Philippine Markets Newsletter

MONDAY MACRO: The top 5 most profitable companies in the PSE may not be who you think they are

September 6, 2021

Most preliminary calculations of profitability begin with profit margins, a pure financial ratio that’s easy to compute. A little more finance lessons in and you’ll come across mixed financial ratios such as return on assets (ROAs), which involves looking at both income statement and balance sheet data.

However, even though the simplest ROA formula of net income over total assets already gives a clearer picture of the company’s profitability, if you have the classic “garbage in, garbage out” problem, you’re bound to still get your ratio wrong.

This is why at Valens, we adjust using the Uniform Accounting methodology, which is applicable to all financial reporting standards globally. Through these adjustments, we’re able to see past accounting distortions and identify the real set of most profitable companies. 

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Earlier, we talked about the importance of looking at a company’s Return on Assets (ROAs). It is a measure of operational efficiency, or how well a company utilizes its assets to generate earnings.

Calculating ROA is simple, but people can still have different results of what a company’s real ROA is due to accounting distortions. When analysts or investors don’t adjust financial statement data, they will end up using inaccurate values for assets and earnings.

To illustrate the gravity of this issue, we take a look at the difference between aggregate Uniform and aggregate as-reported ROA of Philippine corporates (excluding financial companies) on the Philippine Stock Exchange (PSE). 

In 2020, PSE-listed non-financial companies recorded an aggregate as-reported ROA of 3%, which is half of global corporate averages. However, if we made the right adjustments, we’d get a better—though still low—profitability of 4%. 

Furthermore, only 5 companies showed as-reported ROAs that are above 10% in 2020, but in reality, 23 companies managed to generate Uniform ROAs  higher than 10%. This highlights how more companies are actually faring well despite the pandemic.

Specifically, looking at the top 5 companies with the highest Uniform ROAs, we see how much as-reported metrics have distorted their performance.

1. PTFC Redevelopment Corporation (TFC:PHL)

At the top of this list, we have PTFC Redevelopment Corporation with a 26% Uniform ROA. Since its transition to real estate in 2013, the company has seen rising profitability.

As a lessor of storage, warehousing, and office spaces, the company has been able to maintain its occupancy rates during the pandemic, and it even charged customers higher rates. As a result, PTFC has been able to improve margins while keeping asset turns stable, leading to ROA expansion.

That said, the company has a small market capitalization compared to the rest of the PSE, and it hasn’t had any meaningful property additions in recent years. It may become a challenge to maintain such high Uniform ROAs in the future once PTFC decides to expand further.

2. The Philippine Stock Exchange, Inc (PSE:PHL)

Second on the list is the stock exchange company itself with 25% Uniform ROA in 2020. Stock exchanges generally only need a few key buildings to conduct trading operations, so the PSE has only needed to invest little in physical assets.

As a result, the company has been holding a lot of excess cash, far more than operationally required. It also helps that the PSE is the only stock exchange in the country, so every firm planning to go public goes to them.

3. GMA Network, Inc. (GMA7:PHL)

Third, we have GMA with a Uniform ROA of 21% in 2020. Although Uniform ROA is lower than as-reported, it was still high enough to land on the list.

Profitability jumped to a new peak in 2020 as GMA’s main competitor, ABS-CBN (ABS:PHL), was unable to operate because its congressional franchise was not renewed. With the upcoming campaigns for the 2022 presidential elections driving additional broadcasting revenue, it seems likely that GMA7 will at the very least maintain its historically high ROAs.

4. COL Financial Group, Inc. (COL:PHL)

At fourth is COL Financial with a Uniform ROA of 21% in 2020. As one of the most well-known online stockbrokers in the country, it saw massive interest from retail investors during the pandemic.

The company reported a 32% growth of customer accounts in 2020, which will enable COL Financial to generate higher commissions over the years. Coupled with its asset-light business model, COL Financial may therefore see Uniform ROAs rebound in the future.

5. Monde Nissin Corporation (MONDE:PHL)

With a Uniform ROA of 21% as well, Monde Nissin scores fifth on this list. Contrary to what as-reported ROAs are portraying, its acquisitions have been beneficial to the company.

Its widely known brand portfolio is producing solid earnings for the company. That said, since Monde Nissin had just recently gone public, it remains to be seen whether the company can maintain current ROAs as it executes on its growth plans.

In four of the five companies mentioned above, as-reported metrics were significantly understating each company’s true earning power—they were actually 2x-6x more profitable than what as-reported ROAs claim.

On the other hand, in the case of GMA, as-reported metrics were overstating profitability. The company was actually 20% less profitable in reality.

These show how much accounting distortions are painting a vastly different picture of the stocks people are investing in.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available. 

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data. 

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms. 

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful. 

Stay tuned for next week’s Monday Macro report! 


Angelica Lim
Research Director
Philippine Markets Newsletter
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