Sparks fly from this Cebu-based company as it continues to generate better shareholder value with a Uniform ROA of 10%, not 6%
Through its equity interests, this company engages in one of the most important sectors in the country. That said, it still wasn’t spared from the negative impact of the pandemic, looking like it generated little shareholder value in 2020. However, Uniform Accounting tells a more robust story as it considers another important factor regarding company 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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What started out as a family business mostly in shipping and trading in the late 19th century diversified into the power distribution business through its purchase of the Visayas Electric Company (VECO). It would eventually be the second largest privately-owned electric power distribution utility in the Philippines in terms of annual gigawatt-hour (GWh) sales as of 2020.
In 2002, the family business would secure its place on the Philippine Stock Exchange by acquiring the shares of a publicly listed company. Thereafter, the aforementioned company would be later renamed to what is now known as Vivant Corporation (VVT:PHL).
Currently, Vivant is a holding company that has equity interests in numerous companies in the Philippines. Mainly in the energy industry, Vivant expanded from electric power distribution to electric power generation, retail electricity business, and water infrastructure.
This expansion is timely because of the rapidly increasing demand from a growing population in the Philippines.
Additionally, within VECO’s servicing area is Cebu City, a real estate hotspot with its developing IT (Information Technology) and BPO (Business Process Outsourcing) businesses. This positions the company to grow as corporate demand remains to be a key driver for the company.
That said, the pandemic slowed down VECO’s momentum. Even though consumer demand improved because of the work-from-home setup, the weaker commercial and industrial demand dragged sales down, resulting in overall sales decline for 2020.
Moreover, VECO’s power generation and power distribution business, which contributed around 76% and 15% of its revenues respectively, declined by PHP 2.0 billion and PHP 206 million in 2020.
Nevertheless, with global economic recovery and the return of corporate demand, the holding company Vivant Corporation remains optimistic about its financial position going forward.
Looking at as-reported metrics, it appears that Vivant is not generating enough shareholder value, with return on assets (ROAs) reaching just above cost-of-capital levels in 2020.
In reality, the company’s performance actually did much better than expected, with Uniform ROAs reaching a robust Uniform ROA of 10% despite the pandemic-related disruptions.
The distortion between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of minority interest expenses or the income attributable to the non-controlling interests of a company’s subsidiaries.
The Philippine Financial Reporting Standards (PFRS) allow minority interest expense to be recognized under operating cash flow, leading people to incorrectly think that it is essential to the firm’s core operations.
In reality, it should always be classified as a financing cash flow. Minority shareholders provide capital to the subsidiary in exchange for a piece of the company’s profits. As a result, minority interest expense should not be subtracted from revenue when calculating a company’s real core earnings.
In 2020, Vivant recognized PHP 264.7 million in minority interest expense, resulting in a PHP 1.4 billion net profit and a 6% as-reported ROA. Adding this back alongside the many other adjustments Valens makes, the company should actually be recognizing PHP 1.8 billion in Uniform earnings and a 10% Uniform ROA.
Vivant Corporation’s earning power is stronger 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 the company is a weaker business than real economic metrics highlight.
Through Uniform Accounting, we can see that the company’s true ROAs have been mostly understated beyond the past decade. For example, as-reported ROA was 6% in 2020, but its Uniform ROA was actually higher at 10%.
After declining from 15% in 2007 to 8% in 2009, Uniform ROA rebounded to a peak of 32% in 2012. Then, Uniform ROA fell to 12% in 2018, before rebounding to 17% in 2019, and fading to 10% in 2020.
Vivant Corporation is a more efficient business than you think
As-reported metrics significantly understate Axelum Resources’ asset utilization. For example, as-reported asset turnover for the company was 0.3x in 2019, lower than Uniform asset turns of 0.4x, making the firm appear to be a less cost-efficient business than is accurate.
Moreover, as-reported asset turnover has never eclipsed beyond 0.5x, while Uniform asset turns have reached a peak of 0.8x in the same time period, distorting the market’s perception of the company’s asset utilization over the past decade.
SUMMARY and Vivant Corporation Tearsheet
As our Uniform Accounting tearsheet for Vivant Corporation (VVT:PHL) highlights, the company trades at a Uniform P/E of 15.1x, below the global corporate average of 24.0x, but above its historical P/E of 10.3x.
Low P/Es require low EPS growth to sustain them. In the case of Vivant, the company has recently shown a 40% 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, Vivant’s sell-side analyst-driven forecast is to see Uniform earnings shrinkage of 3% and 4% in 2021 and 2022, respectively.
Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Vivant’s PHP 16.72 stock price. These are often referred to as market embedded expectations.
The company is currently being valued as if Uniform earnings were to shrink 13% annually over the next three years. What sell-side analysts expect for Vivant’s earnings growth is above what the current stock market valuation requires through 2022.
Moreover, the company’s earning power is 2x above the long-run corporate average. Furthermore, cash flows and cash on hand are above total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low credit risk.
To conclude, Vivant’s Uniform earnings growth is in line with its peer averages, and currently trades above 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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