% Uniform EPS decline.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings and convert them to Uniform earnings forecasts. When we do this, MacroAsia’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 35% and decline immaterially in 2023 and 2024, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify MacroAsia’s PHP 4.01 stock price. These are often referred to as market-embedded expectations.

The company is currently being valued as if Uniform earnings were to grow by 33% annually over the next three years. What sell-side analysts expect for MacroAsia’s earnings growth is around what the current stock market valuation requires in 2023 but immaterial in 2024.

Moreover, the company’s earning power is below the long-run corporate averages. Furthermore, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends. Intrinsic credit risk is 1375bps above the risk-free rate. Together, this signals a high credit and dividend risk.

Lastly, MacroAsia’s Uniform earnings growth is above its peer averages; however, its Uniform forward P/E is below its average peer valuations.

About the Philippine Markets Newsletter
“Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under IFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one Philippine-listed company that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform Earnings Tearsheet on a Philippine company interesting and insightful.

Stay tuned for next week’s Philippine company highlight!

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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