Philippine Markets Newsletter

Available in stores near you! This food company emptied aisles through its growth initiatives, achieving a Uniform ROA of 6%, not 5%

May 25, 2022

This food and beverage company capitalized on its initiatives to continue to grow amid the pandemic. However, looking at its as-reported data, it looks like these plans aren’t earnings accretive.

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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Incorporated in 1954, Universal Robina Corporation (URC:PHL) has blossomed into one of the largest food and beverage companies in the Philippines, becoming home to some of the most popular snacks in the country—Jack ‘n Jill, C2, and Great Taste.

As we’ve noted before, one of the keys to the company’s success is its intense focus on brand marketing. Besides that, URC also focused on strengthening its portfolio through its growth initiatives.

Even when the pandemic hit, the company continued to expand through its Innovation Process Management (IPM) plan, particularly its “Grow the Core” and “Expand For More” strategies.

With these initiatives, URC prioritized and improved its core categories by identifying consumer needs through customer engagement activities. This included divesting low-performing business ventures.

Specifically, the company profitably sold its Oceania business in 2021, leaving Snack Brands Australia and Griffin’s New Zealand in the hands of URC’s former partner, Intersnack. This transaction helped URC steer its way back to its main business line.

Another part of the company’s growth targets included entering into new categories, improving existing brands, and developing new products through innovation and acquisitions.

URC isn’t new to the world of acquisitions; it had acquired and partnered with several companies, namely, Calbee and the recently divested Griffin’s Food Company. These acquisitions further solidified its position in other snack foods.

In 2021, URC acquired Crunchy Foods (Munchy’s), one of the leading biscuits manufacturers in Malaysia, for PHP 22.9 billion.

Thanks to its strong position internationally, especially in the ASEAN markets, Munchy’s is expected to easily gain scale and expand its footprint in the Philippines. On top of that, the Munchy’s acquisition will enable URC to premiumize its brand image in the long run.

Shifting to its focus on product development, URC’s new products have also been vital to the company’s profitability, contributing around 6%-8% of the company’s total sales in the past two years. Some of these products include the Cream-O Cake Bar, X.O. Milk Tea candy, and C2 Plus Immuno-C—to name a few.

URC even obtained two new sites to reinforce its production lines, achieving a more sustainable supply chain network going forward.

With the company’s growth plans in place, URC looks like it is already on the path to full recovery from the pandemic. However, looking at as-reported metrics, it appears that the company is unable to capitalize on these initiatives, with return on assets (ROAs) barely reaching cost of capital levels in recent years.

In reality, the company’s performance actually fared better than expected, with Uniform ROAs reaching a Uniform ROA of 6% in the past three years.

One of the reasons for the distortion between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of goodwill on URC’s balance sheet. The company’s goodwill sits at about PHP 23.1 billion in recent years, which was approximately 15% of its total assets, stemming from the acquisitions over the course of its operations.

Goodwill is an intangible asset that is purely accounting-based and unrepresentative of the company’s actual operating performance. When as-reported accounting includes this in a company’s balance sheet, it creates an artificially inflated asset base.

As a result, as-reported ROAs are not capturing the strength of URC’s earning power. Specifically, if we remove goodwill along with the other necessary adjustments in Uniform Accounting in 2021, Universal Robina Corporation should be recognizing PHP 12 billion less in assets and a 6% Uniform ROA.

URC’s recent earning power is stronger than you think

As-reported metrics distort the market’s perception of the firm’s recent profitability. If you were to just look at as-reported ROA, you would think that the company is a weaker business than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been mostly understated over the past seven years. For example, as-reported ROA was 5% in 2021, but its Uniform ROA was actually higher at 6%.

URC’s earnings margin is weaker than you think

As-reported metrics significantly overstate Megaworld Corporation’s profitability trends.

For example, as-reported EBITDA margin for the company was 43% in 2021, higher than Uniform earnings margin of 29%, making the firm appear to be a much stronger business than real economic metrics highlight.

SUMMARY and Universal Robina Corporation Tearsheet

As our Uniform Accounting tearsheet for Universal Robina Corporation (URC:PHL) highlights, the company trades at a Uniform P/E of 25.9x, around the global corporate average of 24.0x, but below its historical average of 36.0x.

Moderate P/Es require moderate EPS growth to sustain them. In the case of URC, the company has recently shown a 19% 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, URC’s sell-side analyst-driven forecast is to see Uniform earnings growth of 17% and 16% in 2022 and 2023, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify URC’s PHP 106.50 stock price. These are often referred to as market embedded expectations.

URC is currently being valued as if Uniform earnings were to grow 5% annually over the next three years. What sell-side analysts expect for URC’s earnings growth is above what the current stock market valuation requires through 2023.

Furthermore, the company’s earning power is above the long-run corporate average, and cash flows and cash on hand are also 3x the total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a low dividend risk.

To conclude, URC’s Uniform earnings growth is above its peer averages, and the company is trading well 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!


Angelica Lim
Research Director
Philippine Markets Newsletter
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