Philippine Markets Newsletter

Taking a page from its competitor’s playbook, this multi-format retailer just made one key transaction to generate record-high Uniform ROA

November 24, 2020

Competitive pressures drove this multi-format retailer to follow a strategy its competitor once did.

The move may seem questionable considering the said competitor’s poor as-reported ROAs, but Uniform Accounting reveals the true ROAs the strategy is generating. Today, this multi-format retailer company is actually seeing returns reach a new peak.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Daily:
Tuesday Uniform Earnings Tearsheets – Philippine-listed Focus
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We’ve previously mentioned the intensifying competition of the supermarket space. Given the difficulty in generating customer loyalty, companies have resorted to other ways of attracting customers.

We talked about Puregold’s strategy of market segmentation, where the company owns two brands that targeted different, distinct niches in the market.

The company’s namesake brand caters to buyers who prefer to purchase in small quantities, while the S&R brand serves the bulk purchasing customers.

As a result, Puregold has been sustaining Uniform earning power of at least 10% since 2011, a year before the S&R acquisition. Meanwhile, its as-reported ROA has been below that level since the aforementioned acquisition.

If as-reported metrics are to be believed, Puregold’s acquisition strategy should be considered a failure. However, what we’re seeing instead is one of the firm’s largest competitors copying the same tactic.

Robinsons Retail Holdings, Inc. (RRHI:PHL) is a company that operates in almost every retail market. Among its many business lines, it owns department stores, toy stores, and drug stores, but the supermarkets are the most significant in terms of revenues.

Since 2010, the supermarket business has been RRHI’s largest source of revenue, driven mostly by the Robinsons Supermarket brand, which makes up essentially half of Robinsons Retail’s sales.

Unlike Puregold, Robinsons Retail has historically seen its Uniform earning power stagnate at around 6%-8% levels. In addition, the company’s supermarket business has seen its sales grow at a slower rate than Puregold.

Pressured by the fast-growing competition, Robinsons Retail made a transaction similar to what Puregold did, by purchasing peer Rustan Supercenters in late 2018.

Rustan Supercenters is a high-end grocery chain operator with well-known brands such as Marketplace by Rustan’s and Rustan’s Supermarket.

With the acquisition, Robinsons Retail positions itself to offer more standard products through Robinsons Supermarket and more premium goods with the Rustan’s brands.

As a result, the company was able to generate its highest sales growth since going public in 2019. More importantly, Uniform ROAs nearly doubled in 2019 from 6% to 10%.

However, similar to Puregold, as-reported metrics have once again failed to show an acquisition’s benefits. In 2019, Robinsons Retail’s as-reported ROA declined to a recent low of 4%


As is the case with most mergers and acquisitions, management teams often pay a premium for the acquired assets, which increases the goodwill on the company’s balance sheet.

Although required by the Philippine Financial Reporting Standards (PFRS), goodwill artificially inflates the company’s asset base. It is an intangible asset that is purely accounting-based and unrepresentative of the company’s actual operating assets.

Therefore, goodwill should be removed from the company’s assets.

With the PHP 13.8 billion Rustan Supercenters acquisition in late 2018, Robinsons Retail recognized an additional PHP 9.1 billion of goodwill. This led the company’s goodwill to balloon to PHP 12.5 billion, accounting for nearly 10% of its total as-reported assets in 2019.

Removing goodwill and applying other necessary adjustments, Robinsons Retail’s 4% as-reported ROA and PHP 137.9 billion asset base are adjusted to be only PHP 108.1 billion of Uniform assets, revealing a TRUE Uniform ROA of 10%.

Robinsons Retail’s earning power is stronger than you think


As-reported metrics distort the market’s perception of the firm’s historical profitability. If you were to just look at as-reported ROA, you would think that Robinsons Retail’s profitability has been stronger than real economic metrics have highlighted.

In reality, Robinsons Retail’s true profitability has been lower than its as-reported ROA for the past six years. Specifically, as-reported ROA was 4% in 2019, but Uniform ROA was higher at 10%.

After expanding from 3% levels in 2011 to a high of 7% in 2013, as-reported ROA has since slowly faded to 4% in 2019.

Meanwhile, Uniform ROA rose from 2% levels in 2010-2011 to 7% in 2013, before compressing to 5% levels from 2015-2018. Since then, Uniform ROA has jumped to a peak of 10% in 2019, following the Rustan Supercenters acquisition.

Robinsons Retail’s margins had been weaker than you thought


Improvements in Uniform ROA have been driven by improving Uniform earnings margins. However, prior to 2019, Uniform margins were lower than as-reported EBITDA margins in each of the past nine years.

As-reported EBITDA margins improved from 4% levels in 2010-2011 to 8% in 2013, before stabilizing at 7%-8% levels through 2019.

Meanwhile, after soaring from 1% levels in 2010-2011 to 6% levels in 2015-2016, Uniform ROA declined to 5% levels in 2017-2018. Since then, Uniform ROA has jumped to a peak of 7% in 2019.

Looking at the firm’s margins alone from 2010-2018, as-reported metrics make the firm appear to be a more cost-efficient business than is accurate.

SUMMARY and Robinsons Retail Holdings, Inc. Tearsheet

As the Uniform Accounting tearsheet for Robinsons Retail Holdings, Inc. (RRHI:PHL) highlights, the Uniform P/E trades at 15.7x, which is below corporate averages and its own history.

Low P/Es require low EPS growth to sustain them. In the case of Robinsons Retail, the company has recently shown a 25% Uniform EPS growth.

Sell-side analysts provide stock and valuation recommendations that provide very poor guidance or insight in general. 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, Robinsons Retail’s sell-side analyst-driven forecast calls for a 10% Uniform EPS decline in 2020 followed by an 18% Uniform EPS growth in 2021.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Robinsons Retail’s PHP 69.40 stock price. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 5% each year over the next three years and still justify current valuations. What sell-side analysts expect for Robinsons Retail’s earnings growth is below what the current stock market valuation requires in 2020, but above that requirement in 2021.

Furthermore, the company’s earning power is 2x long-run corporate averages. In addition, cash flows and cash on hand are more than 200% of its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low credit and dividend risk.

To conclude, Robinsons Retail’s Uniform earnings growth is below peer averages in 2020, and the company is trading below its peer average valuations.

About the Philippine Market Daily
“Tuesday 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 Tuesday, 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.


Angelica Lim
Research Director
Philippine Markets Daily
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