Philippine Markets Newsletter

This company packed sustainable profitability through its growth and efficiency initiatives, reaching a Uniform ROA of 10%

December 29, 2021

Despite the changes in consumer behavior, this packaged food product company was able to withstand the effects of the pandemic through its growth and efficiency initiatives.

While as-reported data agree with these strategies, its Uniform metrics actually show the company is faring better with Uniform ROAs reaching above 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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In 2020, consumer eating behavior shifted—people had to cook at home because restaurants were not open. Since they were already preparing their own meals, many also opted to cook healthier and more nutritious food.

Some of the companies that benefited from this change include Shakey’s Pizza Asia Ventures Inc. (PIZZA:PHL) and Century Pacific Food, Inc. (CNPF:PHL), with both forming a partnership through the launch of UnMeat, a vegan meat alternative product made with non-GMO plant-based ingredients.

Another company that was able to capitalize on this demand was RFM Corporation (RFM:PHL) with its long shelf life and healthy produce.

Initially, the company didn’t start out as a packaged products manufacturer. Established in 1957, RFM Corporation is known to be the pioneer of the flour-milling industry in Asia. It supplied several bakeshops, and manufactured biscuits, noodles, and other flour-based products in the country. 

When RFM Corporation decided to expand its business, one of its most notable ventures was its partnership with Unilever to produce Selecta, a well-known brand of ice cream and milk, in 1999.

Since then, the company has been able to produce a wider range of in-demand offerings—which includes Sunkist, White King, and the recently acquired Royal brand—enabling the company to strengthen its position in different types of food products.

Despite the intense competition in the flour and packaged business, RFM Corporation managed to maintain its above cost-of-capital profitability in 2015-2019.

On top of that, even when the pandemic hit, the company still reported net revenue of PHP 15.7 billion in 2020, a 2% increase from the previous year’s PHP 15.3 billion. 

According to Chairman Jose Concepcion, this growth was attributed to the surge in demand for milk, pasta, and sauces. This will likely continue even after strict quarantine measures have been fully eradicated.

However, since consistent price hikes in commodity and raw materials threaten RFM Corporation’s path to sustainable profitability, the company had to focus on its efficiency strategy. It did this by effective supply chain and internal operations management.

Also, as part of its business initiatives, RFM Corporation continues to prioritize its growth strategy by keeping an eye out for M&A and expansion opportunities.

Overall, the company has been successful with its business so far as its as-reported metrics are showing an upward trend since 2008. 

Like its as-reported data, Uniform Accounting also tells us that RFM Corporation’s profitability is gradually expanding but at more robust levels, with Uniform ROAs reaching a high of 10%.

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 RFM Corporation, as-reported metrics’ asset base for ROA calculation is at PHP 19.0 billion in 2020, leading to a 6% as-reported ROA.

However, when subtracting current operating liabilities and applying other needed adjustments, we arrive at RFM Corporation’s PHP 12.8 billion Uniform assets, resulting in a 10% Uniform ROA.

RFM Corporation’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 much weaker business than real economic metrics highlight.

In reality, RFM Corporation’s Uniform ROA has actually been higher than its as-reported ROA for fifteen of the past sixteen years.

Through Uniform Accounting, we can see that the company maintains above cost-of-capital ROAs since 2012. Additionally, Uniform ROA has generally improved from 5% in 2009 to 10% levels in 2019-2020.

Meanwhile, as-reported ROA has only improved from 4% to 6% levels in the same time frame. 

RFM Corporation’s asset utilization is more efficient than you think

RFM Corporation’s profitability has been driven primarily by stronger asset turns, a key driver of profitability. 

Uniform asset turns improved from 0.7x-0.8x levels in 2004-2007 to 1.1x-1.2x levels in 2008-2012, before fading to 1.0x levels in 2013-2014. Thereafter, Uniform turns ranged from 1.2x-1.3x in 2015-2020.

As-reported metrics have been making the firm appear to be a less asset-efficient business than real economic metrics highlight.

SUMMARY and RFM Corporation Tearsheet

As our Uniform Accounting tearsheet for RFM Corporation (RFM:PHL) highlights, the company trades at a Uniform P/E of 12.1x, below the global corporate average of 24.0x, but around its historical P/E of 12.7 x.

Low P/Es require low EPS growth to sustain them. In the case of RFM Corporation, the company has recently shown an 11% 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, RFM Corporation’s sell-side analyst-driven forecast is to see Uniform earnings shrink 5% and immaterially by 2021 and 2022, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify RFM Corporation’s PHP 4.65 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 10% annually over the next three years. What sell-side analysts expect for RFM Corporation’s earnings growth is well below what the current stock market valuation requires through 2022.

Furthermore, the company’s earning power is 2x the long-run corporate average. Moreover, cash flows and cash on hand are 4x their total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a low dividend risk.

To conclude, RFM Corporation’s Uniform earnings growth is in line with its peer averages, and also 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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