Philippine Markets Newsletter

Affordability and adaptability remains to be this property behemoth’s core mission, building a Uniform ROA of 4%, not 2%

March 23, 2022

As one of the biggest real estate companies in the country, this real estate firm’s ability to adapt and provide through its pre-planned digitalization initiatives enabled it to sustain its operations during the pandemic.

However, looking at its as-reported metrics, it seems that doing so hasn’t been enough to achieve better returns.

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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The Philippines continues to face the same problems of housing costs amid a rapidly increasing population: a majority of Filipinos are unable to earn enough income to cover more than the basic necessities.

So with the growing population of homebuyers and investors looking for comfortable yet affordable homes in safe communities, an opportunity arises for real estate and property developers.

One real estate company already in the business of catering to all income is Vista Land & Lifescapes, Inc. (VLL:PHL).

To address the demand, the company developed its flagship brand, Camella, and its “communicities,” a type of property that combines essential and non-essential forms of establishments into one location.

To further diversify its portfolio, Vista Land also ventured into the retail and commercial segment by acquiring mall and office developer Starmalls Incorporated (STR:PHL) for PHP 33.5 billion in 2015.

Securing this transaction further enabled Vista Land to open its doors to potential partnerships with other real estate developers—including its collaboration with Japanese real estate developer Mitsubishi Estate Co. Ltd. (MEC).

All of these accomplishments set the company for continued growth—until the pandemic hit.

Since most people were forced to stay at home, real estate companies were also forced to adapt to the change by implementing their own digitalization initiatives.

Much like the Far Eastern University, Incorporated (FEU:PHL), Vista Land was already able to start investing in its technological infrastructure way back in 2019.

Currently, some of these innovations include:

  • the implementation of its Online Reservation Portal – allows access to Vista Land’s whole inventory
  • the expansion of its online payment choices – AllEasy and PesoPay
  • the transition to virtual property tours – Camella Virtual Gallery Tour and Virtual Project Tours

The company even improved its Search Engine Optimization (SEO) marketing initiatives to increase online product visibility.

Overall, the company’s digital positioning, coupled with its ability to capitalize on the growing desire of clients for affordable house and lot products, enabled Vista Land to keep its business afloat during the pandemic.

However, as-reported metrics don’t show that Vista Land was successful with its plans—with return on assets (ROAs) only reaching 2% in its current year.

In reality, the company’s resiliency and focus, as well as the execution of its technological plans, have led to better Uniform returns of more than 4%.

One of the said distortions for the discrepancy is due to the treatment of non-operating long-term investments according to the Philippine Financial Reporting Standards (PFRS).

Based on PFRS, non-operating long-term investments are part of the company’s balance sheet, but in reality, non-operating long-term investments are not essential to the firm’s assets and should be removed from the total assets.

For example, in 2020, Vista Land recognized a non-operating long-term investment of PHP 34.3 billion, accounting for 12% of its as-reported total assets of PHP 284.1 billion.

After removing the PHP 34.3 billion item from the asset base and with the many other necessary adjustments Valens makes, we arrive at a TRUE earning power of 4%.

Vista Land’s earning power is stronger than you think

As-reported metrics distort the market’s perception of the firm’s historical profitability. If you were to just look at as-reported ROA, you would think Vista Land’s profitability has been weaker than real economic metrics have highlighted in fifteen of the past sixteen years.

In reality, Vista Land’s true profitability has generally been higher than as-reported ROA since 2005. Specifically, Uniform ROA was 4% in 2020, but as-reported ROA was only 2% that year. Though this difference may seem small, it’s actually the difference between a profitable company and a company barely earning enough to cover its cost of capital.

Since 2005, as-reported ROA has ranged from 2%-5% levels through 2020, and is currently sitting at the lower end of that range.

Meanwhile, after expanding from 7% in 2005 to a peak of 10% in 2006, Uniform ROA declined back to 7% levels in 2009-2010. Thereafter, Uniform ROA improved to 9% in 2013, before compressing to 4% in 2020.

Vista Land’s earnings margin is weaker than you think

Trends in Uniform ROA have been primarily driven by trends in Uniform earnings margin.

As-reported margins declined from 35%-37% levels in 2005-2008 to 32%-34% levels in 2009-2014, before subsequently recovering to 41%-42% levels in 2017-2019. Thereafter, Uniform margins have compressed to 39% in 2020.

Meanwhile, Uniform margins expanded from 27% in 2005 to 34% in 2006, before compressing to 26% levels in 2008 and rebounding to 30%-31% levels in 2017-2019. Since then, Uniform margins have regressed to 26% in 2020.

Looking at the firm’s margins alone, as-reported metrics are making the firm appear to be a more cost-efficient business than is accurate.

SUMMARY and Vista Land & Lifescapes, Inc. Tearsheet

As our Uniform Accounting tearsheet for Vista Land & Lifescapes, Inc. (VLL:PHL) highlights, it trades at a Uniform P/E of 19.0x, below the global corporate average of 24.0x, but around its historical average of 18.2x.

Low P/Es require low EPS growth to sustain them. In the case of Vista Land, the company has recently shown a 55% Uniform EPS shrinkage.

Sell-side analysts provide stock and valuation recommendations that provide very poor guidance or insight in general. 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, Vista Land’s sell-side analyst-driven forecast calls for a 3% and 12% Uniform EPS growth in 2021 and 2022.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Vista Land’s PHP 2.81 stock price. These are often referred to as market embedded expectations.

Vista Land is currently being valued as if Uniform earnings were to shrink 3% annually over the next three years. What sell-side analysts expect for Vista Land’s earnings growth is above what the current stock market valuation requires in 2021 and 2022.

Furthermore, the company’s earning power is below the long-run corporate average, and cash flows and cash on hand are above total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a low dividend and credit risk.

To conclude, Vista Land’s Uniform earnings growth is near its peer averages, but the company is trading below its peer average 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!


Angelica Lim
Research Director
Philippine Markets Newsletter
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