Philippine Markets Newsletter

Fortifying its brand equity and evolving with consumer trends is this company’s bread and butter, resulting in a Uniform ROA of 10%, not 6%

February 15, 2023

Capitalizing on brand awareness and strategic product distribution across the country, this food and beverage company has endured “margin stresses” caused by rising commodity prices and pandemic disruptions.

However, as-reported ROA seems to misrepresent this company’s earning power at 6% as compared to the TRUE Uniform ROA of 10%.

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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RFM Corporation (RFM:PHL) is a major manufacturer of food and beverage products in the country, specifically in the flour, bread, and bakery products segment—which are primarily sold to institutional customers.

The company also caters to its local market with its pasta and pasta sauces under notable brands Fiesta and Royal. It obtained Royal in 2014 as part of its strategy of acquiring Filipino companies with strong local brands and partnership with internationally renowned food institutions. 

Back in 1990, RFM acquired the trademark Selecta to establish its ice cream, ice cream desserts, and other similar food products business. In 1999, the company made a joint venture with Unilever Philippines, Inc. establishing Unilever RFM Ice Cream, Inc. to take over the production and marketing of its products.

The company has also expanded into ready-to-drink (RTD) milk and juices under its Selecta and Sunkist brand, respectively.

Even amid supply chain disruptions caused by the pandemic, RFM was able to sustain its brand growth with its RTD milk drink and pasta segments, growing its revenues by 56% and 44%, respectively, for 2020.

For 2021, RFM relaunched its Selecta Sterilized Milk drink targeting the working population as the reopening of businesses introduced hybrid work setups. The company was successful in doing so, growing its market share for the product by 73%.

Its ice cream desserts business is also leading with 72% market share in the ice cream take home/bulk category and 30% in single-served/out-of-home category.

The company also dominated with its pasta and sauce brands, ending the year with 49% volume and value share.

As part of the company’s efforts to revitalize its pasta and sauce category, RFM introduced different ways of consuming its products by creating new recipes and partnering with online influencers to help promote the brand.

On top of that, the company increased its product offerings by introducing smaller low-priced value-for-money products such as its Fiesta Spaghettipid pack. In doing so, RFM hopes to cater to new consumer habits brought about by the pandemic as households become more budget-conscious.

Despite these improvements, profits grew by only 2% in 2021, as the company faced margin stresses from higher costs of raw materials. To address that issue, RFM is planning on increasing its product visibility in supermarkets and groceries nationwide.Ideally, this increases turns to make up for the lower margins, resulting in better profitability. 

Looking at its as-reported metrics, RFM has managed to maintain its profitability levels despite continued pressures on its margins brought by rising raw material prices.However, with ROAs at 5%, the company is barely breaking even.

Uniform Accounting tells us a different story—RFM’s profitability is significantly better at more robust levels reaching 10% in 2021, which is double its as-reported metrics.

What as-reported metrics fail to consider is how current liabilities are factored into the ROA 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 by 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.

In the case of RFM, as-reported metrics’ asset base for ROA calculation is at PHP 19.9 billion in 2021, leading to an 6% as-reported ROA.

However, when subtracting current operating liabilities and applying other needed adjustments, we arrive at RFM’s PHP 12.0 billion Uniform assets, resulting in a 10% Uniform ROA.

RFM Corporation’s earning power is stronger than you think

As-reported metrics distort the market’s perception of the firm’s historical profitability. If you were to just look at as-reported ROA, you would think RFM’s profitability has been weaker than real economic metrics highlight

Through Uniform Accounting, we can see that the company’s true ROAs have been understated. For example, as-reported ROA was 6% in 2021, but its Uniform ROA was higher at 10%.

RFM Corporation’s Uniform asset turns are stronger than you think

For the past seven years, as-reported metrics have understated RFM’s asset turns, a key driver of profitability.

Moreover, since 2015, as-reported turns ranged from 0.8x-0.9x through 2021. Meanwhile, Uniform turns was able to reach a high of 1.4x.

SUMMARY and RFM Corporation Tearsheet

As the Uniform Accounting tearsheet for RFM Corporation (RFM:PHL) highlights, the company trades at a Uniform P/E of 7.7x, which is below the global corporate average of 18.4x and its historical P/E of 10.9x.

Low P/Es require low EPS growth to sustain them. In the case of RFM, the company has recently shown a 2% 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, RFM’s sell-side analyst-driven forecast calls for a 6% Uniform EPS growth and a negligible Uniform EPS shrinkage in 2022 and 2023, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify RFM’s PHP 3.69 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 19% annually over the next three years. What sell-side analysts expect for RFM’s earnings growth is below what the current stock market valuation requires through 2023.

Furthermore, the company’s earning power is 2x the long-run corporate average. Meanwhile, cash flows and cash on hand are at 235% of its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low dividend and credit risk.

Lastly, RFM’s Uniform earnings growth is in line with peer averages in 2022, while the company is trading below its peer average 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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