Philippine Markets Newsletter

Capturing a wide geographical presence and continuous developments has this real estate company building a Uniform ROA of 3%, not 2%

July 12, 2023

This company was able to further establish itself as a key player in the Philippine real estate market thanks to a combination of multiple project developments, effective investments, and strategic execution.

Despite the company’s efforts to increase its revenue and market share, as-reported metrics do not show the benefits of these strategies, 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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One of the most established property developers in the country, Filinvest Land, Inc. (FLI:PHL), has built a variety of commercial, residential, and leisure properties throughout the Philippines.

To differentiate itself, Filinvest Land focused on budget-friendly pricing, with a wide range of developments that caters to multiple income segments. Over the years, it has expanded its portfolio to include mid-rise and high-rise condominiums, BPO hubs, office buildings, shopping centers, and leisure developments.

This continuous expansion of housing projects throughout the country seems to be an effective strategy.

Reservation sales saw a 13% percent growth in 2022 for seven new residential projects in Rizal, Bulacan, Cavite, Pampanga, and Metro Manila. Revenues also grew from PHP 17 billion in 2021 to PHP 20 billion in 2022. This was mostly attributed to higher sales of housing projects in Cavite, Laguna, and Rizal and its medium-rise condo projects in Metro Manila and Davao.

Aside from its continuous growth and a large number of past and ongoing development projects, Filinvest Land’s investment on digital and online platforms back in 2018 is also paying dividends.

Focused on addressing the needs of homebuyers, the company developed online platforms such as the MyHome App, Customer Service Desk Online, and an E-Settle Payment Facility to aid in more seamless transactions.

Now, with the reopening of the economy, improvement in mall occupancy and foot traffic has helped Filinvest Land to more than double its mall rental revenues in 2022.

Looking ahead, Filinvest Land’s plans include entering the logistics and e-commerce warehouses sector, as well as developing co-living spaces this year. It has also added four new provinces as targets for the company’s residential property expansion to increase its geographical presence.

Yet, looking at as-reported metrics, it appears that Filinvest Land continues to struggle, with return on assets (ROAs) only reaching 2% in 2022.

In reality, the company’s Uniform ROA was actually a bit higher than that at 3%.

One of the said 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.

Specifically, in 2022, Filinvest Land recorded interest expenses at PHP 2.3 billion. Adding back this expense because it is not an operating expense, along with many other necessary adjustments made by Valens, leads to a PHP 5.1 billion Uniform Earnings and a 3% Uniform ROA, higher than its PHP 2.9 billion as-reported net income and 2% as-reported ROA.

Cross-comparison against peers also becomes possible since the performance, expectations, and valuations of companies are now evaluated irrespective of the amount of leverage.

Filinvest Land’s profitability is more robust than you think

As-reported ROA can distort the market’s perception of a firm’s profitability. For example, Filinvest Land’s as-reported ROA did not climb past 4% in the last decade, hovering between 2% to 4%.

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 Filinvest Land’s profitability was actually between 2% to 5% in the past ten years, which suggests that the company’s profitability has been stronger than as-reported metrics show.

SUMMARY and Filinvest Land, Inc. Tearsheet

As our Uniform Accounting tearsheet for Filinvest Land, Inc. (FLI:PHL) highlights, the company trades at a Uniform P/E of 22.1x, above the global corporate average of 18.4x, but around its historical P/E of 22.6x.

High P/Es require high EPS growth to sustain them. In the case of Filinvest Land, the company has recently shown a 127% 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, Filinvest Land’s sell-side analyst-driven forecast is to see a Uniform earnings decline of 26% and growth of 58% 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 Filinvest Land’s PHP 0.67 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 1% annually over the next three years. What sell-side analysts expect for Filinvest Land’s earnings growth is above what the current stock market valuation requires through 2024.

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

To conclude, Filinvest Land’s Uniform earnings growth is in line with its peer averages and above 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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