Philippine Markets Newsletter

Favorable commodity and power prices generated a historic year for this construction conglomerate, building returns to 22%, not 14%

November 28, 2023

Surprisingly, construction was not the top business of this conglomerate in 2022 despite its origins. Its strengths rely on its ability to diversify and recognize avenues for growth.

However, as-reported metrics fail to paint an accurate picture of its performance despite having a monumental year.

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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In 2022, global economic challenges stemmed from Eastern Europe’s conflict. Sanctions on Russia, a major oil exporter, spiked fuel and oil prices. This led to a crude oil supply drop, intensifying economic uncertainties for businesses and consumers.

The conflict also affected the Wholesale Electricity Spot Market (WESM) with higher generation charges and elevated electricity costs. This, however, was advantageous for power generation firms in the Philippines such as Semirara Mining and Power Corporation (SCC:PHL) and ultimately, its parent company, DMCI Holdings, Inc. (DMC:PHL).

Despite originating as a construction firm, DMCI has long been relying on its ability to successfully expand into other industries. Shortly after incorporating in 1995, DMCI purchased a 40% interest in SCC in 1997, subsequently increasing to its current stake at 56.65%.

The year 2022 was historic for DMCI, as its topline grew 32% from PHP 108.3 billion in 2021 to PHP 142.6 billion. As a result, the conglomerate posted its highest net income to date, rising by 69%, from PHP 18.4 billion in 2021 to PHP 31.1 billion.

This performance was on the back of higher average prices for coal, power, and nickel. Most notably, SCC earned a net income of PHP 22.7 billion in 2022 from PHP 9.2 billion in 2021, a massive 145% increase.

In addition, DMCI also has its own ore and mineral mining firm with DMCI Mining Corporation, which incorporated in 2007. Net income for the subsidiary increased 7% from PHP 1.21 billion to PHP 1.29 billion in 2022 driven by higher prices and favorable forex rates.

On the other hand, its flagship arm, DMCI Project Developers Inc. or DMCI Homes, saw reduced revenues by 11% from PHP 24.66 billion to PHP 21.91 billion. Despite higher prices and construction accomplishment, sales cancellations rose from 6% to 13% in 2022.

DMCI recognizes that 2022 was a one-off year as management says that they expect a softer performance in 2023. In turn, the conglomerate is pivoting to increasing the volume of its projects with the government and its “Build Better More” program.

As for its mining business, DMCI Mining is targeting to ship 1.5 million wet metric tons of nickel ore in 2023. It plans to take advantage of the spike in nickel prices, driven by the rising popularity of electric vehicles.

Overall, from its construction origins, DMCI has built a group of companies that, from its initiatives and positioning, has the capability to take it to greater heights.

DMCI’s earning power is stronger than you think

Despite its monumental achievement, as-reported returns for DMCI only show 14%.

In reality, the company achieved higher Uniform returns at 22% which reflects its TRUE earning power after its historic year.

Historically, one of the largest distortions for DMCI comes from the treatment of minority interest expenses or the income attributable to the non-controlling interests of a company’s subsidiaries.

The Philippine Financial Reporting Standards (“PFRS”) allows minority interest expense to be recognized under operating cash flow, leading people to incorrectly think that it is essential to the firm’s core operations.

In reality, it should always be classified as a financing cash flow. Minority shareholders provide capital to the subsidiary in exchange for a piece of the company’s profits. As a result, minority interest expense should not be subtracted from revenue when calculating a company’s real core earnings.

In 2022, DMCI recognized PHP 17.4 billion in minority interest expense, resulting in a PHP 31.1 billion net profit. Adding this back alongside the many other adjustments Valens makes, the company should actually be recognizing PHP 44.4 billion in Uniform earnings.

DMCI has a more efficient business than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. The firm’s asset utilization, a critical factor in profitability, is also greatly distorted. As-reported asset turnover has been consistently lower than Uniform asset turnover for the past decade, giving the organization a lower asset efficiency score than actual economic measures indicate.

Moreover, in the past sixteen years, as-reported asset turnover has reached a peak of 0.6x. In comparison, Uniform turns have reached a high of 0.9x over the same time period, making DMCI appear to be a less efficient business than real economic metrics highlight.

SUMMARY and DMCI Holdings, Inc. Tearsheet

As our Uniform Accounting tearsheet for DMCI Holdings, Inc. (DMC:PHL) highlights, the company trades at a Uniform P/E of 4.8x, below the global corporate average of 18.4x but in line with its historical P/E of 4.8x.

Low P/Es require low EPS growth to sustain them. In the case of DMCI, the company has recently shown an 80% 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, DMCI’s sell-side analyst-driven forecast is to see a Uniform earnings decline of 16% and 19% 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 DMCI’s PHP 9.25 stock price. These are often referred to as market-embedded expectations.

The company is currently being valued as if Uniform earnings were to decline by 28% annually over the next three years. What sell-side analysts expect for DMCI’s earnings growth is above what the current stock market valuation requires through 2024.

Moreover, the company’s earning power is 4x the long-run corporate average. Additionally, cash flows and cash on hand are 3x above its total obligations. Together, this signals a moderate credit risk.

Lastly, DMCI’s Uniform earnings growth is below its peer averages, while its Uniform forward P/E is 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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