Philippine Markets Newsletter

Heating up its product offerings through its innovation strategies enabled this pizza parlor to achieve Uniform ROA of 4%, not 0%

August 31, 2021

Business expansion is one of the incremental steps in market domination. However, it can be challenging to do this during a pandemic.

As one of the largest pizza brands in the Philippines, this company has prioritized improving its product portfolio and expanding its business. 

Despite its ability to withstand this environment, its as-reported metrics show that the company wasn’t able to effectively execute its initiatives. Its Uniform return on assets (ROA), on the other hand, reveals that the company is actually performing much better.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Daily: 
Tuesday Uniform Earnings Tearsheets – Philippine-listed Focus
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Global expansion is one of the most common strategies for businesses focusing on growth beyond the geographical markets they currently serve.  

This strategy is especially evident in the restaurant industry, particularly the fast-food segment. For example, Jollibee Corporation (JFC:PHL) made it its mission to continuously spread joy by opening up branches in countries in Southeast Asia, the Middle East, North America, and Europe.

However, with the continued effects of the pandemic, some of the companies in the industry had to recalibrate their focus in order to remain profitable. 

For one, Shakey’s Pizza Asia Ventures Inc. (PIZZA:PHL), one of the leaders in the full-service restaurant categories, was forced to close 91% of its store network. Although dine-in services were permitted in the latter part of 2020 as government restrictions relaxed, there’s still a limit on the dining capacity of these establishments. 

Due to this, Shakey’s aim of accomplishing a record-breaking year with the opening of 38 new stores was put on hold. Instead, management opted to focus on strengthening and improving all of its existing products and networks, especially its local branches.

One strategy that has helped Shakey’s during this predicament is its already-established delivery services and digital transformation through its mobile app and its “31-Minute Delivery, If It’s Late, It’s Free” guarantee.

In order to further adapt to the changing environment, the company also developed new offerings in select stores wherein customers can “Park & Dine”, “Park & Order”, eat outdoors, and drink R&B milk tea—a Singapore brand that Shakey’s acquired in 2020.

Due to these initiatives, the company saw a spike in demand for in-home and out-of-store purchases.

Another thing to point out is the company’s menu improvements and entry into the healthy alternatives market. In 2020, Shakey’s partnered with its sister company Century Pacific Food, Inc. (CNPF:PHL) and launched UnMeat, a vegan meat alternative product made with non-GMO plant-based ingredients.

Despite all of the disruptions the company experienced in 2020, Shakey’s was still able to withstand the changes in consumer behavior, giving it the ability to restart its expansion strategies.

By opening 30 more restaurants and launching several cloud kitchens, the company would cater not only to the dine-in guests but also out-of-store.

Much like its sister company, Shakey’s resilience and adaptability enabled it to retain its market leadership in the full-service restaurant industry.

However, the company’s as-reported metrics are not taking into account Shakey’s ability to revamp its operations based on emerging trends, with returns only showing an immaterial number in 2020.

In reality, these initiatives proved that the company actually did better than expected, with Uniform ROAs still garnering near cost-of-capital levels despite the pandemic-related disruptions.

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

Specifically, in 2020, the company recorded a PHP 333.3 million interest cost. Adding back this expense because it is not an operating expense, along with many other necessary adjustments made by Valens, leads to a PHP 142 million net income and a 4% Uniform ROA, higher than its PHP 253.6 billion as-reported net loss and immaterial as-reported ROA.

Shakey’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 that Shakey’s profitability is lower than what real economic metrics highlight in all years.

In reality, Shakey’s true profitability has consistently been higher than its as-reported ROA since 2013. For example, as-reported ROA was 8% in 2019, but Uniform ROA is displaying much stronger profitability at 21%.

Historically, as-reported ROA declined from 15% levels in 2014-2015 to 8% levels through 2019, before falling further to immaterial levels in 2020. 

Meanwhile, Uniform ROA fell from 24% in 2013 to 18% in 2018, before recovering to 21% in 2019 and contracting to a low of 4% in 2020.

Shakey’s earnings margin is much weaker than you think, but its Uniform asset turns make up for it

Trends in Uniform ROA have been driven by trends in Uniform earnings margin, offset by generally declining Uniform asset turns.

After improving from 9% levels in 2013-2014 to a high of 15% in 2019, Uniform margins compressed to a low of 3% in 2020.

Meanwhile, Uniform turns gradually declined from a peak of 2.8x in 2013 to 1.3x-1.4x levels in 2018-2020.

At current valuations, the market is pricing in expectations for a reversal of recent declines in Uniform margins and continued compression in Uniform turns. 

SUMMARY and Shakey’s Pizza Asia Ventures, Inc. Corporation Tearsheet

As our Uniform Accounting tearsheet for Shakey’s Pizza Asia Ventures, Inc. (PIZZA:PHL)  highlights, the company trades at a Uniform P/E of 31.8x, above the global corporate average of 21.9x but below its historical P/E of 60.5x.

High P/Es require high EPS growth to sustain them. In the case of Shakey’s, the company has recently shown a 121% 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, Shakey’s sell-side analyst-driven forecast is to see a Uniform earnings decline of 135% in 2021 and a Uniform earnings growth of 567% in 2022.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Shakey’s PHP 7.85 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 25% annually over the next three years. What sell-side analysts expect for Shakey’s earnings growth is below what the current stock market valuation requires in 2021, but above this requirement in 2022.

Furthermore, the company’s earning power is below the long-run corporate average. However, cash flows and cash on hand are 2x their total obligations—including debt maturities, capex maintenance, and dividends. Also, intrinsic credit risk is 160bps above the risk free rate. Together, this signals a low dividend and credit risk.

To conclude, Shakey’s Uniform earnings growth is above its peer averages, and also currently trades above its average peer valuations.

About the Philippine Market Daily
“Tuesday 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 Tuesday, 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 Daily

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