Philippine Markets Newsletter

Education seems to be the key for this holding company, unlocking Uniform profitability of more than double what as-reported metrics highlight

August 8, 2023

With the resumption of full face-to-face classes, educational institutions are expected to benefit from the surge of enrollment. This holding company rides this wave by increasing its presence in the education sector and becoming the country’s largest private education network.

Despite this, as-reported metrics distort its TRUE profitability at just 4% versus its Uniform profitability of 9%.

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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Established in 1957, PHINMA Corporation’s (PHN:PHL) operations originated in construction and cement production through the acquisition of a cement plant from Cebu Portland Cement Company. Over time, the company expanded into diverse sectors such as energy, property development, and education.

Early this year, PHINMA Corporation raised its stake in its education and hotel segment as a response to the growing value of these businesses along with the easing mobility restrictions. The company purchased shares and assets from its parent company, PHINMA Inc., worth PHP 2.8 billion.

Through the company’s education arm, PHINMA Education Holdings, Inc., the company shifted its focus to education as one of its core businesses. This transformation began with the acquisition of Araullo University in Nueva Ecija in 2004. Subsequently, the company acquired eight more tertiary institutions in the Philippines and one in Indonesia.

In 2022, PHINMA Education saw a 10% increase in revenue to PHP 4.1 billion. Consolidated revenues for the company achieved a 10% growth, reaching PHP 17.7 billion, compared to the previous year of PHP 16.1 billion.

PHINMA Education also became the country’s largest private education network in terms of student population, with a 32% increase from 94,000 to 124,500 students for the 2022-2023 school year. This was the result of the company’s initiative to provide affordable and accessible education.

This initiative aligns well with the current landscape of tertiary education in the country. The Commission on Higher Education (“CHED”) reported a significant enrollment increase from 2.9 million in 2017 to 4.1 million in 2022, attributed to free college tuition.

PHINMA Corporation collaborated with Bukas, an education financing platform, to assist financially challenged students in affording tertiary education back in late 2022. This partnership led to improved student retention in both the Philippines and Indonesia.

However, the company’s financial performance faced challenges from macroeconomic headwinds and from the revision in school opening schedule. Net profit declined by 18.7% to PHP 1.53 billion due to higher raw material costs and a strong US dollar.

Despite these challenges, PHINMA Corporation’s growth strategy of raising its stake in its education and hotel segments is expected to yield positive results with the reopening of the country’s economy. As-reported metrics, however, understate the company’s ability with ROAs only reaching 4% in 2022.

In reality, Uniform ROAs achieved 9% as a result of its continued dedication of offering affordable and accessible quality education.

One of the said distortions stems from how Philippine Financial Reporting Standards (PFRS) classifies PHINMA Corporation’s non-operating long-term investments.

Composed mostly of long-term financial securities and non-controlling ownership interests, these are not considered to be core to the company’s operations since the firm has no management influence on either of these.

As such, removing non-operating long-term investments from the balance sheet and with the other adjustments Valens makes, PHINMA Corporation’s Uniform earning power has actually been more than 2x as-reported ROA.

Specifically, in 2022, the company recorded non-operating long-term investments at PHP 3.8 billion. Removing non-operating long-term investments from the balance sheet, along with many other necessary adjustments made by Valens, leads to a PHP 22.2 billion Uniform Net Assets and a 9% Uniform ROA, versus 4% as-reported ROA.

PHINMA Corporation’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 PHINMA Corporation’s profitability has been weaker 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 4% in 2022, but its Uniform ROA was actually higher at 9%.

SUMMARY and PHINMA Corporation Tearsheet

As our Uniform Accounting tearsheet for PHINMA Corporation (PHN:PHL) highlights, the company trades at a Uniform P/E of 10.1x, below the global corporate average of 18.4x, but around its historical P/E of 9.2x.

Low P/Es require low EPS growth to sustain them. In the case of PHINMA Corporation, the company has recently shown a 22% 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, PHINMA Corporation’s sell-side analyst-driven forecast is to see Uniform earnings grow by 6% and decline by 10% 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 PHINMA Corporation’s PHP 19.50 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 11% annually over the next three years. What sell-side analysts expect for PHINMA Corporation’s earnings growth is above what the current stock market valuation requires through 2024.

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

Lastly, PHINMA Corporation’s Uniform earnings growth is around its peer averages, and is trading 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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