Philippine Markets Newsletter

This coconut exporter is not a nut as it brings fruitful profits for shareholders with a Uniform ROA of 8%, not 3%

April 6, 2022

As the largest coconut manufacturer and exporter in the Philippines, this company managed to generate robust shareholder value. However, as-reported metrics fail to show a crucial component in the company’s profitability, telling a different story to investors.

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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Founded in 1986, Fiesta Brands, Inc. (FBI) grew into an established manufacturer and exporter of various coconut products.

FBI’s management incorporated Axelum Resources Corp (AXLM:PHL) primarily as a placeholder to produce coconut water for The Vita Coco Company, the world’s largest coconut water brand. 

Axelum Resources would eventually become the primary company in 2016 as it purchased the assets of Fiesta Brands and its other companies that focused on utilizing different coconut products.

These included Fresh Fruit Ingredients with its distribution on sweetened and toasted coconut, Cocoderivatives with coconut oil, and Muenster Ingredients Manufacturing with its focus on desiccated coconuts.

By 2020, the company became the country’s largest fully-integrated manufacturer and exporter of premium food-grade coconut products, ranging from desiccated coconut, coconut water, coconut milk powder, coconut milk/cream, coconut cooking oil, reduced-fat coconut, and sweetened coconut.

The company also established a wide distribution network in the United States, Canada, Australia, New Zealand, Japan, Europe, the Middle East, and other parts of Asia. This geographical footprint was necessary to alleviate country-specific market risks and quickly capitalize on shifting consumer behavior based on volume demand.

This strength in distribution helped the company generate revenues in 2020 as its sales declined by only 3% from 2019 to 2020 amid the pandemic. 

However, the downside to this distribution setup is the additional expenses due to freight costs, which nearly tripled from 2019, as well as higher costs from raw and packaging materials from pandemic-related headwinds. As such, margins and profitability declined by a larger percentage compared with revenue decline.

Nevertheless, Axelum Resources remains positive that the global economic recovery would stimulate growing demand and offset unexpected costs.

Looking at as-reported metrics, it appears that Axelum Resources is not generating enough shareholder value, with return on assets (ROAs) reaching below cost of capital levels once again in 2020.

In reality, the company’s distribution network actually proved that the company actually did much better than expected, with Uniform ROAs reaching a robust Uniform ROA of 8% despite the pandemic-related disruptions.


The distortion between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of goodwill on Axelum Resources’s balance sheet.

In recent years, goodwill sits at about PHP 1.2 million, which is about 11% of the company’s total assets, arising from acquisitions made to expand its market reach.

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 Axelum Resources’s earning power. Adjusting for goodwill, we can see that the company isn’t producing paltry returns. In fact, it has been the opposite, with the company earning robust returns that have been more than 2x greater.

Axelum Resources’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, especially with recent years showing below cost-of-capital returns.

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

After declining from 16% in 2016 to 13% in 2018, Uniform ROA rebounded to 16% in 2019. Then, Uniform ROA fell to 8% in 2020.

Axelum Resources 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 0.5x in 2020, lower than Uniform asset turns of 1.0x, making the firm appear to be a less cost efficient business than is accurate. 

Moreover, as-reported asset turnover has never eclipsed beyond 0.8x, while Uniform asset turns have reached a peak of 1.3x in 2016-2018, distorting the market’s perception of the company’s asset utilization over the past decade.

SUMMARY and Axelum Resources Corp. Tearsheet

As our Uniform Accounting tearsheet for Axelum Resources Corp. (AXLM:PHL) highlights, the company trades at a Uniform P/E of 22.6x, around the global corporate average of 24.0x, but above its historical P/E of 19.3x.

Moderate P/Es require moderate EPS growth to sustain them. In the case of Axelum, the company has recently shown a 55% 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, Axelum’s sell-side analyst-driven forecast is to see Uniform earnings growth of 14% in 2021, but a 1% shrinkage in 2022.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Axelum’s PHP 2.48 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 3% annually over the next three years. What sell-side analysts expect for Integrated Micro-Electronics’ earnings growth is above what the current stock market valuation requires in 2021, but below the requirement in 2022.

Moreover, the company’s earning power is 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, Axelum’s Uniform earnings growth is above peer averages, and 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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