Philippine Markets Newsletter

Let’s get this bread! With superior quality & competitive pricing, this company continued to flourish with a Uniform ROA of 4%, not 3%

May 18, 2022

Flour is an essential ingredient for everyday food… from bread, pasta, cookies, and donuts. When people were forced to stay at home during the pandemic, we saw home bakers and aspiring entrepreneurs turn to baked goods to make the most out of a bad situation. This is why this company remains competitive even as other businesses face demand issues, something we won’t see if looking at the company’s financial statements.

However, Uniform Accounting tells a different story about the company’s true profitability.

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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Every year, the Philippines produces 84 million bags of flour, with 70% going to the bread industry and the remainder going into pastries, noodles, and other flat flour products. That’s an estimate of about 20 kilograms of flour-based food that Filipinos consume.

In 2020, the Philippines was the third-largest wheat importer in the world. With the growing population and the rising per capita income, the demand for wheat flour and milling wheat nearly doubled in the last decade, especially for bread and noodles.

Furthermore, bread was a highly demanded commodity amidst the quarantine restrictions throughout the country. With stores and supermarkets running out of bread, customers had to be urged by flour miller officials to buy within their normal consumption, ensuring that the bread supply was enough to meet the country’s demand.

Today, one of the companies able to capitalize on this high demand is Liberty Flour Mills, Inc. (LFM:PHL), a company that remains focused on producing flour and flour-related products since it was founded in 1958.

Liberty Flour Mills primarily sells its products on a wholesale basis to members of the baking and food supply industries across the country. The company’s products sell a hard variety of flour that is suited for making bread, a soft variety of flour for baking cookies, and a flour by-product used in animal feeds.

The company currently has two subsidiaries: LFM Properties Corporation (LPC) and Liberty Engineering Corporation (LEC), the former of which is in the business of leasing office and commercial space and the latter of which is in the business of selling, leasing, and buying equipment and machinery.

Meanwhile, with 22 major flour millers across the country, competition in the flour industry is known to be intense. With approximately 5% of the country’s market share, Liberty Flour Mills is focused on superior quality in relation to its competitors while keeping prices competitive.

However, foreign exchange fluctuations continue to be the company’s major risk considering that its raw materials, such as wheat, are sourced abroad. 

With wheat prices rising due to India, the world’s second-biggest wheat producer, imposing an export ban, this may negatively affect the company’s sales if it maintains its focus on maintaining or improving its market share.

Looking at as-reported metrics, it appears that this strategy of Liberty Flour Mills continues to create profitability below cost of capital levels, showing returns only reaching 3% in 2020.

In reality, the company’s performance needs more credit as it profited much better than represented, with profitability reaching a Uniform ROA of 4%.


The distortion between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of non-operating long-term investments on Liberty Flour Mills’ balance sheet.

These long-term investments are intangible assets that are purely accounting-based and unrepresentative of the company’s actual operating performance. When as-reported accounting includes this in a company’s balance sheet, it creates an artificially inflated asset base.

As a result, as-reported ROAs are not capturing the strength of Liberty Flour Mills’ earning power. Adjusting for non-operating long-term investments, we can see that the company’s displayed performance is actually misrepresented. In fact, the returns are better than it seems.

Liberty Flour Mills’ earning power is stronger than you think


As-reported metrics distort the market’s perception of the firm’s recent profitability. If you were to just look at as-reported ROA, you would think that the company is a weaker business than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been inaccurately represented beyond the past decade. For example, as-reported ROA was 3% in 2020, but its Uniform ROA was actually higher at 4%.

Liberty Flour Mills’ earnings margin is weaker than you think

As-reported metrics significantly overstate Liberty Flour Mills’ profitability trends. For example, as-reported EBITDA margin for the company was 17% in 2020, higher than Uniform earnings margin of 8%, making the firm appear to be a much stronger business than real economic metrics highlight

Moreover, as-reported asset turnover has reached up to 26%, while Uniform earnings margins have yet to peak beyond 16% in the same time period, distorting the market’s perception of the company’s historical profitability trends.

SUMMARY and Liberty Flour Mills, Inc. Tearsheet

As our Uniform Accounting tearsheet for Liberty Flour Mills, Inc. (LFM:PHL)  highlights, the company trades at a Uniform P/E of 25.0x, around the global corporate average of 24.0x, but below its historical P/E of 62.9x.

Low P/Es require low EPS growth to sustain them. In the case of Liberty Flour Mills, the company has recently shown a 1,083% Uniform EPS shrinkage.

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, Liberty Flour Mills’ sell-side analyst-driven forecast is to see Uniform earnings growth of 29% in 2021 and immaterial levels by 2022.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Liberty Flour Mills’ PHP 21 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 9% annually over the next three years. What sell-side analysts expect for Liberty Flour Mills’ earnings growth is above what the current stock market valuation requires in 2021, but below the requirement by 2022.

Moreover, the company’s earning power is below the long-run corporate average. Yet, cash flows and cash on hand are around 4x above total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low credit risk.

To conclude, Liberty Flour Mills’ Uniform earnings growth is above its peer averages, but 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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