Rising commodity prices has led this coal producer to enjoy a historic year, fueling its returns to a high of 43%, not 33%
This coal producer has effectively taken advantage of favorable market conditions and historical coal prices, recording its most profitable year to date.
However, as-reported metrics seem to downplay the company’s success by showing returns significantly lower than its TRUE earning power.
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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The Russia-Ukraine War and its imposed sanctions caused global prices of commodities to skyrocket. While oil and gas price increases headlined most news articles, coal saw the biggest price hike out of all commodities, soaring to historic highs in September 2022.
While this meant higher costs for many companies, coal producers like Semirara Mining and Power Corporation (SCC:PHL) enjoyed an unexpectedly successful year. Semirara is the biggest coal producer in the Philippines, with a massive 99% share of the country’s total coal output.
The company supplies affordable fuel to power plants, cement factories, and other industrial facilities across the country and is the only power producer that owns and mines its own fuel source.
After seeing a sudden spike in demand for coal in the early months of 2022, Semirara was quick to look for the best growth opportunities given the volatile environment. These included increasing plant production capacity, expansion and plant improvement projects, and diversifying its market focus to reduce costs.
The average selling price of coal per metric ton rose by as much as 122% from January to September, which was the same time coal prices reached its historic highs. With rising commodity prices, Semirara was able to meet the escalated demand with increased production in its plants.
Semirara also shifted its focus from heavily depending on China to domestic, South Korean, and other ASEAN markets in acquiring inventory. This diversification strategy allowed the company to reduce its costs during the time wherein China was importing discounted coal from Russia.
Expansion projects and plant improvements are also consistently on top of Semirara’s priorities in order to improve both its capacity and efficiency. PHP 8.8 billion was set aside in 2022 for mine equipment refleeting, power plant maintenance, and power plant construction.
Among these projects was the construction of a 13-megawatt (“MW”) power plant in Semirara Island which aimed to provide additional steady supply for the company’s mining operations.
Semirara saw a 33% increase in domestic coal sales year-on-year, from 5.8 million metric tons in 2021 to 7.7 million metric tons in 2022. This led to the company seeing an all-time high in net income of PHP 39.9 billion, which resembled a 146% improvement from the previous year.
Overall, despite the volatility in the energy sector, Semirara appears set to use a successful 2022 as a stepping stone to continue its growth through various expansion plans and other opportunistic strategies for its future initiatives.
Semirara’s earning power is stronger than you think
Semirara’s situational decision making combined with a historic rise in coal prices seems to be understated when looking at as-reported metrics with asset returns only showing 33%.
In reality, the company achieved higher Uniform returns of 43%, making 2022 its most profitable year since the company was established.
What as-reported financials have gotten wrong is the depreciation of the company’s fixed assets.
Depreciation expense is a non-cash expense, meaning it does not represent an actual outlay of cash. Also, it can be easily manipulated by changing the asset’s life. As such, depreciation expense should be removed from earnings.
However, the company does spend cash on maintenance capital expenditures to ready the same assets for use in the following years. That said, this expense barely shows up in its entirety on the balance sheet.
To arrive at an estimate of the firm’s maintenance capex, what is done instead is smoothing as-reported depreciation expense over a few years, adjusting for inflation and asset impairments.
In Semirara’s case, PHP 1.6 billion of depreciation expense was charged in 2022. As a result, along with the many other adjustments made, we arrive at a PHP 38.7 billion in Adjusted earnings and a 43% Uniform earning power for the company in 2022.
SUMMARY and Semirara Mining and Power Corporation Tearsheet
As our Uniform Accounting tearsheet for Semirara Mining and Power Corporation (SCC:PHL) highlights, the company trades at a Uniform P/E of 4.6x, below the global corporate average of 18.4x and around its historical P/E of 4.1x.
Low P/Es require low EPS growth to sustain them. In the case of Semirara, the company has recently shown a 159% 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, Semirara’s sell-side analyst-driven forecast is to see a Uniform earnings decline of 15% and 22% 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 Semirara’s PHP 34.90 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 29% annually over the next three years. What sell-side analysts expect for Semirara’s earnings growth is above what the current stock market valuation requires through 2024.
Moreover, the company’s earning power is 7x the long-run corporate averages. Furthermore, cash flows and cash on hand are almost 6x its total obligations—including debt maturities, capex maintenance, and dividends. Intrinsic credit risk is 90bps above the risk-free rate. Together, this signals a low credit and dividend risk.
Lastly, Semirara’s Uniform earnings growth is in line with its peer averages; however, its Uniform forward P/E is 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!
Regards,
Angelica Lim
Research Director
Philippine Markets Newsletter
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