Philippine Markets Newsletter

By building a solid foundation, this real-estate titan continued to develop a more robust profitability with a Uniform ROA of 5%, not 3%

June 29, 2022

Despite many hurdles, the Philippine real estate industry has remained one of the most resilient industries. 

Looking at this real estate company, in particular, it may seem that it still has a long way to go for its profitability to reach pre-pandemic levels. However, Uniform Accounting tells a different story.

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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With the Philippines becoming a popular investment destination for BPO firms because of the industry’s young and competitive talent pool, the demand for the Philippines’ office space increased.

One of the companies that continues to capitalize on this growth in demand is Megaworld Corporation (MEG:PHL), a company that is focused on real estate development, leasing, and marketing. It focused on supplying office buildings to support BPO businesses during the development of its Eastwood City township in 1996.

On August 19, 1999, the company changed its name from Megaworld Properties & Holdings, Inc. to coincide with its transition to a holding company, though it remained focused on real estate development.

Among Megaworld’s known subsidiaries and associates are Eastwood Cyber One Corporation, Empire East Land Holdings, Inc., and Bonifacio West Development Corporation.

As mentioned in our previous Monday Marketing Marvels, Megaworld remained competitive through the years due to its innovation in property development and strategy to transition from traditional advertising to digital solutions.

To begin with, it was the first real estate company to offer flexible design options and payment plans to its target consumers, owing to the growing demand for communal township developments, particularly among middle-income buyers.

Furthermore, the company had also made a significant investment in digital marketing. Transitioning from traditional advertising to digital solutions, Megaworld’s marketing plan included using online promotions on social media, blogs, and websites.

With social media being the quickest and most cost-efficient method of distributing information, it aims to target its consumers that are practically already on social media.

With the real estate industry in the Philippines becoming more competitive, Megaworld is turning to social media to spread its ideas and stay ahead of the competition as a result.

Looking at as-reported metrics, it appears that Megaworld Corporation is not generating shareholder value, with return on assets (ROAs) reaching below cost of capital levels since 2006.

In reality, the company’s performance needs more credit as it profited much better than represented, with Uniform ROAs reaching a robust Uniform ROA of 5%.

One major contributing factor that has led to the misstatement of as-reported metrics is the failure to consider current liabilities in the profitability 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 for 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.

When current liabilities are subtracted from Megaworld’s assets, along with the many other necessary adjustments made, this leads to a 5% Uniform ROA in 2021.

Megaworld Corporation’s 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 beyond the past decade. For example, as-reported ROA was 3% in 2021, but its Uniform ROA was actually higher at 5%. 

Megaworld Corporation’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

Moreover, as-reported asset turnover has reached up to 45%, while Uniform earnings margins have yet to peak beyond 29% in the same time period, distorting the market’s perception of the company’s historical profitability trends.

SUMMARY and Megaworld Corporation Corporation Tearsheet

As our Uniform Accounting tearsheet for Megaworld Corporation (MEG:PHL) highlights, the company trades at a Uniform P/E of 14.5x, below the global corporate average of 20.6x and its historical P/E of 17.0x.

Low P/Es require low EPS growth to sustain them. In the case of Megaworld Corporation, the company has recently shown a 43% 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, Megaworld Corporation’s sell-side analyst-driven forecast is to see Uniform earnings shrink by 6% in 2022 and grow by 42% by 2023.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Megaworld Corporation’s PHP 2.37 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 Megaworld Corporation’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. Yet, cash flows and cash on hand are 2x above total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low credit risk.

To conclude, Megaworld Corporation’s Uniform earnings growth is below 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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