Philippine Markets Newsletter

This 100-year old conglomerate shows the benefits of venturing into diversification, showing with more than double its as-reported returns

March 16, 2022

As one of the largest companies in the country, this company’s ability to invest and diversify its operations enabled it to search for growth opportunities even during the tight quarantine restrictions.

However, as-reported metrics tell a different story, failing to explain why the company’s performance has always produced better shareholder value than investors see.

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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In the late 1800s, Paulino Aboitiz started abaca trading in Leyte, then formally incorporated his business as the Aboitiz & Company in 1920. After his son, Don Ramon Aboitiz, took over as head of the company, the younger Aboitiz sought to diversify the business in order to establish a strong foundation for growth.

Aboitiz ventured from trading abaca and other agricultural materials to selling chemicals, construction materials, and industrial equipment in the mid-1900s.

By 1994, the company would change its name to Aboitiz Equity Ventures, Inc. (AEV:PHL) and join the list of publicly traded companies in the Philippines. Aboitiz Equity Ventures operates through multiple industries such as power through Aboitiz Power Corporation, financial and banking services (UnionBank), food production (Pilmico Foods Corporation), infrastructure (Aboitiz InfraCapital), and real estate development (AboitizLand).

Normally, this diversity in business would give large companies the ability to capitalize on multi-sectoral growth opportunities and mitigate downside risks to a particular industry. However, the pandemic’s widespread negative impact resulted in a 26% decline in core net income for 2020, driven by a 25% income decline from its power unit that makes up 52% of the company’s income.

As the Philippine economy recovers with the vaccine rollout and the new and active cases per day decline, the company was able to record PHP 27.3 billion net income in 2021, even exceeding its pre-pandemic 2019 net income of PHP 22 billion.

During the peak of quarantine restrictions, Aboitiz Equity Ventures recognized the importance of investing in order to fully capitalize on expansion after the pandemic. As such, the company allocated around PHP 48 billion for capital expenditures. 

Moreover, Aboitiz Equity Ventures formed strategic partnerships with established players to boost its growth initiatives. Last September, the company sold 25% of its shares in its power unit to JERA Co., which is one of Japan’s largest power generation companies. The funds will be utilized to unlock value for its energy projects.

With Aboitiz Equity Ventures’ diversification strategies and growth investments, it would seem like the company has been successful in producing economic value for its stockholders.

However, looking at as-reported metrics, it appears that Aboitiz Equity Ventures has been doing just enough to stay above cost of capital levels, with return on assets (ROAs) reaching 3% in 2020.

In reality, Uniform Accounting shows that Aboitiz Equity Ventures’ initiative to diversify its business has generated better returns, with Uniform ROAs exceeding cost of capital levels, at 8%.

One of the said distortions stems from how Philippine Financial Reporting Standards (PFRS) classifies Aboitiz Equity Ventures’ non-operating long-term investments. 

Composed mostly of long-term financial securities and non-controlling ownership interests, these are not considered to be core to the company’s operations since the firm has no management influence on either of these.

As such, removing non-operating long-term investments from the balance sheet and with the other adjustments Valens makes, Aboitiz Equity Ventures’ Uniform earning power has actually been more than 2x as-reported ROA since 2014.

Specifically, in 2020, Aboitiz Equity Ventures recorded non-operating long-term investments at PHP 150 billion. Removing non-operating long-term investments from the balance sheet,  along with many other necessary adjustments made by Valens, leads to a PHP 268 billion Uniform Net Assets and an 8% Uniform ROA, more than 2x as-reported ROA since 2014.

Aboitiz Equity Ventures’ 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, especially with recent years showing below cost-of-capital returns.

Through Uniform Accounting, we can see that the company’s true ROAs have actually been higher than its as-reported ROA in the past sixteen years. For example, as-reported ROA was 3% in 2020, but its Uniform ROA was actually higher at 8%. 

From 2005 to 2009, Uniform ROA ranged at 4% to 7% levels, before expanding to a peak of 22% in 2010 following the company’s acquisition of 747 Megawatt (MW) Tiwi-MakBan Geothermal Power Plant.

Then, Uniform ROA collapsed to 10% in 2013, before improving to a range of 11%-14% levels in 2014-2019, and deteriorating further to 8% levels in 2020.

Aboitiz Equity Ventures is a more efficient business than you think

Aboitiz Equity Ventures’ strong profitability has been primarily driven by robust asset turns.

Uniform asset turns steadily improved in 2005-2007, ranging from 1.2x-1.5x, before dropping to 0.5x in 2009. Then from 2010-2015, Uniform turns improved, ranging from 0.7x  to 0.9x, before fading back again to 0.5x in 2016. Thereafter, Uniform asset turns have recovered back to 0.7x in 2020.

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

SUMMARY and Aboitiz Equity Ventures, Inc. Tearsheet

As our Uniform Accounting tearsheet for Aboitiz Equity Ventures, Inc. (AEV:PHL) highlights, the company trades at a Uniform P/E of 27.8x, above the global corporate average of 24.0x, and its historical P/E of 19.7x.

High P/Es require high EPS growth to sustain them. In the case of Aboitiz Equity Ventures, the company has recently shown a 126% 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, Aboitiz Equity Ventures’ sell-side analyst-driven forecast is to see Uniform earnings shrink by 740% in 2021, but grow by 9% in 2022.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Aboitiz Equity Ventures’ PHP 57.75 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 2% annually over the next three years. What sell-side analysts expect for Aboitiz Equity Ventures’ earnings growth is below what the current stock market valuation requires in 2021, but above the requirement in 2022.

Moreover, the company’s earning power is above the long-run corporate average. However, cash flows and cash on hand are below total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a high dividend risk.

To conclude, Aboitiz Equity Ventures’ Uniform earnings growth is well below peer averages, but currently trades in line with 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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