Philippine Markets Newsletter

Building upon its setbacks led this real estate firm to reach Uniform profitability higher than as-reported metrics highlight

March 29, 2023

This real estate firm is slowly building its way back from the effects of the pandemic. It did so while offering more affordable housing for Filipinos, turning disadvantages into opportunities.

This refocusing helped it reach Uniform ROA of 3%, 100 bps higher than what as-reported metrics show.

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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Century Properties Group, Inc. (CPG:PHL) is primarily involved in real estate development in the Philippines. It currently has a combined 1.8 million square meters of gross floor area of completed projects and over 47 buildings completed since establishment.

Historically, over 80% of revenues were generated from real estate development, mostly on residential projects within and outside Metro Manila.

Since its listing in the Philippine Stock Exchange in 2012, CPG has developed 29 buildings and completed an average of 2.8 residential projects annually. CPG has also spent PHP 6.8 billion in capital expenditures to fund projects since 2018.

As part of the property sector, CPG is susceptible to highly cyclical periods of developments and downturns. Thus, when the pandemic hit, real estate revenues for the firm declined by 25% for 2020.

Residential demand within Metro Manila was at a record low as leasing started slowing down due to low consumer confidence and demand. Local professionals opted to go back to their home provinces as a result of the pandemic-induced work-from-home setup.

This continued through 2021 where real estate revenues further decreased by 19% due to slowdown in operations brought by restrictions, primarily from vertical housing projects.

On the other hand, this gave way for its subsidiary, PHirst Park Homes, Inc. (PPHI) to take advantage of the rising demand for affordable first-homes as the country reopened with its projects within the fringes of Metro Manila.  

To date, the subsidiary showcased 10 projects in provinces just outside Metro Manila. This has a total combined value of PHP 26 billion comprising townhouse units and single attached units since its launch in 2018. 

Thanks to these affordable housing projects, the subsidiary’s revenue contribution increased from PHP 2.2 billion in 2020 to PHP 3.9 billion in 2021, more than half of CPG’s overall real estate revenue.

More recently, CPG announced that it is expanding its presence in this category by launching its new subsidiary, Century PHirst Corp. The subsidiary is primarily focused on diversifying the affordable housing options for first-time-homebuyers, still just outside of Metro Manila. It is also offering mixed-use developments such as commercial, retail and institutional components as part of the expansion.

The firm is currently on track to reverse its performance since the pandemic. Revenues for Q3 2022 increased by 37% mainly due to higher sales of their affordable housing projects during the period. Overall, CPG is slowly rebuilding its profitable position by turning the crisis into an opportunity to grow its business.

However, looking at the as-reported metrics, the company was shown to be less lucrative, only reaching 1.5% in 2021.

In reality, CPG has managed to offset the effects of the pandemic by focusing on opportunities outside Metro Manila and offering affordable housing. This has led them to reach a Uniform ROA of 2.5% in 2021.

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 CPG, as-reported metrics’ asset base for ROA calculation is at PHP 54.5 billion in 2021, leading to a 1.5% as-reported ROA.

However, when subtracting other current liabilities of PHP 5.4 billion, accounts payable of PHP 3.1 billion, and applying other needed adjustments, we arrive at CPG’s PHP 45.2 billion Uniform assets, resulting in a 2.5% Uniform ROA.

CPG’s profitability 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 that CPG’s profitability has been weaker than what real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROA has been understated since 2016. For example, as-reported ROA was 1.5% in 2021, but its Uniform ROA was higher at 2.5%.

CPG’s earnings margin is slightly weaker than you think, but its Uniform asset turns make up for it

Trends in Uniform ROA have been driven by trends in Uniform earnings margin, coupled with declining Uniform asset turns.

Uniform margins expanded from 2.6% in 2015 to an understated 8.4% in 2017, before slightly rising to 11.8% in 2021 making its as-reported margin slightly inflated at 14.3%. Meanwhile, Uniform turns remained stable at 0.2x levels since 2016.

SUMMARY and Century Properties Group, Inc. Tearsheet

As our Uniform Accounting tearsheet for Century Properties Group, Inc. (CPG:PHL) highlights, the company trades at a Uniform P/E of 14.2x, which is below the global corporate average of 18.4x and its historical P/E of 19.8x.

Low P/Es require low EPS growth to sustain them. In the case of CPG, the company has recently shown a 173% Uniform EPS shrinkage.

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, CPG’s sell-side analyst-driven forecast is to see a 42,603% Uniform earnings growth in 2022 and immaterial in 2023, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify CPG’s PHP 0.36 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 3% over the next three years. What sell-side analysts expect for CPG’s earnings growth is above what the current stock market valuation requires through 2023.

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

To conclude, CPG’s Uniform earnings growth is below its peer averages and it also currently trades 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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