Philippine Markets Newsletter

Staying true to its strategy enabled this alcoholic beverage company to achieve a Uniform ROA of 12%, not 6%

July 26, 2023

This alcoholic beverage company has remained successful for years just by using a single strategy.

Despite the company’s efforts, as-reported metrics still show meager returns, when in reality, its TRUE profitability shows otherwise.

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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2022 was a challenging period for the alcoholic drinks industry in the Philippines as instability and inflationary pressures ravaged the global economy.

Fortunately, the industry’s ability to cater to its consumers’ evolving demands and shift towards e-commerce resulted in an impressive economic performance in 2023. It achieved $13.3 billion in revenue, which is expected to grow annually by 6% through 2027.

For one, Emperador Inc. (EMI:PHL) has become an established global player and producer of high-quality liquor and innovative products. It ended 2022 with strong growth, with revenue improving 12% year-on-year from PHP 56 billion in 2021 to PHP 63 billion.

Interestingly, this improvement was driven by the sales of single malt whiskies throughout Asia, North America, and Europe, including the recent uptick in travel retail.

For the past years, its passion to continuously pursue its long-term “CPI” strategy—contemporize its offering, premiumize its portfolio, and internationalize its business—immensely guided the company’s success.

Most recently, the sherry innovation phenomenon has become very popular, particularly on single malts. Because of this, Emperador has been capitalizing on this versatile liquid concept to contemporize brandy—particularly one of its products Brandy de Jerez’s overall image—and attract new customers.

In line with this, the company also premiumized its whisky segment by partnering with Kengo Kuma and auctioning one rare bottle of Luminary No. 1—which was sold for £100,000 at Sotheby’s.

It also launched a line of innovative Premium Tower Cocktails, which expanded options and ignited an inspiring ingenuity of mixing different flavors.

On top of that, Emperador is gradually meeting its goal of expanding in the global markets, with its brandy segment dominating the Philippines, Spain, Mexico, and North America. As a result of this progress, it reported a net income of PHP 10.1 billion, which is 10% higher than the PHP 9.9 billion recorded in 2021.

The company also became the first Philippine company to be part of the Straits Times Index. This acknowledgment recognizes Emperador’s outstanding performance and may expose the company to a more extensive base of institutional and retail investors.

With all these striking gains, strategies, and achievements, it appears Emperador has a bright future for success. Despite these efforts, the as-reported metrics seem to understate and distort the true reflection of Emperador’s profitability.

In reality, the company’s performance needs more credit as it profited much better than represented, with Uniform ROAs reaching 5%.

One of the distortions between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of goodwill on Emperador’s balance sheet. The company’s goodwill sits at about PHP 29.6 billion in 2022, which was approximately 21% of its total assets, stemming from the acquisitions over the course of its operations.

Goodwill is an intangible asset that is 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 Emperador’s earning power. Specifically, if we remove goodwill along with the other necessary adjustments in Uniform Accounting in 2022, the company should be recognizing PHP 57 billion less in assets and a 12% Uniform ROA.

Emperador’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 2022, but its Uniform ROA was actually 2x higher at 12%.

SUMMARY and Emperador, Inc. Tearsheet

As our Uniform Accounting tearsheet for Emperador, Inc. (EMI:PHL) highlights, the company trades at a Uniform P/E of 28.4x, above the global corporate average of 18.4x, but around its historical P/E of 27.3x.

High P/Es require high EPS growth to sustain them. In the case of Emperador, the company has recently shown a 6% 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, Emperador’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 11% through 2024.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Emperador’s PHP 21.00 stock price. These are often referred to as market-embedded expectations.

The company is currently being valued as if Uniform earnings were to grow by 11% annually over the next three years. What sell-side analysts expect for Emperador’s earnings growth is above what the current stock market valuation requires through 2024.

However, the company’s earning power is 2x the long-run corporate averages. Moreover, cash flows and cash on hand are 4x its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low dividend risk.

To conclude, Emperador’s Uniform earnings growth is in line with its peer averages, but 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!


Angelica Lim
Research Director
Philippine Markets Newsletter
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