This mining firm is creating opportunities for growth within its operations. It did this by expanding its presence in the renewable energy (“RE”) sector, which is driving the demand for its principal product.

However, as-reported metrics distorts its performance showing substantially lower returns than what TRUE Uniform metrics present.

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
Powered by Valens Research

In late September, the Philippine Stock Exchange (“PSE”) announced that it would make changes to the composition of its index, removing Union Bank of the Philippines (UBP:PHL). This is due to its public float falling below the 20% requirement to be included in the index.

As its replacement, Nickel Asia Corporation (NIKL:PHL) was included in the index, effective early October.

Nickel Asia’s inclusion comes as no surprise as the mining firm showed promising growth on the back of its increasing profitability in recent years.

Revenue in 2021 grew 26% from PHP 21.7 billion to PHP 27.4 billion because of higher ore prices fueled by the surging demand for nickel. Thus, the mining firm enjoyed a 92% net income growth for the year from PHP 4.1 billion to PHP 7.8 billion.

In recent years, demand for the commodity is being driven by the popularity of electric vehicles since nickel is one of the major ingredients for producing rechargeable batteries.

This puts Nickel Asia in a favorable position as it is the top producer of nickel ore and the world’s largest exporter. In fact, in 2021, the Philippines exported a total of $1.5 billion worth of nickel ore.

However, the mining firm only sold 15.9 million wet metric tonnes (“WMT”) of nickel ore in 2022, 11% lower than the 17.9 million WMT sold in 2021. The firm cites unfavorable weather that affected mining operations for the year as the reason for the lower sales volume.

Still, net income for 2022 slightly increased by 2% to PHP 7.9 billion.

It is clear that to secure its future, the mining firm should increase its investments into its other operations such as its sale of power. Revenue growth for the segment reached 52% to PHP 773 million in 2022 from PHP 508 million, mainly from the commercialization of the additional 38-megawatt (“MW”) capacity installed.

Seeing this, Nickel Asia is increasing its investment in its RE arm, Emerging Power, Inc. (“EPI”) by PHP 3 billion. This investment will increase Nickel Asia’s stake in EPI to 95.8% from 86.3% to support its operations as it intends to launch 650 MW of projects by 2025.

Additionally, the mining firm is setting a $2 million per MW capital expenditure budget through EPI. This budget is allocated to spearhead its geothermal power plants in Biliran and Mindoro, which are set to begin operations by fourth quarter of 2023 and second quarter of 2025, respectively.

Overall, Nickel Asia is setting its eyes on expanding multiple segments of its business. The mining firm can expect growth coming from its RE division through its development. Additionally, its primary nickel ore trading operation can expect rising demand from this due to its part in producing rechargeable batteries.

Nickel Asia’s earning power is stronger than you think

Despite creating opportunities for growth, Nickel Asia seems to generate underwhelming returns, with ROAs only reaching 16% in 2022.

In reality, the company achieved higher Uniform returns at 28%.

The crucial lesson to learn from this is that accounting distortions can completely alter a company’s market valuation, which in turn can affect an investor’s stock decisions. In this case, Uniform ROA levels are more than double as-reported ROA levels.

Historically, one of the largest distortions for Nickel Asia comes from the treatment of minority 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, misleading people to 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, Nickel Asia recognized PHP 2.95 billion in minority interest expense, resulting in a PHP 7.93 billion net income and a 16% as-reported ROA. Adding this back alongside the many other adjustments Valens makes, the company should actually be recognizing PHP 10.08 billion in Uniform earnings and a 28% Uniform ROA.

Nickel Asia has a more efficient business than you think

The firm’s asset utilization, a critical factor in profitability, is also greatly distorted. As-reported asset turnover of 0.5x in 2022 was lower than Uniform asset turnover of 0.8x, giving the organization a lower asset efficiency score than actual economic measures indicate.

Additionally, for the past ten years, as-reported turns have consistently been less than Uniform turns, which has distorted the market’s assessment of the firm’s historical asset efficiency levels.

Uniform turns historically increased from 0.5x in 2009 then jumped to a 1.7x high in 2014. This pattern is similar to the company’s ROA trend. Then, between 2016 and 2022, Uniform turns compressed to and stabilized at 0.7x-1.0x values.

SUMMARY and Nickel Asia Corporation Tearsheet

As our Uniform Accounting tearsheet for Nickel Asia Corporation (NIKL:PHL) highlights, the company trades at a Uniform P/E of 7.5x, below the global corporate average of 18.4x and around its historical P/E of 7.0x.

Low P/Es require low EPS growth to sustain them. In the case of Nickel Asia, the company has recently shown a 4% 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, Nickel Asia’s sell-side analyst-driven forecast is to see a Uniform earnings shrinkage of 3% and growth of 5% 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 Nickel Asia’s PHP 5.48 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 18% annually over the next three years. What sell-side analysts expect for Nickel Asia’s earnings growth is above what the current stock market valuation requires through 2024.

Moreover, the company’s earning power is 5x the long-run corporate averages. Additionally, cash flows and cash on hand are 2.9x its total obligations—including debt maturities, capex maintenance, and dividends. Intrinsic credit risk is 70bps above the risk-free rate. Together, this signals a low dividend risk.

Lastly, Nickel Asia’s Uniform earnings growth is above 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!

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
Powered by Valens Research
www.valens-research.com