Philippine Markets Newsletter

Coal tailwinds are heating demand for this mining company, rebounding to a Uniform ROA of 19%, not 15%

July 13, 2022

With inflation going upwards, the global market is affected as it continues to recover from the pandemic.

Meanwhile, this mining company not only found a way to rebound from the pandemic, but also capitalized on the current situation. However, its as-reported metrics did not fully capture the company’s TRUE return on assets (ROA).

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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What started out as a coal mining company in Semirara Island, Antique, became a successful vertically integrated coal-fired power plant after being acquired by DMCI Holdings, Inc. in 1998 through a debt-to-equity conversion.

After acquiring the Calaca power plant of the National Power Corporation (NPC), the company was subsequently renamed as Semirara Mining and Power Corporation (SCC:PHL).

Being the only power producer that has the exclusive rights to explore, extract, and develop its own fuel source on Semirara island, the company was able to generate affordable power for the Luzon and Visayas islands.

Although the company’s profitability would decline during the pandemic in 2020 due to a smaller output, Semirara has been experiencing various market tailwinds, helping the firm prosper ever since.

In 2021, the market experienced a fast economic recovery from China combined with supply disruptions as a result of planned closures of nuclear reactors in Europe. Because of these, demand for coal was pushed, resulting in doubling index prices.

The Average Newcastle (NEWC) coal prices expanded by 127% while the Average Indonesian Coal Index 4 (ICI4) grew by 122%, where around 40% and 60% of its sales volumes are benchmarked, respectively.

Thereafter, amounting to 73% of Semirara’s total coal sales in 2021, export coal sales of PHP 24 million for the company more than doubled from 2020 as the average selling price for coal skyrocketed by 71%.

Strong demand for coal seems to continue so far in 2022 as Australian production has been reported to be disrupted while Russian coal has been sanctioned amid its geopolitical conflict with Ukraine.

Meanwhile, its power segment saw lower plant output in 2021 due to initial quarantine restrictions. Fortunately, this was offset by the higher spot market rate, resulting in a surprising turnaround as standalone revenues improved by 28%.

Altogether, these prices contributed to high returns. Semirara recognizes that there is no assurance of their sustainability. Going forward, the company aims to mitigate risks that may negatively affect coal prices and coal supply such as market volatility and unfavorable weather conditions.

Looking at as-reported metrics, it appears that Semirara is generating healthy shareholder value levels, with return on assets (ROAs) recovering to historical peaks last seen in 2017.

In reality, the company’s profitability actually did better than presented, with Uniform ROAs performing better at 19%.

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—should also be factored in.

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 less 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 Semirara’s assets, along with the many other necessary adjustments made, this leads to a 19% Uniform ROA in 2021.

Semirara’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 Semirara’s profitability has been stronger than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been mostly understated over the past decade. For example, as-reported ROA was 15% in 2021, but its Uniform ROA was actually higher at 19%.

Semirara’s earnings margins are weaker than you think

Trends in Uniform ROA have been driven by trends in Uniform earnings margin and Uniform asset turns. Since 2006, as-reported metrics have significantly understated Semirara’s margins, a key driver of profitability.

Moreover, as-reported margins have reached 50%. In comparison, Uniform margins have yet to exceed 38% over the same time period, making Semirara appear to be a more efficient business than real economic metrics highlight.

SUMMARY and Semirara Mining and Power Corporation Tearsheet

As our Uniform Accounting tearsheet for Semirara Mining and Power Corporation (SCC:PHL) highlights, the company trades at a Uniform P/E of 8.1x, below the global corporate average of 19.7x and its historical P/E of 14.6x.

Low P/Es require low EPS growth to sustain them. In the case of Semirara, the company has recently shown a 797% 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, Semirara’s sell-side analyst-driven forecast is to see Uniform earnings growth of 35% in 2022 and a decline of 31% in 2023.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Semirara’s PHP 34.35 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 12% annually over the next three years. What sell-side analysts expect for Semirara’s earnings growth is above what the current stock market valuation requires in 2022, but below that requirement in 2023.

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

Lastly, Semirara’s Uniform earnings growth is well above its peer averages, but is trading 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.

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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