Philippine Markets Newsletter

Expansions and organic growth seem to work every time for this supermarket retailer, bagging Uniform returns of 16%, not 6%

September 13, 2023

Organic growth paired with strategic acquisitions seem to be an easy task for this supermarket retailer due to its consistent market presence growth yearly.

Amid inflation and other macroeconomic headwinds, this company has taken advantage of the reopening of the economy, paired with its customer-first approach and expansion initiatives that helped it become a trusted retailer by its consumers.

However, as-reported metrics don’t seem to believe that, showing returns of 6% while TRUE Uniform returns are at 16%.

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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Since its first store opened in 1998, Puregold Price Club, Inc. (PGOLD:PHL) quickly experienced massive success in the supermarket retail industry. Thanks to its numerous acquisitions and organic growth initiatives, it has worked its way up to compete with the biggest supermarket retailers in the country.

Specifically, its customer-first approach has made it possible for it to bring affordable products and store accessibility to millions of people, a strategy that has paid dividends over the years.

This is why even with macroeconomic headwinds posing challenges for most businesses in 2022, Puregold was able to offset an increase in its operating expenses and cost of goods sold. It even recorded higher store traffic and multiple new store openings that year.

Since its initial public offering in 2011, the company has been opening an average of 25 to 30 stores per year. With another 24 new Puregold stores opening in 2022, the company ended the year with 452 Puregold stores, 22 S&R membership shopping warehouses, and 48 S&R New York Style quick service restaurants.

This aggressive market expansion strategy isn’t just limited to its organic growth. The supermarket chain has managed to maintain high profitability even through its acquisitions. It has prioritized strategic partnerships that increased their store presence in as many areas and markets as possible.

For example, Puregold acquired S&R Membership Shopping Club to expand its reach to a different target market. Then in 2022, it acquired PSMT Philippines, Inc. to help in maximizing the wholesale grocery distributor’s potential.

Combined with a large percentage of consumers reverting back to pre-pandemic lifestyles in 2022, Puregold’s store growth has allowed it to realize higher sales. It saw a 16% increase in revenues and a net sales increase of 12% to PHP 184.3 billion from the PHP 164.1 billion it saw the previous year.

Clearly, its acquisition and store growth initiatives, its strategic cost management, and the renewed level of consumer demand continue to drive Puregold’s success, allowing it to achieve a 14% net income surge. 

Puregold’s earning power is stronger than you think

Despite its successful execution of multiple expansion and growth initiatives, as-reported metrics still seem to understate Puregold’s efforts, distorting the company’s profitability with returns only showing 6%.

In reality, the company achieved higher Uniform returns of 16%.

One of the said distortions stems from how Philippine Financial Reporting Standards (PFRS) classify interest expense.

According to PFRS, interest expense can be classified as an operating cash flow. In reality, interest expense represents the cost of debt and is rightfully only a financing cash flow. As such, in Uniform Accounting, interest expense is added back to earnings.

As a firm that funded its investments through debt, Puregold recognized sizable interest expense from its debt.

Specifically, in 2022, it recorded a PHP 2.9 billion interest expense. Adding back this expense because it is not an operating expense, along with many other necessary adjustments made by Valens, leads to a PHP 9.65 billion net income and 16% Uniform ROA, higher than the PHP 9.29 billion as-reported net income and 6% as-reported ROA.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated each year since the company was publicly listed. 

Puregold has a more efficient business than you think

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

Moreover, as-reported asset turnover has reached a peak of 2.9x during the last fifteen years. In comparison, Uniform turns have reached a high of 4.5x over the same time period, making Puregold appear to be a less efficient business than real economic metrics highlight.

SUMMARY and Puregold Price Club, Inc. Tearsheet

As our Uniform Accounting tearsheet for Puregold Price Club, Inc. (PGOLD:PHL) highlights, the company trades at a Uniform P/E of 9.1x, below the global corporate average of 18.4x and its historical P/E of 12.9x.

Low P/Es require low EPS growth to sustain them. In the case of Puregold, the company has recently shown a 50% 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, Puregold’s sell-side analyst-driven forecast is to see a Uniform earnings decline of 2% and growth of 21% 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 Puregold’s PHP 29.65 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 12% annually over the next three years. What sell-side analysts expect for Puregold’s earnings growth is above what the current stock market valuation requires through 2024.

Moreover, the company’s earning power is 3x the long-run corporate averages. Furthermore, cash flows and cash on hand are over 4x its total obligations—including debt maturities, capex maintenance, and dividends. Intrinsic credit risk is 330bps above the risk-free rate. Together, this signals a moderate credit risk.

Lastly, Puregold’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!


Angelica Lim
Research Director
Philippine Markets Newsletter
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