Philippine Markets Newsletter

Offering a differentiated product in its niche helped this company generate a 14% Uniform ROA, not 8%

February 24, 2021

With the automotive paints and coating market, people are able to retouch or even customize their cars for a low price. One company has successfully differentiated itself from its competitor with its unique paint formula and patented system.

As-reported metrics are reflecting this, with current return on assets (ROA) at just above the cost of capital. However, Uniform Accounting shows that the business has even better Uniform return on assets (ROA) than what the market thinks.

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

Philippine Markets Daily:
Wednesday Uniform Earnings Tearsheets – Asia-listed Focus
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Most large companies, especially conglomerates, generally operate in many segments where they see a lot of growth and profitability. An example is Jardine Matheson, which currently operates in different industries such as engineering and construction, food retailing, luxury hotels, transport services, and more.

On the other hand, there are companies that specialize in one specific sub-industry called a niche market.

A niche market is a segment of a larger industry with a focus on one specific product. Unlike the broader industries that serve a wider customer base, niche markets have their unique demand and customer preferences. Because of this, companies targeting a niche market can pursue loyalty by specializing in a specific offering, and profiting from the overlooked consumers.

An example of a niche market is the USD 17 billion automotive paints and coating industry, which is expected to become a USD 27 billion market by 2027.

This market serves the need for vehicles’ surface protection solutions and for aesthetic purposes. These coatings are designed to protect car surfaces from any environmental damages and minor accidents.

One of the most popular ways to retouch a car’s paint job is through the use of aerosol paint because of its low cost and ease of use, especially to touch up small spots of a car.

This is what Samurai 2k Aerosol specializes in.

Samurai 2k Aerosol creates paint specifically formulated for motorcycles and other automotive uses. While the company’s peers commonly use acrylic enamel, Samurai uses an NC modified acrylic resin.

By using NC modified acrylic resin, Samurai’s paint is gasoline resistant, which means it won’t fade or dissolve, unlike their competitor’s products. It also provides features like weather and abrasion resistance, hardness and adhesion, and anti-corrosion.

Furthermore, Samurai has a patented product called the Samurai 2k system, which stores two different chemicals, resin and hardener, in a can. This means users with no professional experience can still get professional results with high quality and a beautiful finish on their paint job.

Samurai is the only company that has this system in the Philippines. Meanwhile, its 2K system is patented in Utility Innovation and Industrial Design in countries such as Malaysia, China, Indonesia, Philippines, Thailand, Vietnam, and Australia.

The success of the company’s unique spray system is evident in its current revenues. Amidst the pandemic, Samurai reported H1 2021 revenues of MYR 44.1 million, which is 55.2% stronger than the previous year. Its gross profit margin also increased from 46.6% to 49.5%. This shows that the company is also benefiting from the At-Home Revolution, where car and motor enthusiasts turn to DIY projects such as repainting their vehicles while staying at home.

Given the company’s differentiated offering in its niche, one might expect Samurai to be generating impressive returns. However, by looking at as-reported metrics, this aerosol company may look like a business with weak, falling returns near the corporate averages. Its as-reported return on asset (ROA) sits at just 8% in 2019.

This is not actually the case for Samurai. In reality, the company has higher-than-average returns at 14% in 2019, signaling its strong performance in operating in its niche market. Its Uniform ROAs are consistently more robust than what as-reported metrics show.

What as-reported metrics fail to do is to consider the company’s excess cash on the balance sheet. While most companies inherently need some level of cash to operate, the portion of that balance that is earning limited or no return—or excess cash—ends up diluting as-reported ROAs.

When excess cash remains included in the company’s asset base in computing its performance metrics, the company’s profitability and capital efficiency may appear weaker than it actually is. Removing excess cash allows investors to see through the distortions that come from management carrying much more cash on the balance sheet than what is operationally required.

From 2014 to 2019, Samurai has had a significant amount of excess cash sitting idly in its balance sheet, ranging from 9% to 34% of its as-reported total assets.

After excess cash and other necessary significant adjustments are made, we can see that Samurai’s returns are actually a lot stronger than what as-reported metrics show. Without these adjustments, it appears that the company hasn’t been profiting from its differentiated offering in its niche market, leading to poorer valuations.

Samurai 2K’s profitability is more robust than you think

As-reported metrics are distorting the market’s perception of the firm’s 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 reveal.

Samurai’s Uniform ROA has been higher than its as-reported ROA for the past six years. For example, Uniform ROA was 56% in 2016, while as-reported ROA was only 20%.

The company’s Uniform ROA for the past six years has ranged from 11% to 56%, while as-reported ROA has ranged only from 7% to 20% in the same timeframe.

Specifically, Uniform ROA rose from 24% in 2014 to 56% in 2016, before fading to 14% in 2019.

Samurai 2K’s Uniform earnings margins are generally weaker than you think, but its Uniform asset turns make up for it

From 9% in 2014, Uniform margins gradually expanded to a peak of 19% in 2016, before declining to 5% in 2017. It then rebounded to 12% in 2019.

Meanwhile, Uniform turns improved from 2.6x in 2014 to 3.0x in 2016, before fading to 1.2x in 2019.

SUMMARY and Samurai 2K Aerosol Limited Tearsheet<

As the Uniform Accounting tearsheet for Samurai 2K Aerosol Limited (1C3:SGP) highlights, its Uniform P/E trades at 18.9x, which is below the global corporate average of 21.7x and its own historical average of 27.3x.

Low P/Es require low EPS growth to sustain them. That said, in the case of Samurai, the company has recently shown a 30% Uniform EPS shrinkage.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Samurai’s Wall Street analyst-driven forecast is a 3% and 0% EPS decline in 2020 and 2021, respectively.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Samurai’s SGD 0.52 stock price. These are often referred to as market embedded expectations.

In order to justify current market expectations, Samurai would need to have Uniform earnings grow by 4% each year over the next three years. What Wall Street analysts expect for Samurai’s earnings growth is below what the current stock market valuation requires in 2020 and 2021.

Furthermore, the company’s earning power is at the long-run corporate average. Also, cash flows and cash on hand are over 2x its total obligations—including debt maturities, capex maintenance, and dividends. All in all, this signals a low credit and dividend risk.

To conclude, Samurai’s Uniform earnings growth is above its peer averages, while the company is trading in line with its average peer valuations.

About the Philippine Markets Daily
“Wednesday Uniform Earnings Tearsheets – Asia-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 UAFRS, 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 company listed in Asia that’s relevant to the Philippines and 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 Earning Tearsheet on an Asian company interesting and insightful.

Stay tuned for next week’s Asia company highlight!


Angelica Lim
Research Director
Philippine Markets Daily
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