Philippine Markets Newsletter

Expanding to different businesses helped boost this retail holdings company upward, reaching a Uniform ROA of 9%, not 5%

August 31, 2022

After evolving beyond its original purpose of oil and mineral exploration, this retail holding company has taken on major interests in areas such as grocery retail, real estate, and liquor distribution. 

However, as-reported metrics seem to show this company is just getting by despite being able to expand its products and range of businesses. On the other hand, Uniform Accounting shows that the business has better profitability in reality. 

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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The retail industry is still very much considered a growing market in the Philippines.  

As a response to the COVID-19 lockdowns, new distribution channels like online shopping rose in recent years. What was supposed to take another decade to grow suddenly evolved in less than two years like never before.  

In a report by PR Newswire, the retail industry in the Philippines is expected to grow by $70.67 billion from 2021-2026, with a CAGR forecast of 11.68%.

One retail holding company that is benefitting from this growth is Cosco Capital Inc (COSCO:PHL). 

Cosco is primarily engaged in the grocery and specialty retail, wine and liquor distribution, real estate, and oil and minerals businesses—holding shares in various businesses including Puregold Price Club Inc. (supermarkets), Ellimac Prime Holdings (real-estate), Meritus Prime Distributions (liquor distribution), and Pure Petroleum (oil storage tanks).

For its grocery store business, Cosco Capital posted P10.5 billion in net income for 2021, a 5% increase from the P10 billion recorded in 2020. 

This is attributable to the company’s changes in strategic initiatives and efficiency measures through enhancements in its cost management. 

Cosco Capital also continued to focus on organic expansion and the opening of more grocery stores, with the company introducing 30 new Puregold stores and two new S&R stores. This brought its Puregold Group’s network to a total of 499 stores. 

Externally, rising consumer demand from the reopening of the economy also drove sales upwards while strong supplier support despite inflation and rising commodity prices allowed for sustained growth by the company. 

Aside from strong performance in its grocery businesses, Cosco Capital also enjoyed an uptick in its liquor business. 

Keepers Holdings, the largest imported liquor distributor in the Philippines and one of Cosco Capital’s subsidiaries, experienced a 32% growth in revenues in 2021 stemming from the company’s various strategic cost control initiatives, as well as the strong performance of its imported whiskey Alfonso. 

In 2021, Cosco Capital signed a P500 million joint venture agreement with Siam Global House PLC (SIAM), a Thailand-based distributor of home construction materials and equipment. Reportedly, SIAM owns 55% of the venture, with Cosco Capital owning the remaining 45%. 

The deal aims for the construction of 3-5 one-stop warehouse stores in NCR. It also allows Cosco Capital to enter into the warehouse store space, immediately placing them in direct competition with established companies like Wilcon Depot (WLCON:PHL) and AllHome (HOME:PHL).

All in all, Cosco Capital’s willingness to expand its portfolio to span more industries and new businesses has not waned despite challenging macroeconomic conditions. However, looking at as-reported data, it seems that this strategy isn’t working too well for the company, with ROAs barely reaching above cost-of-capital levels.

In reality, Cosco Capital has been successful with these initiatives so far, with Uniform ROAs reaching 9% currently.

What as-reported metrics fail to do is to consider the company’s excess cash on the 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 the balance sheet than what is operationally required.

For 2021, Cosco Capital had a significant amount of excess cash sitting idly in its balance sheet for up to 29% of its as-reported total assets.

If we remove this item from Cosco Capital’s asset base and with the many other necessary adjustments Valens makes, we arrive at a 9% Uniform ROA for 2021, nearly double its as-reported ROA of only 5%.

Cosco Capital’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 Cosco Capital’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 twelve. For example, as-reported ROA was 5% in 2021, but its Uniform ROA was actually higher at 9%.

Cosco Capital’s asset turns are more efficient than you think

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

Moreover, as-reported asset turnover has exceeded only up to 1.3x over the past decade. In comparison, Uniform turns have reached up to 2.2x over the same time period. This shows Cosco Capital really is a more efficient business than as-reported metrics highlight.

SUMMARY and Cosco Capital, Inc. Tearsheet

As our Uniform Accounting tearsheet for Cosco Capital, Inc. (COSCO:PHL) highlights, the company trades at a Uniform P/E of 4.3x, below the global corporate average of 19.3x, but at its historical P/E of 4.3x.

Low P/Es require low EPS growth to sustain them. In the case of Cosco Capital, the company has recently shown a 61% Uniform EPS decline.

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, Cosco Capital’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 105% in 2022 and an immaterial shrinkage in 2023.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Cosco Capital’s PHP 4.42 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to compress by 21% annually over the next three years. What sell-side analysts expect for Cosco Capital’s earnings growth is above what the current stock market valuation requires in 2022, but below the requirement in 2023.

However, the company’s earning power is 2x the long-run corporate average. Moreover, cash flows and cash on hand are 8x its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low credit and dividend risk.

To conclude, Cosco Capital’s Uniform earnings growth is above its peer averages, but below 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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