Philippine Markets Newsletter

One of the oldest conglomerates in the country thrives in a fast-paced digital economy, boasting real returns 2X as-reported metrics

May 31, 2023

One of the Philippines’ biggest and oldest conglomerates is taking advantage of the country’s push for a better e-commerce industry. It did this with its subsidiaries’ successful digital integration posting double-digit growth for 2022.

However, as-reported metrics do not show the effectiveness of this strategy showing less than double its 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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Digital transformation for many companies in the Philippines has been key to adapting in the fast-changing market. The Department of Trade and Industry (DTI) recognizes this, presenting an updated roadmap in 2022 for the e-commerce industry. 

Titled “Basta e-Commerce Madali,” the updated 2016-2020 roadmap highlighted the need for faster adoption of e-commerce platforms to reduce the disruption of businesses, especially when the pandemic struck.  

For one of the country’s largest conglomerates, digital transformation has been critical for the success of its businesses.

Ayala Corporation (AC:PHL) is one of the oldest and most diversified conglomerates in the Philippines. It has interests in a wide range of industries, including real estate, banking, and telecommunications.

For 2022, Ayala Corporation reported a core net income of ₱27.7 billion, up 18% from the previous year. In fact, all of its major subsidiaries posted double-digit growth for the year.

In banking, Bank of the Philippine Islands (BPI:PHL) capitalized on the digital banking trend, boosting operational efficiency and its customer base. BPI grew its digital clients by 50% to 2.8 million, which translated to a better revenue per capita of 2x its non-digital clients. This resulted in a 43% net income increase to PHP 35 billion, excluding its one-off gain from property sale. 

Similarly, its real estate arm, Ayala Land (ALI:PHL), utilized digital platforms for property transactions and virtual tours while adding more logistics and industrial spaces to its portfolio. This translated to stronger commercial lot sales and higher revenues from commercial leasing. Together, ALI posted a 52% jump on its net income to PHP 19 billion. 

For 2022, Globe Telecom (GLO:PHL), the conglomerate’s telecommunications unit, improved its network infrastructure to meet increased data traffic due to the pandemic. It resulted in higher data service revenues, increasing net income by 46% to PHP 35 billion. Also, despite an increasingly competitive landscape for digital banking, GCash ended the year with 76 million registered users from 55 million users in 2021.

Overall, Ayala Corporation’s profitability in 2022 is a sign of the company’s ability to adapt to changing market conditions. The company is well-positioned to continue to grow in the years to come.

However, a review of the as-reported data suggests that Ayala Corporation has not broken even in the past 10 years despite continued innovation.

In reality, the company produced more than twice as much value for its shareholders at Uniform ROA at 7%, versus as-reported 3% ROA.

The difference between Ayala Corporation’s Uniform and as-reported ROAs is due to the fact that as-reported metrics do not take into account the amount of non-operating long-term investments on the company’s balance sheet. These long-term investments are intangible assets that are purely accounting-based and do not represent the company’s actual operating performance. 

When as-reported accounting includes these assets 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 ROA can distort the market’s perception of a firm’s profitability. For example, Ayala Corporation’s as-reported ROA did not climb past 5% in the last ten years, hovering between 2%-4%. This suggests that the company’s profitability has been weak during the period. 

However, a more accurate picture of the company’s profitability can be obtained by using Uniform Accounting, which adjusts for certain accounting choices that can artificially inflate or deflate ROA. 

Using Uniform ROA we can see that Ayala Corporation’s profitability was actually between 5%-14% for the past decade, which suggests that the company’s profitability has been stronger than as-reported metrics show.

Ayala Corporation has a slightly 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 0.2x in 2022 was lower than Uniform asset turnover of 0.4x, giving the organization a lower asset efficiency score than actual economic measures indicate.

Uniform turns of Ayala corporation were historically more than double as-reported turns trend. However, in recent years, both metrics are seeing a decline.

SUMMARY and Ayala Corporation Tearsheet

As our Uniform Accounting tearsheet for Ayala Corporation (AC:PHL) highlights, the company trades at a Uniform P/E of 14.8x, below the global corporate average of 18.4x and its historical P/E of 18.5x.

Low P/Es require low EPS growth to sustain them. In the case of Ayala Corporation, the company has recently shown a 176% 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, Ayala Corporation’s sell-side analyst-driven forecast is to see Uniform earnings growth of 146% and 46% 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 Ayala Corporation’s PHP 694.00 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 2% 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 2024.

Moreover, the company’s earning power is in line with the long-run corporate averages. However, 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 and 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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