Philippine Markets Newsletter

Aseana City became this company’s source of income, achieving a Uniform ROA of 7%, not 5%

June 7, 2023

Land reclamation isn’t a modern concept in the Philippines—Manila City experienced its fair share of reclamation activities as early as the Spanish colonial period to make space for a port. And this real estate industry is continuing that practice by continuously developing its “Next Generation City.”

However, as-reported metrics do not show the benefits of this strategy, achieving only meager returns in the process.

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 earliest reclamation within Metro Manila started during the Spanish colonial period in the 19th century. Since then, the city has had about 25 projects that aimed to reclaim more than 10,000 hectares of land in Manila Bay from Navotas City to Cavite province despite heavy criticisms from several environmental groups.

In 1977, the Bay City was constructed under the supervision of the Public Estate Authority (now Philippine Reclamation Authority). The initial plan was to reclaim 3,000 hectares of land in Manila Bay. However, they were only able to build 660 hectares, which encompassed Pasay, Paranaque, and some parts of Manila.

Included in the significant developments in the Bay City are the Cultural Center of the Philippines Complex, SM Mall of Asia, Entertainment City, and Aseana City.

In today’s world where high productivity is praised and rest is frowned upon, citizens tend to have that growing desire of looking for a place to slow down in an urban environment instead of a rural setting.

This is what Aseana City has been aiming for, targeting families and individuals who want to experience adequate living standards but still have access to all modern amenities and popular public places.

Developed by D.M. Wenceslao and Associates (DMW:PHL), Aseana City is now named as the “Next Generation City,” sporting its vibrant mixed-use development that spans a formidable 108 hectares. D.M. Wenceslao even recognized Metro Manila’s lack of people-centric urban designs as it made it its mission to adopt a more people-friendly approach. 

This goal will come to fruition with the development of Parqal, a five-hectare mixed-use development that focuses on walkability and convenience for its market. This project will serve as Aseana City’s flagship spine for its sidewalk masterplan.

Additionally, the city has convenient linkages to the NAIA Expressway, LRT Line 1 Extension, and the Parañaque Integrated Terminal Exchange (PITx).

Most recently, D.M. Wenceslao signed a lease contract with St. Luke’s Medical Center, Inc. (SLMC) for a chunk of land in Aseana City. This agreement alone could entice potential tenants or customers because having immediate access to top-notch healthcare facilities is actually a need for those living within the area.

Besides focusing on the healthcare side, D.M. Wenceslao also signed a lease contract with Landers, one of the largest membership shopping chains in the country. The success of this project could mean a recurring income-accretive to D.M. Wenceslao.

Overall, the company’s partnership and expansion initiatives appear to be pushing it in the right direction.  However, looking at its as-reported data suggests that its strategies have not been accretive to the business.

In reality, the company’s Uniform ROA was actually able to reach above cost-of-capital levels at 7%, as compared to its as-reported ROA of 5%.

What as-reported metrics fail to consider is how current liabilities are factored into the ROA calculation. Traditional ROA calculations for measuring a firm’s earning power only include current and long-term assets as part of the cost of investment. 

However, a company’s ability to receive goods and services in advance of payments – the current operating liabilities – ought to be factored in as well.

Current liabilities (excluding short-term debt) are necessary for operations. Items such as accounts payable, accrued expenses, and others are used to maintain the firm’s current capital position. On the other hand, long-term liabilities are mostly just used to finance the business.

If a company has a ton of cash to service its current liabilities and we only factor in its cash, it would make the company look inefficient. In reality, the company is just being responsible by building liquid assets to meet short-term obligations. 

As such, net working capital (current assets – current liabilities) is used for the firm’s ROA calculation. This shows a company’s real cash management ability and thereby, its true earning power.

In the case of D.M. Wenceslao, as-reported metrics’ asset base for ROA calculation is at PHP 30.2 billion in 2022, leading to a 5% as-reported ROA.

However, when subtracting current operating liabilities and applying other needed adjustments, we arrive at D.M. Wenceslao’s PHP 38.6 billion Uniform assets, resulting in a 7% Uniform ROA.

D.M. Wenceslao’s profitability is much more robust than you think

As-reported ROA can distort the market’s perception of a firm’s profitability. For example, D.M. Wenceslao’s as-reported ROA did not climb past 6% in the last seven years, hovering between 3%-6%. 

However, a more accurate picture of the company’s profitability can be obtained by using Uniform Accounting, which adjusts for certain accounting choices that can artificially inflate or deflate ROA. 

Using Uniform ROA, we can see that D.M. Wenceslao’s profitability was actually between 7%-10% for the past seven years, which suggests that the company’s profitability has been stronger than as-reported metrics show.

SUMMARY and D.M. Wenceslao Tearsheet

As our Uniform Accounting tearsheet for D.M. Wenceslao & Associates, Incorporated (DMW:PHL) highlights, the company trades at a Uniform P/E of 12.5x, below the global corporate average of 18.4x, but around its historical P/E of 12.6x.

Low P/Es require low EPS growth to sustain them. In the case of D.M. Wenceslao, the company has recently shown a 5% Uniform EPS growth.

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, D.M. Wenceslao’s sell-side analyst-driven forecast is to see a Uniform earnings decline of 3% and immaterial growth 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 D.M. Wenceslao’s PHP 6.75 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink by 9% annually over the next three years. What sell-side analysts expect for D.M. Wenceslao’s earnings growth is above what the current stock market valuation requires through 2024.

Moreover, the company’s earning power is only 1x the long-run corporate averages. However, cash flows and cash on hand are 4x the total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low dividend risk.

To conclude, D.M. Wenceslao’s Uniform earnings growth is in line with its peer averages and 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!


Angelica Lim
Research Director
Philippine Markets Newsletter
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