Philippine Markets Newsletter

Coconuts are the key to this packaged foods company, reaching a Uniform ROA of 11%, not 5%

January 17, 2024

This packaged foods and meats company specializes in manufacturing and exporting coconut products to top-tier clients. However, as reported data doesn’t seem to think so with ROAs only reaching 5%.

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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The Philippines produces around 347 million metric tons of coconut fruit annually, making it among the top coconut exporters in the world.

One company that benefits from this is Axelum Resources (AXLM:PHL). 

For years, the company has been helping coconut farmers from CARAGA, Northern Mindanao, and Davao—which are within 200 kilometers of its main production facility, the Medina Plant—by purchasing their coconut products at a premium. The commodities in these locations account for 30% to 35% of the country’s total yearly harvests.

Axelum Resources then breaks this commodity down to produce its two main products: white meat and coconut water. 

White meat produces coconut milk powder, coconut cooking oil, and toasted coconut, while its coconut water segment is currently the major supplier of the world’s largest coconut water brand Vita Coco.

As a global distributor for these products, Axelum Resources is able to cater to famous local and international brands across the globe. Specifically, the company supplies 32 out of 72 major supermarkets in North America.

In order to efficiently enhance these business operations, the company adopted a QR-code warehousing system and launched a computerized maintenance management system. 

On top of that, Axelum Resources is set to accelerate its consumer segment by launching new products and embarking on brand-building campaigns to promote market awareness both domestically and overseas, particularly with the launch of its newest Fiesta Coconut Milk Powder.

With all of these in focus, the company achieved an 11% increase in sales from PHP 6.3 billion to PHP 7 billion in 2022.

Axelum Resources’ earning power is stronger than you think

However, as-reported metrics understate the abilities of Axelum Resources with ROAs only reaching 5% in 2022.

In reality, Axelum Resources reached a higher Uniform ROA of 11%.

One of the distortions between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of goodwill on Axelum Resources’s balance sheet. The company’s goodwill sits at about PHP 1.7 billion in 2022, which was approximately 15% of its total assets, stemming from the acquisitions throughout its operations.

Goodwill is an intangible asset that is purely accounting-based and unrepresentative of the company’s actual operating performance. When as-reported accounting includes this in a company’s balance sheet, it creates an artificially inflated asset base.

As a result, as-reported ROAs are not capturing the strength of Axelum Resources’ earning power. Specifically, if we remove goodwill along with the other necessary adjustments in Uniform Accounting in 2022, the company should be recognizing PHP 2.9 billion less in assets and an 11% Uniform ROA.

Axelum Resources has a more efficient business than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. The firm’s asset utilization, a critical factor in profitability, is also greatly distorted. 

For Axelum, as-reported asset turnover has been consistently lower than Uniform asset turnover for the past decade, giving the company a lower asset efficiency score than actual economic measures indicate.

Moreover, in the past four years, as-reported asset turnover never broke past 0.6x. In comparison, Uniform turns have reached a high of 1.0x over the same time period, making Axelum appear to be a less efficient business than real economic metrics highlight.

SUMMARY and Axelum Resources Corp. Tearsheet

As our Uniform Accounting tearsheet for Axelum Resources Corp. (AXLM:PHL) highlights, the company trades at a Uniform P/E of 10.8x, which is below the global corporate average of 18.4x and its historical P/E of 13.8x.

Low P/Es require low EPS growth to sustain them. In the case of Axelum Resources, the company has recently shown a 50% 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, Axelum Resources’ sell-side analyst-driven forecast is to see a Uniform earnings shrinkage of 10% and 2% 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 Axelum Resources’ PHP 2.30 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 14% annually over the next three years. What sell-side analysts expect for Axelum Resources’ earnings growth is above what the current stock market valuation requires through 2024.

Moreover, the company’s earning power is 2x the long-run corporate average. Cash flows and cash on hand are 4x its total obligations. Moreover, intrinsic credit risk is 440bps above the risk-free rate. Together, this signals a moderate credit risk.

Lastly, Axelum Resources’ Uniform earnings growth is below its peer averages, but its Uniform forward P/E being in line with 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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