Philippine Markets Newsletter

Strategic win-win partnerships helped this mall operator serve its communities, while boasting its most profitable year yet

April 19, 2023

This mall operator has been able to withstand the effects of the pandemic and quickly bounced back through win-win partnerships. As a result, it attracted consumers to return to its establishments. 

In what would have been their most profitable year to date, as-reported metrics seem to distort this development, only reporting 4.5% instead of a Uniform return of 10%.

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 pandemic has strained the capability of businesses, especially ones relying on foot traffic, to remain profitable in the midst of quarantine restrictions. For many, the idea of being able to go out safely again was extremely far-fetched.

But by some miraculous development, vaccines that helped combat the disease became available just before 2020 ended. The rollout of vaccines in the country started in March 2021, and by then it was only a matter of time until the country–and businesses–reopened.

To help with the vaccination efforts, Vistamalls, Inc. (STR:PHL) partnered with the Department of Health and Local Government Units for its malls to become official vaccination centers. The company opened its doors in cities and municipalities including Las Piñas, Taguig, Bataan, Dasmariñas, and Tanza, Cavite. 

Along with this, the company also partnered with the Philippine Statistics Authority to establish satellite registration centers in its establishments. This is in support of the government’s push for a single national ID.

Vistamalls earns revenues through rental income from stores leasing in its properties, as well as  parking fees collected from consumers going to its malls.

Correspondingly, through its partnerships, Vistamalls was able to generate foot traffic encouraging its lessors to open their stores, taking advantage of the slow and steady stream of consumers in its malls.

Relaxing mobility restrictions also helped as consumers started splurging through “revenge shopping.” They can freely go to stores as long as they have been vaccinated, proving it using their vaccination cards.

Vistamalls’ efforts to bring consumers back inside its establishments proved to be successful. Rental income for 2021 increased by 29% from PHP 6.8 billion the previous year to PHP 8.8 billion due to an increase in occupancy and rental rates.

Parking fees also increased by 6% from PHP 115 million due to a higher number of vehicles using its malls’ parking space. They were also able to cut advertising costs by 23.9%, to PHP 25 million, as they shifted to digital marketing. 

As a result, net earnings grew by 62% from PHP 2.3 billion in 2020 to PHP 4.4 billion in 2021. 

Overall, it seems that Vistamalls, through their partnerships, helped encourage consumers to go back to malls. In turn, the company has bounced back stronger from the effects of the pandemic. 

However, looking at the as-reported metrics, the company was shown to be stagnating since 2016, only reaching 4.5% in 2021.

In reality, the company’s real economic profitability has actually been more than what as-reported metrics highlight, reaching its highest 10% in 2021.

What as-reported metrics fail to consider is how current liabilities are factored into the ROA calculation. Traditional ROA calculations for measuring a firm’s earning power only include current and long-term assets as part of the cost of investment.

However, a company’s ability to receive goods and services in advance of payments – the current operating liabilities – ought to be factored in as well.

Current liabilities (excluding short-term debt) are necessary for operations. Items such as accounts payable, accrued expenses, and others are used to maintain the firm’s current capital position. On the other hand, long-term liabilities are mostly just used to finance the business.

If a company has a ton of cash to service its current liabilities and we only factor in its cash, it would make the company look inefficient. In reality, the company is just being responsible by building liquid assets to meet short-term obligations.

As such, net working capital (current assets – current liabilities) is used for the firm’s ROA calculation. This shows a company’s real cash management ability and thereby, its true earning power.

In the case of Vistamalls, as-reported metrics’ asset base for ROA calculation is at PHP 80.7 billion in 2021, leading to a 4.5% as-reported ROA.

However, when subtracting other current liabilities of PHP 33.8 billion and applying other needed adjustments, we arrive at Vistamalls’ PHP 36.5 billion Uniform assets, resulting in a 10% Uniform ROA.

Vistamalls’ profitability is stronger 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 reveal.

For example, Uniform ROA for Vistamalls was 10% in 2021, substantially higher than the as-reported ROA of 4.5%, making the company appear to be a much weaker business than real economic metrics highlight for the past six years. 

Moreover, since 2015, Uniform ROA has climbed from 2% to 10%, while as-reported ROA has not eclipsed past 5% in the same time frame, substantially distorting the market’s perception of the firm’s ceiling.

Vistamalls’ Uniform earnings margins are weaker than you think but its Uniform asset turns make up for it in recent years

Trends in Uniform ROA have been driven primarily by Uniform earnings margin, and to a lesser extent, Uniform asset turns.

Since compressing to 3% in 2012, Uniform margins have fluctuated from 17% to 40%. Meanwhile, Uniform turns fell to immaterial levels after falling from 0.2x levels in 2006, but then gradually expanded to 0.3x levels in 2019 to 2021. 

SUMMARY and Vistamalls, Inc. Tearsheet

As our Uniform Accounting tearsheet for Vistamalls, Inc. (STR:PHL) highlights, the company trades at a Uniform P/E of 6.9x, below the global corporate average of 18.4x and its historical P/E of 13.4x.

Low P/Es require low EPS growth to sustain them. In the case of Vistamalls, the company has recently shown a 106% 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, Vistamalls’ sell-side analyst-driven forecast is to see Uniform earnings growth of 23% and 1% 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 Vistamalls’ PHP 2.80 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 12% per year over the next three years. What sell-side analysts expect for Vistamalls’ earnings growth is well above what the current stock market valuation requires in 2023 and 2024.

Moreover, the company’s earning power is 2x the long-run corporate average. Additionally, cash flows and cash on hand are 158% above total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a low credit risk and dividend risk.

To conclude, Vistamalls’ Uniform earnings growth is well above its peer averages, but 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!


Angelica Lim
Research Director
Philippine Markets Newsletter
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