This real estate corporation is tapping into the potential of using data science and artificial intelligence (“AI”) to stay one step ahead of its peers.

However, as-reported metrics still show weaker returns relative to its TRUE earning power, even with operational improvements from this recent strategy.

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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When we think of real estate companies, we often associate them with tangible activities such as land development and infrastructure building. These companies deal with physical materials and machineries to operate and run their businesses.

However, in the case of the property developer Megaworld Corporation (MEG:PHL), it’s setting its sights on investing heavily in AI and data science in the near future.

Megaworld is primarily in the development, leasing, and marketing of real estate properties. It is also known for its mixed-use “lifestyle malls” such as the Newport Mall in Pasay, Eastwood Mall in Quezon City, and the Venice Grand Canal Mall in Taguig.

In 2022, as the country recovered from the pandemic, Megaworld benefited from the rise in demand for residential properties and mixed-use developments. Real estate sales increased by 18% from the previous year to PHP 36.9 billion.

The corporation’s hotel operations also had a milestone year, with revenues up 35% to PHP 2.6 billion, the highest in its history. Consolidated revenues for the corporation were up 17% at PHP 60 billion.

As the pandemic accelerated digital transformation, many companies have adapted to flexible operations such as the digitization of internal operations. Megaworld recognized this development and aligned its business with the demand for higher technological integration from its consumers.

The company recently opened its Township Analytics and Technology (“TAT”) Lab, which is touted as the country’s first data science lab from a property developer. The lab’s focus is on using data science and AI to increase the level of safety and security in Megaworld’s townships nationwide.

The lab’s first accomplishment was its advanced accident detection system, which won the annual ASEAN Enterprise Innovation Awards. The system was designed to detect accidents seconds before they happen, which can trigger faster incident responses.

The TAT Lab has also partnered with Komunidad, a climate data analytics group, to implement a weather monitoring program. This aims to help people within Megaworld’s townships get accurate weather analytics for their specific area, as opposed to generic weather analysis for the whole region.

Looking ahead, Megaworld is allocating a PHP 350 billion capital expenditure program for the next five years. The program is focused on developing residential and mixed-use properties outside Metro Manila.

However, its as-reported metrics appear as if the corporation is not generating shareholder value, with return on assets (ROAs) reaching below cost of capital levels since 2006.

In reality, the company’s performance needs more credit as it profited much better than represented, with Uniform ROAs reaching a Uniform ROA of 5%.

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—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 for 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.

When current liabilities are subtracted from Megaworld’s assets, along with the many other necessary adjustments made, this leads to a 4% Uniform ROA in 2022.

Megaworld’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 the company is a weaker business than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been mostly understated beyond the past decade. For example, as-reported ROA was 3% in 2022, but its Uniform ROA was actually higher at 4%.

SUMMARY and Megaworld Corporation Tearsheet

As our Uniform Accounting tearsheet for Megaworld Corporation (MEG:PHL) highlights, the company trades at a Uniform P/E of 12.1x, below the global corporate average of 18.4x, but around its historical P/E of 13.4x.

Low P/Es require low EPS growth to sustain them. In the case of Megaworld, the company has recently shown a 12% 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, Megaworld’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 6% and 12% 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 Megaworld’s PHP 2.01 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 9% annually over the next three years. What sell-side analysts expect for Megaworld’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 below its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals moderate dividend risk.

To conclude, Megaworld’s Uniform earnings growth is in line with its peer averages and 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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