Philippine Markets Newsletter

Partnerships and developments in the construction industry are building up this company’s profitability, with Uniform ROA at 8%!

January 6, 2021

As the global economy slowly recuperates from the pandemic, construction and infrastructure proposals should also resume. This company, with its strategic partnerships around the globe, benefits from the growth of the construction industry.

However, as-reported metrics show this company has weak profitability, consistently around or below cost of capital. Uniform Accounting reveals this is not the case, and the company’s returns are actually stronger.

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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The housing and construction industries have a direct effect on a nation’s economy.

When an economy is improving, additional modern office structures are constructed to address rising demand from businesses. Residential areas are also built or remodeled to cater to the growing demand from consumers who now have more income to spend.

Construction also has a positive impact on industries other than its own. For instance, the construction industry stimulates growth in real estate, equipment, retail, and tourism, among other industries.

Prior to the pandemic, a change took place from the construction of modern infrastructures to the maintenance of existing infrastructure in Japan. Examples of these include the linear automobile proposals for transportation, the renovation of Tokyo in preparation for the Tokyo Olympics, and the renovation of Shibuya station area.

In the field, the ongoing growth of solar power plants and the advancement of other kinds of sustainable energy is constantly rising. Accordingly, the need of rising commercial sectors for building supplies and fuel has encouraged Japanese trading houses to extend their forestry activities.

One such company benefiting from these developments is Sumitomo Forestry. To further expand its operations and manage extensive company-owned forests in Japan and around the world, Sumitomo Forestry has made strategic partnerships with various companies.

In 2017, one of Vietnam’s dominating wood processing and embellishing supplies companies, A Cuong Working JSC, declared a partnership with Sumitomo Forestry, enhancing their focus on company expansion.

Sumitomo Forestry sent specialists from Japan in order to support A Cuong’s production lines in manufacturing furniture and make it eligible for exports to Japan and the US. This was possible since Sumitomo Forestry’s housing development business in both markets already produces revenues exceeding $4 billion every year.

Furthermore, the partnership has created an ideal supply chain in Vietnam, satisfying international standards and providing for all clients in Vietnam, as well as customers in Japan and all over the world.

In 2019, Sumitomo Forestry entered into an agreement with Marui Group Co., Ltd. to obtain 40% of the stocks of its wholly-owned subsidiary, Aim Create Co., Ltd.

This partnership enables Sumitomo Forestry to combine its proficiency in the outline and construction of structures with Aim Create’s expertise in interior design, arrangement, and construction of business offices.

Sumitomo Forestry was able to reinforce its nonresidential buildings sector, such as business offices, elderly, and childcare facilities, with Aim Create’s resources and expertise.

Another key strategic partner of Sumitomo Forestry is UPM Timber. UPM Timber acts as a supplier of raw materials to contractors of Sumitomo Forestry, which are utilized by the latter in house development.

With their continuing close partnership, Sumitomo Forestry has also been advancing its business for middle- to large-scale wooden structures in the direction of achieving the idea of “Environmentally-Friendly and Timber-Utilizing Cities” that transforms urban areas into forests.

Moreover, Sumitomo Forestry and UPM Timber are working together to create value for European lumber. Together, the two companies have launched a joint project to market UPM products to Asian countries.

The growth in the construction industry, plus Sumitomo Forestry’s strategic partnerships around the world, gives the company an opportunity to improve its profitability and expand its customer base.

However, Sumitomo Forestry’s as-reported returns do not reflect this. Historically, the company’s as-reported ROAs have always been weak and below cost of capital, making it look like it hasn’t been benefiting from these tailwinds.


This is a misrepresentation of Sumitomo Forestry’s profitability. Uniform Accounting, on the other hand, shows us that in fifteen of the past sixteen years, the company’s real returns are more robust than what as-reported metrics show.


One key metric that is causing distortions in as-reported ROAs is minority interest expense.

Minority interest expense is the portion of the company’s total earnings that is attributed to its minority shareholders. These minority shareholders are investors or other organizations that own less than 50% of the company.

Sumitomo Forestry regularly reports minority interest expenses, which are deducted from the company’s total earnings. This is done to account for the part of the earnings that is allocated to the company’s minority shareholders.

However, removing minority interest expenses from a company’s net income does not show its performance as a whole, making the company’s profitability appear substantially weaker than it actually is. By adding it back to the company’s net income, we can see the company’s true earning power as a whole and not just a part of it.

After adjusting for minority interest expense and applying other adjustments, we can see that Sumitomo Forestry is not at all a weak business as displayed by its below cost-of-capital as-reported ROAs. In fact, its Uniform returns currently sit at 8%, significantly higher than the 3% as-reported.

Sumitomo Forestry’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 highlight.

Sumitomo Forestry’s Uniform ROA has been higher than its as-reported ROA in fifteen of the past sixteen years. For example, when Uniform ROA peaked at 9% in 2016, as-reported ROA was only 3%.

The company’s Uniform ROA for the past sixteen years has ranged from -1% to 9%, while as-reported ROA remained only between 1% and 5% in the same time frame.

From 6% levels in 2005, Uniform ROA fell to -1% in 2010 before gradually reaching its peak of 9% in 2016. Uniform ROA then slightly declined to 8% in 2020.

Sumitomo Forestry’s Uniform earnings margins are weaker than you think, but its Uniform asset turns make up for it


Volatility in Uniform ROA has been driven by trends in Uniform asset turns and Uniform earnings margins, with peaks and troughs lining up historically with that of Uniform ROA.

After falling from 1% in 2005 to negative levels in 2010, Uniform margins gradually improved to 4% in 2020.

Meanwhile, Uniform turns declined from 5.2x in 2005 to 2.7x in 2008. It then recovered to 3.9x in 2013 before declining to 2.2x in 2020.

SUMMARY and Sumitomo Forestry Co., Ltd. Tearsheet

As the Uniform Accounting tearsheet for Sumitomo Forestry Co., Ltd. (1911:JPN) highlights, its Uniform P/E trades at 17.0x, which is below corporate average valuation levels, but above its own recent history.

Low P/Es require low EPS growth to sustain them. In the case of Sumitomo Forestry, the company has recently shown an 8% 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 Japan’s Modified International Standards (JMIS) earnings and convert them to Uniform earnings forecasts. When we do this, Sumitomo Forestry’s sell-side analyst-driven forecast is a 46% earnings shrinkage in 2021, followed by a 116% earnings growth in 2022.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Sumitomo Forestry’s JPY 2,154 stock price. These are often referred to as market embedded expectations.

Sumitomo Forestry can have a 3% Uniform earnings shrinkage for each of the next three years and still justify current market expectations. What sell-side analysts expect for Sumitomo Forestry’s earnings is below what the current stock market valuation requires in 2021, but well above its requirement in 2022.

The company’s earning power is around the corporate average. Moreover, cash flows and cash on hand are above its total obligations. Together, this signals a low credit and dividend risk.

To conclude, Sumitomo Forestry’s Uniform earnings growth is below its peer averages in 2021, and the company is trading in line with its peer valuations.

About the Philippine Market 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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