Philippine Markets Newsletter

This company digitally powered through with its initiatives, achieving a Uniform ROA of 11%, not 4%

July 6, 2022

This power company capitalized on the importance of the continuous improvement of digital initiatives for its firm.

However, its as-reported data doesn’t seem to show that this direction is profitable, with ROAs only reaching below cost-of-capital levels

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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Since its incorporation, Aboitiz Equity Ventures Inc. (AEV:PHL) has had major investments under its belt—power, banking and financial services, food, infrastructure, and land.

For its power generation business, Aboitiz Power Corporation (AP:PHL) is AEV’s largest subsidiary, currently contributing 60% of its parent company’s total revenue. This unit is engaged in solar, oil, coal, hydroelectric, and geothermal operations.

The company has been recording year-over-year sales growth historically. By 2010, Aboitiz Power was able to increase its revenues to P59.5 billion, which was a 157% increase from 2009.

However, in the succeeding years, the company’s profitability took a downward trend. This was most evident at the beginning of 2020 as a result of Aboitiz Power failing to contract the bulk of its capacity beforehand.

Fast forward to 2021, Aboitiz Equity Ventures has made exceptional progress toward its 10-year growth plan with energy transition. Aboitiz Power was able to remain in the FTSE4Good index for its fourth consecutive year and get a higher overall rating of 3.1 as compared to 2020’s rating of 2.5.

For context, the FTSE4Good index is a series of benchmark and tradable indexes for Environmental, Social, and Governance (ESG) investors.

Given the increasing importance of ESG among corporations nowadays, the company has further solidified its ESG goal to grow its Cleanergy attributable capacity to 4,600MW.

As part of that goal, Aboitiz Power has set its sights on a 50:50 balance between its renewable and thermal portfolios by 2030 in order to pursue environmental sustainability and decarbonization for the country’s energy system.

In order to do this, the company created a partnership with Japanese firm JERA, one of the world’s biggest power producers, by getting its 27% stake acquired by the latter.

One of the things that the company also focused on is the integration of technology and innovation into its business processes.

Specifically, seeing that there is an ongoing need to remain relevant and competitive in a continuously evolving market, Aboitiz Power systematized its 1AP Digital Strategy (or DigitaLeap) to strengthen its digital ecosystem across the firm.

DigitaLeap currently includes four key focuses:

  • Digitalizing the company’s core operations toward more smart solutions
  • Solidifying its cybersecurity alertness and protection
  • Executing intelligent forecasting and planning through advanced analytics
  • Establishing a robust and well-planned smart infrastructure to execute its digital strategy

Through the years, the company’s focus on its digital initiatives helped the company adjust to the constantly changing environment. However, the as-reported metrics of Aboitiz Power imply the company may not be as adaptable as it wants to be, with as-reported showing only below cost-of-capital levels in 2021.

In reality, Aboitiz Power’s continued focus on improving its business digitally has actually produced above cost-of-capital returns.

One of the said distortions stems from how Philippine Financial Reporting Standards (PFRS) classifies interest expense.

According to PFRS, interest expense can be classified as an operating cash flow. In reality, interest expense represents the cost of debt and is rightfully only a financing cash flow. As such, in Uniform Accounting, interest expense is added back to earnings.

Specifically, in 2021, the company recorded a PHP 13.6 billion interest cost. Adding back this expense because it is not an operating expense, along with many other necessary adjustments made by Valens, leads to a PHP 23.1 billion net income and an 11% Uniform ROA, higher than its PHP 20.8 billion as-reported net income and 4% as-reported ROA.

Aboitiz Power’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 4% in 2021, but its Uniform ROA was actually higher at 11%.

Aboitiz Power’s earnings margin is weaker than you think

As-reported metrics significantly overstate Aboitiz Power’s profitability trends. For example, as-reported EBITDA margin for the company was 28% in 2021, higher than Uniform earnings margin of 17%, making the firm appear to be a much stronger business than real economic metrics highlight

SUMMARY and Aboitiz Power Corporation Tearsheet

As our Uniform Accounting tearsheet for Aboitiz Power Corporation (AP:PHL) highlights, the company trades at a Uniform P/E of 15.9x, below the global corporate average of 24.0x and its historical P/E of 15.8x.

Low P/Es require low EPS growth to sustain them. In the case of Aboitiz Power, the company has recently shown a 120% 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, Aboitiz Power’s sell-side analyst-driven forecast is to see Uniform earnings grow by 22% and 24% in 2022 and 2023, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Aboitiz Power’s PHP 35.25 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 4% annually over the next three years. What sell-side analysts expect for Aboitiz Power’s earnings growth is above what the current stock market valuation requires through 2023.

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

To conclude, Aboitiz Power’s Uniform earnings growth is below its peer averages, and 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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