Philippine Markets Newsletter

Building and innovating its network enabled this home retail company to more than just break even with a Uniform ROA of 7%, not 6%

February 1, 2023

As a giant in the home improvement retail front, this company was able to capitalize on the effects of the pandemic through expansion and innovation. However, as-reported metrics show that it is only generating modest 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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Home improvement retailers were one of the winners during the pandemic, as consumers stuck at home began investing in their own personal spaces where they will be spending most of their time.

Established in 2013, AllHome Corporation (HOME:PHL) is a one-stop shop that offers broad and comprehensive products varying from construction, furnishing, everyday home essentials, and many others.

The retailer started with four stores and approximately 23,000 sqm of net retail space in Mega Manila and Pampanga. As of 2021, it has 57 stores and a net selling area of 297,469 sqm, and is planning on expanding in key cities and emerging urban centers outside the National Capital Region.

The challenges brought by the pandemic served as a catalyst to improve the company’s performance and efficiency by integrating global business and consumer trends into its strategies. This led to the company recording PHP 14.3 billion in revenue in 2021, which is a 15% increase from PHP 12.4 billion in 2020.

On top of that, AllHome has begun working to revolutionize its customers’ digital experience by optimizing its omnichannel strategy through the following:

  • Zendesk – a customer service omnichannel ticketing tool that caters to customer concerns and inquiries.
  • MoEngage – customizes digital marketing campaigns to target customers, monitors conversion rates from website visits to sales, and measures the campaign’s ROI.
  • Click & Collect service – caters to customers who prefer to shop online or over the phone and pick up the items in the nearest store.

These enhancements to the company’s omnichannel capability led to e-commerce contributing to 11% of the company’s sales by the end of 2021.

Overall, AllHome looks positioned to thrive in the home retail improvement space in the Philippines, given its focus on innovation.

However, looking at as-reported metrics, it appears that the company is barely making a profit, with return on assets (ROAs) of just 6% in 2021.

In reality, Uniform Accounting shows that the company’s focus on its expansion and product development strategies has generated higher returns, with Uniform ROAs above break-even at 7%.

One of the distortions stems from how Philippine Financial Reporting Standards (PFRS) classifies interest expense.

According to PFRS, interest expense is an operating cash flow. In reality, interest expense represents the cost of debt and is rightfully a financing cash flow. As such, in Uniform Accounting, interest expense is added back to earnings.

For example, in 2021, AllHome recognized an interest expense of PHP 391 million, which is 28% of as-reported net income of PHP 1.4 billion. When we add the PHP 391 million back to earnings, because it is not an operating expense, net income increases. This adjustment alone results in a higher Uniform earning power at 7%.

AllHome’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 AllHome’s profitability has been weaker than real economic metrics have highlighted in the past three years.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated. For example, as-reported ROA was 6% in 2021, but its Uniform ROA was higher at 7%.

SUMMARY and AllHome Corp. Tearsheet

As our Uniform Accounting tearsheet for AllHome Corp. (HOME:PHL) highlights, the company trades at a Uniform P/E of 14.5x, which is below the global corporate average of 18.4x and its historical P/E of 24.9x.

Low P/Es require low EPS growth to sustain them. In the case of AllHome, the company has recently shown a 27% 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, AllHome’s sell-side analyst-driven forecast calls for a 30% Uniform EPS shrinkage and a 40% Uniform EPS growth 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 AllHome’s PHP 2.49 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 3% annually over the next three years. What sell-side analysts expect for AllHome’s earnings growth is below what the current stock market valuation requires in 2022, but above that requirement in 2023.

Furthermore, the company’s earning power is 1x the long-run corporate average. However, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals average dividend and credit risk.

Lastly, AllHome’s Uniform earnings growth is in line with peer averages in 2022, and the company is also 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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