Philippine Markets Newsletter

Diversification is key to this conglomerate’s success, building Uniform returns of 5%, not 3%

September 6, 2023

Thanks to their diversified nature, the biggest conglomerates were able to withstand the impact of the pandemic by outperforming in most of their sectors.

One conglomerate, in particular, has focused on developing all of its sevices the past two years, and is currently reaping the rewards from all of its hardwork.

However, as-reported metrics doesn’t seem to believe that, showing returns of 3% while TRUE Uniform returns are at 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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In an earlier report, we discussed how San Miguel Corporation (SMC:PHL), one of the Philippines’ biggest conglomerates, was able to maintain its profitability despite several macroeconomic issues.

As a conglomerate, SMC spreading its business across other sectors enabled the company to achieve record consolidated group revenue in 2022. Besides SMC, another conglomerate that was able to weather the storm was Alliance Global Group, Inc. (AGI:PHL).

While the past two years was no doubt challenging for the company, Alliance Global was able to further improve its business by:

  • expanding its township developments through Megaworld Corporation (MEG:PHL);
  • strengthening its liquor distribution through Emperador Inc. (EMI:PHL);
  • improving hotel brands through Travellers International;
  • and increasing the number of restaurants across the country through Golden Arches.

For 2022, specifically, its real estate arm Megaworld was able to launch 20 projects that were valued at approximately PHP 45 billion. It also developed and improved its own customer service brand—the M.E.G.A. DNA—boosting its reservation sales to PHP 119 billion.

Emperador, on the other hand, has been busy expanding its global reach to Asia and North America. That, as well as the segment’s strong performance in the whiskey business, helped the company experience a record PHP 62.8 billion in sales during the year.

On top of that, Alliance Global’s recent acquisition of Travellers International pushed the company to rebrand Resorts World Manila, officially launching it as Newport World Resorts in 2022. This enabled it to host one of the biggest assembly of top-tier hotels in one area, including Marriott, Sheraton, and Hilton—to name a few.

Finally, its restaurant business, Golden Arches continued to develop its omnichannel customer experience services with its NXTGEN stores. It also opened 45 new McDonald’s stores, bringing the country’s total number of restaurants to 704 nationwide. Due to these initiatives, the segment garnered around PHP 61.1 billion in sales—a 31% increase from the previous year.

Overall, 2022 became a year of recovery for Alliance Global. Because of these developments, the company achieved an overall record-level revenue of PHP 183.6 billion in 2022, which is a 20% jump from last year’s PHP 152.8 billion.

Clearly, Alliance Global’s focus on its continued improvements with each sector is a step in the right direction, positioning it as one of the most successful conglomerates in the industry.

Alliance Global’s earning power is stronger than you think

Despite being all out with its transformation and growth initiatives, as-reported metrics still seem to understate Alliance Global’s efforts, distorting the company’s profitability with returns only showing 3%.

In reality, the company achieved higher Uniform returns of 5%.

Historically, one of the largest distortions for Alliance Global comes from the treatment of minority interest expenses or the income attributable to the non-controlling interests of a company’s subsidiaries.

The Philippine Financial Reporting Standards (PFRS) allow minority interest expense to be recognized under operating cash flow, leading people to incorrectly think that it is essential to the firm’s core operations.

In reality, it should always be classified as a financing cash flow. Minority shareholders provide capital to the subsidiary in exchange for a piece of the company’s profits. As a result, minority interest expense should not be subtracted from revenue when calculating a company’s real core earnings.

In 2022, Alliance Global recognized PHP 9.1 billion in minority interest expense, resulting in a PHP 16.1 billion net profit and a 3% as-reported ROA. Adding this back alongside the many other adjustments Valens makes, the company should actually be recognizing PHP 24.1 billion in Uniform earnings and a 5% Uniform ROA.

Alliance Global has a more efficient business than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. For more than two decades, as-reported metrics have understated Alliance Global’s asset efficiency, a key driver of profitability.

Moreover, as-reported asset turnover has reached a peak of 0.3x during the last sixteen years. In comparison, Uniform turns have reached a high of 0.7x over the same time period, making Alliance Global appear to be a less efficient business than real economic metrics highlight.

SUMMARY and Alliance Global Group Tearsheet

As our Uniform Accounting tearsheet for Alliance Global Group, Inc. (AGI:PHL) highlights, the company trades at a Uniform P/E of 14.2x, below the global corporate average of 18.4x and its historical P/E of 15.7x.

Low P/Es require low EPS growth to sustain them. In the case of Alliance Global, the company has recently shown a 36% 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, Alliance Global’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 46% and 19% 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 Alliance Global’s PHP 12.00 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 3% annually over the next three years. What sell-side analysts expect for Alliance Global’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 also below its total obligations—including debt maturities, capex maintenance, and dividends. Intrinsic credit risk is 310bps above the risk-free rate. Together, this signals high dividend risk.

Lastly, Alliance Global’s Uniform earnings growth is near its peer averages and its peer average 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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