Philippine Markets Newsletter

One of the biggest conglomerates in the Philippines continues to invest in its different businesses, reaching a Uniform ROA of 5%, not 2%

September 14, 2022

Through its largest contributing subsidiaries, one of the Philippines’ biggest conglomerates is ready to take advantage of the country’s reopening.

However, as-reported metrics continue to downplay this company’s profitability as well as its expected recovery post-pandemic.

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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According to the Philippine Statistics Authority (PSA), the country saw a continuous recovery, reporting a GDP growth rate of 7% in Q2 2022.

Ayala Corporation (AC:PHL) is set to take advantage of this economic recovery through its various subsidiaries, which was headed by the recently-resigned Fernando Zobel de Ayala.

With the country exiting hard lockdown mandates, the company benefited from the boost of consumer confidence, helping the company post double-digit growth across its portfolio.

As mentioned in our previous article, almost half of the Ayala Corporation’s revenues come from real estate (43%) and financial services (5%), which are sectors subject to normal cyclical risks. Even so, the company’s recovery is led by these same sectors that grew its net income by 62% to PHP 27.8 billion in 2021, and by 56% to PHP 16.3 billion for H1 2022 year-on-year.

For real estate, Ayala Land, Inc. (ALI:PHL) saw a net income growth of 40% to PHP 12.1 billion in 2021 as there is a stronger demand for property development and residential sales reservations. While commercial leasing still struggled as revenues declined 5%, Q4 2022 saw improved mobility from relaxed restrictions.

CapEx for the real estate segment reached PHP 64 billion for the year, the majority of which went to the completion of residential projects. Ayala Land is also maximizing its capital by utilizing its recently launched subsidiary, AREIT, Inc. (AREIT:PHL), infusing the fund with its mature income-generating properties, which are mostly office leasing.

Going to Ayala Corporation’s financial services segment, Bank of the Philippine Islands (BPI:PHL) continues to be one of the top-performing banks in the country. It is one of the main reasons for Ayala Corporation’s turnaround, posting 12% net income growth to PHP 23.9 billion in 2021.

As part of its recovery efforts, BPI expanded its presence in the digital space through the launch of BizKo for SMEs. This provided payments, payroll, invoicing, and other solutions for its SME clients, with its trading app set to launch by H2 2022.

Moving on to Ayala Corporation’s telecommunications segment, Globe Telecom (GLO:PHL) also posted massive net income growth at 27% to PHP 23.7 billion for 2021, primarily due to its higher revenues from data-related services, gain from the sale of its investment in Mynt and the impact of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) law.

Meanwhile, PHP 89 billion of the segment’s CapEx for 2022 will go towards network expansion and boosting internet quality and coverage in the country.

Like BPI, Globe is also at the forefront of expanding financial services in the digital space with the success of GCash, especially during the pandemic. The application garnered around 55 million registered users and gross transactions reached PHP 3.8 trillion in 2021.

All in all, Ayala Corporation has completely turned things around, prioritizing existing assets that have thrived during the pandemic and continuing to focus its efforts on new opportunities for growth.

However, looking at as-reported data, it seems that Ayala Corporation produced little economic value for their investors even with the reopening of the country and continued innovation of the company.

In reality, the company produced almost twice as much economic value putting its Uniform ROA at 5%.

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 Ayala Corporation’s 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 Ayala Corporation’s earning power. Adjusting for non-operating long-term investments, we can see that the company isn’t actually displaying weak performance. In fact, it is the opposite, with returns that are more than 2x greater.

Ayala Corporation’s profitability is much more robust 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 Ayala Corporation’s profitability has been recently weaker than what real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been inaccurate over the past decade. For example, as-reported ROA was 2% in 2021, but its Uniform ROA was actually higher at 5%.

Ayala Corporation’s earnings margins are less profitable than you think

Trends in Uniform ROA have been driven by trends in Uniform earnings margin. For more than two decades, as-reported metrics have overstated Ayala Corporation’s earnings margin, a key driver of profitability.

Moreover, as-reported margins have reached up to 33%. In comparison, Uniform margins have yet to eclipse 27% over the same time period, making Ayala Corporation appear to be a less profitable business than real economic metrics highlight.

SUMMARY and Ayala Corporation Tearsheet

As the Uniform Accounting tearsheet for Ayala Corporation (AC:PHL) highlights, the company trades at a Uniform P/E of 15.0x, below the global corporate average of 19.3x and its historical P/E of 19.6x.

Low P/Es require low EPS growth to sustain them. In the case of Ayala Corporation, the company has recently shown a 327% 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, Ayala Corporation’s sell-side analyst-driven forecast is to see Uniform earnings growth of 333% and 39% in 2022 and 2023, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Ayala Corporation’s PHP 724.00 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink by 3% annually over the next three years. What sell-side analysts expect for Ayala Corporation’s earnings growth is above what the current stock market valuation requires through 2023.

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

To conclude, Ayala Corporation’s 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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