Philippine Markets Newsletter

This well-diversified company added another business strategy to its roster, achieving a Uniform ROA of 4%, not 1%

December 28, 2022

Its diversification and digitalization strategy allowed this company to withstand the negative effects of the pandemic. However, as-reported metrics show that it wasn’t benefitting from its initiatives.

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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Ever since the pandemic began, companies were forced to adopt and manage certain changes in their processes.

One such company that was able to do this was Filinvest Development Corporation (FDC).

The company is one of the most well-diversified corporations in the Philippines, operating in real estate development (Filinvest Land, Inc.), banking (East West Banking Corporation), power (FDC Utilities, Inc.), and sugar businesses (Pacific Sugar Holdings Corporation). It also owns and manages hotels, resorts, and private membership clubs (Filinvest Hospitality Corporation).

We’ve noted before that this diversity in businesses helped Filinvest Development keep the company profitable in 2020 even as its hospitality and resort and real estate businesses suffered due to the pandemic.

As an added focus on its business strategy, the company wanted to solidify its footing by further establishing its digital innovations to accelerate and drive digitalization initiatives across its group during the health crisis.

Now, with the easing of mobility restrictions, Filinvest Development has realigned its strategies to strengthen its competitive advantage by constantly seeking digital opportunities while focusing on project expansions on its different businesses.

For its banking and financial services, the company launched Project Carbon Training to focus on enhancing the skills of its people so that they can create leads, engagements, and sales even without the need for face-to-face customer interaction.

Meanwhile, its real estate business embraced digital marketing aggressively. The segment even started using tools like drone videos, interactive images of unit interiors, as well as panoramic window views to increase their reservation sales.

On top of that, expanding and focusing on the renewables path while diversifying its current portfolio has been the way forward for its power and utility business. Filinvest Development aims to have a balanced portfolio of these services in response to changing business demands.

Specifically, the company’s power utility arm and ENGIE Services Philippines have recently made a partnership with Filinvest Land Inc. (FLI) to explore new projects with renewable energy generation facility installations in Pampanga and Laguna.

These various strategic digital and growth opportunities would make one think Filinvest Development has been successful in generating sustainable profitability despite the pandemic.

Yet, looking at as-reported metrics, it appears Filinvest Development has not benefited from its plans. As-reported return on assets (ROAs) show the company has produced little to no economic value for its stockholders, only reaching 1% in 2021.

In reality, Uniform Accounting shows that Filinvest Development’s initiative to adapt and diversify has generated better returns, with Uniform ROA reaching 4%.

What as-reported metrics fail to do is to consider the company’s excess cash on its balance sheet. While most companies inherently need some level of cash to operate, the portion of that balance that is earning limited or no return—or excess cash—ends up diluting as-reported ROAs.

When excess cash remains included in the company’s asset base in computing its performance metrics, the company’s profitability and capital efficiency may appear weaker than it actually is.

Removing excess cash allows investors to see through the distortions that come from management carrying much more cash on its balance sheet than what is operationally required.

For 2021, Filinvest Development had a significant amount of excess cash sitting idly in its balance sheet for up to 18% of its as-reported total assets.

Filinvest Development’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 Filinvest Development’s profitability has been a lot weaker than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated over the past sixteen years. For example, as-reported ROA was 1% in 2021, but its Uniform ROA was 4x higher at 4%.

Filinvest Development’s earnings margin is weaker than you think

For more than two decades, as-reported metrics have overstated Filinvest Development’s earnings margin, a key driver of profitability.

Moreover, Uniform margins have only reached 27%. In comparison, as-reported margins have already eclipsed beyond 34% over the same time period, making the company appear to be a more profitable business than real economic metrics highlight.

SUMMARY and Filinvest Development Corporation Tearsheet

As the Uniform Accounting tearsheet for Filinvest Development Corporation (FDC:PHL) highlights, the company trades at a Uniform P/E of 22.5x, above the global corporate average of 18.4x, but below its historical P/E of 27.5x.

Low P/Es require low EPS growth to sustain them. In the case of Filinvest Development, the company has recently shown a 24% 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, Filinvest Development’s sell-side analyst-driven forecast is to see Uniform earnings growth of 4% in 2022, but an immaterial growth in 2023.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Filinvest Development’s PHP 6.50 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 1% annually over the next three years. What sell-side analysts expect for Filinvest Development’s earnings growth is above what the current stock market valuation requires through 2023.

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

To conclude, Filinvest Development’s Uniform earnings growth is near peer averages, but currently trades 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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