Death has been this company’s lifeline for years, reaching a Uniform ROA of 7%, not 4%
Deathcare has become a huge investment for people around the country, especially when the pandemic hit.
However, as-reported financials show that the company is only producing near cost-of-capital returns, when in fact, it is showing better profitability.
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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Dying is not cheap.
Inflation hasn’t been only affecting lifebound aspects, but also the Philippines’ ever-growing death population.
According to one of the country’s leading death care businesses, Golden MV Holdings, Inc. (HVN:PHL), it is estimated that the cheapest funeral costs range from PHP 8,000 to PHP 15,000, while the most expensive costs range from PHP 300,000 to PHP 500,000.
However, despite the high costs, death care is still a huge investment for forward planning citizens of the country.
That is why Golden Haven remains somewhat profitable post-pandemic, with revenues only decreasing 4% from PHP 5.2 billion in 2021 to PHP 5.0 billion in 2022.
The company is planning to improve this by continuing to pursue an aggressive growth strategy for its new memorial park developments.
For one, Golden Haven Memorial Parks Inc., a subsidiary of Golden Haven, announced that it has started the construction for a new crematorium at Golden Haven Zamboanga. This marks Zamboanga’s first crematorium facility, importing two crematory machines that will lessen smoke emissions during the cremation process.
Another milestone is the development of the Golden Haven Pet Crematorium, which will be launched at its flagship projects in Las Piñas.
While the company is already known for having a comprehensive deathcare facility, this development will further seal the deal as it continues to take into consideration the diverse needs of the community.
Besides its expansion initiatives, Golden Haven has also delved into the digital world by bringing its business online. According to the company’s CFO Estrellita Tan, transactions can now be made through its website, making it more convenient for clients and investors.
Overall, while deathcare is a tough business to swallow, its continued success with its expansion initiatives might just boost this company’s profitability upward.
Golden Haven’s earning power is stronger than you think
As-reported metrics understate Golden Haven’s performance with ROAs only reaching 4% in 2022.
In reality, Golden Haven reached a higher Uniform ROA of 7%.
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 Golden Haven, as-reported metrics’ asset base for ROA calculation is at PHP 28.0 billion in 2022, leading to a 4% as-reported ROA.
However, when subtracting other current liabilities of PHP 4.6 billion and applying other needed adjustments, we arrive at Vistamalls’ PHP 22.5 billion Uniform assets, resulting in a 7% Uniform ROA.
Golden Haven 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 Golden Haven, as-reported asset turnover has been almost consistently lower than Uniform asset turnover for the past nine years, giving the company a lower asset efficiency score than actual economic measures indicate.
Moreover, during the past nine years, as-reported asset turnover never broke past 0.4x. In comparison, Uniform turns have reached a high of 0.8x over the same time period, making Golden Haven appear to be a less efficient business than real economic metrics highlight.
SUMMARY and Golden MV Holdings, Inc. Tearsheet
As our Uniform Accounting tearsheet for Golden MV Holdings, Inc. (HVN:PHL) highlights, the company trades at a Uniform P/E of 354.6x, which is above the global corporate average of 22.4x and its historical P/E of 253.2x.
High P/Es require high EPS growth to sustain them. In the case of Golden Haven, the company has recently shown a 14% 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, Golden Haven’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 2% in 2023 and grow immaterially in 2024.
Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Golden Haven’s PHP 880.00 stock price. These are often referred to as market-embedded expectations.
The company is currently being valued as if Uniform earnings were to grow by 77% annually over the next three years. What sell-side analysts expect for Golden Haven’s earnings growth is above what the current stock market valuation requires through 2024.
Moreover, the company’s earning power is more than the long-run corporate average. Cash flows and cash on hand are below its total obligations. Moreover, intrinsic credit risk is 80bps above the risk-free rate. Together, this signals a low credit risk.
Lastly, Golden Haven’s Uniform earnings growth is below its peer averages, while its Uniform forward P/E is 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!
Regards,
Angelica Lim
Research Director
Philippine Markets Newsletter
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