Philippine Markets Newsletter

This company’s sustainability initiatives to protect the planet’s waters is ethically maximizing its Uniform returns to 12%!

November 11, 2020

The scarcity of freshwater resources is a current problem around the world. It’s estimated that by 2025, two-thirds of the world could face water shortages, and this Japanese beverage company is doing its part in actively protecting water as one of the most important resources that we have.

Uniform Accounting shows that this company’s ethical sustainability initiatives are being recognized by the community. It has successfully maximized its wealth while doing what is right for the world, resulting in a more robust Uniform return on assets (ROA) than what is reported.

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

Philippine Markets Daily:
Wednesday Uniform Earnings Tearsheets – Asia-listed Focus
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Water scarcity is one of the major problems the world is facing today.

According to an article published by the Warwick ASEAN Conference, there are currently two billion people living in countries with high water shortage. The United Nations also predicts that 700 million people will become displaced because of this high water stress by 2030.

The earth only has so much fresh water reservoir accessible for human consumption. However, population growth and worsening pollution are quickly depleting this resource.

This problem is even more drastic in Asia. Although the continent houses more than half of the world’s population, its freshwater resources are actually less than any other continent, except for Antarctica. Moreover, over two-thirds of the world’s population growth is coming from Asia, and the continent’s urbanization rate is increasing rapidly.

Governments and companies all over the world have been making an effort to conserve water through various water management systems, and by conducting water-related projects and solutions.

This global beverage company puts water sustainability as a top priority, especially since this is its main raw material.

Suntory Beverage & Food Limited’s sustainable water philosophy puts “Mizu To Ikiru” or “living with water” at its center. The company is committed to three principles focusing on the said philosophy: to renew the world like water, to satisfy people like water, and to move freely like water.

To “renew the world like water,” Suntory has continuously directed its efforts towards protecting water as one of the most precious natural resources, and making it available for the next generation. It also reduces its environmental impact by using recycled materials and energy-saving vending machines.

Second, to “satisfy people like water” for the company means to enrich society by delivering value to consumers through quality products and maintaining a long-lasting relationship with each other.

Finally, just as water moves freely and goes with the flow, the company aims to constantly embrace change and adapt like water.

With water as the most important ingredient or resource for the company and its products, Suntory’s sustainable water philosophy works towards contributing less to the world’s water crisis.

Suntory investigates and conserves watersheds around its sites to better understand the natural cycle of water and improve the quality and quantity of its water. The company also engages with communities to improve their water situations. In addition, it employs stricter wastewater management than what is required by the law.

Suntory’s dedication to Mizu To Ikiru, along with its sustainability initiatives, adheres to Tenet One of The Return Driven Strategy™, as discussed in the book Driven.

Tenet One calls on businesses to “ethically maximize wealth.” To do this, a company must first define what wealth is, and then, “in order to create wealth, one must first not destroy it.” It is clear to Suntory that water is its most precious asset. The firm’s efforts to reduce its carbon footprint to safely and efficiently manufacture its products is one way Suntory has been able to ethically maximize its wealth.

However, when we look at its as-reported results, Suntory does not really seem to be maximizing its wealth through its ethical sustainability initiatives. As-reported returns have been just below cost-of-capital average levels, and currently sits at 5%.

This picture of the company’s profitability is inaccurate. Uniform Accounting shows us that Suntory’s real earning power is better than what we think, with a Uniform ROA of 12%.

Suntory’s consistently above cost-of-capital Uniform ROAs prove that wealth is achieved by staying ethical in its operations and by taking care of the resources that it needs to operate.

One of the things that as-reported metrics fail to consider, which causes the distortion between Uniform ROA and as-reported ROA, is the company’s goodwill and intangible assets.

Goodwill and other intangibles are 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 showing Suntory’s real earning power. After goodwill, other intangible assets, and other significant adjustments are made, we will see that the company’s earning power is actually 2.5x better than what is reported.

Suntory’s profitability is much better than you think it is

As-reported metrics are distorting the market’s perception of the firm’s 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.

Suntory’s Uniform ROA has been higher than its as-reported ROA in the past nine years. For example, Uniform ROA was 12% in 2019, more than twice its as-reported ROA of 5%. When Uniform ROA peaked at 15% in 2016, as-reported ROA was only 4%.

The company’s Uniform ROA for the past eight years has ranged from 6% to 15%, while as-reported ROA remained only at 4% to 5% levels in the same time frame.

From 10% in 2011, Uniform ROA fell to 6% in 2012 before reaching a peak of 15% in 2016. Uniform ROA then settled at 12% in 2019.

Suntory’s Uniform earnings margins are weaker than you think but its robust Uniform asset turns make up for it

Volatility in Uniform ROA has been driven by trends in Uniform asset turns, and to a lesser extent by Uniform earnings margins, with peaks and troughs lining up historically with that of Uniform ROA.

From 4% in 2011, Uniform margins declined to 3% in 2012 before rising to 5%-7% levels through 2019.

Meanwhile, Uniform turns declined from 2.4x in 2011 to 1.7x in 2014, before reaching a peak of 2.5x in 2016. It then faded to 2.1x in 2019.

SUMMARY and Suntory Beverage & Food Limited Tearsheet

As the Uniform Accounting tearsheet for Suntory Beverage & Food Limited (2587:JPN) highlights, its Uniform P/E trades at 22.7x, which is around corporate average valuation levels, but below its own recent history.

Average P/Es require average EPS growth to sustain them. In the case of Suntory, the company has recently shown a 1% 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 Japan’s Modified International Standards (JMIS) earnings and convert them to Uniform earnings forecasts. When we do this, Suntory’s sell-side analyst-driven forecast is a 29% earnings shrinkage in 2020, followed by a 19% earnings growth in 2021.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Suntory’s JPY 3,665 stock price. These are often referred to as market embedded expectations.

Suntory can have a 4% Uniform earnings shrinkage each year over the next three years and still justify current market expectations. What sell-side analysts expect for Suntory’s earnings is below what the current stock market valuation requires in 2020, but well above that requirement in 2021.

The company’s earning power is twice the corporate average. Additionally, cash flows and cash on hand are above its total obligations. Together, this signals a low credit and dividend risk.

To conclude, Suntory’s Uniform earnings growth is below its peer averages in 2020. Also, the company is trading below its peer valuations.

About the Philippine Markets Daily
“Wednesday Uniform Earnings Tearsheets – Asia-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 UAFRS, 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 company listed in Asia that’s relevant to the Philippines and 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 Earning Tearsheet on an Asian company interesting and insightful.

Stay tuned for next week’s Asia company highlight!


Angelica Lim
Research Director
Philippine Markets Daily
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