Philippine Markets Newsletter

This conglomerate continues to be a pioneer as it overperforms as-reported metrics with a Uniform ROA of 5%, not 2%

January 12, 2022

In one of our previous articles, we mentioned that businesses are commonly named after their owners. Thanks to its successful ventures driving growth and innovation, this company has become a household name.

Although its as-reported metrics do not show it, the company’s ability to ensure shareholder value is reflected better on its Uniform return on assets (ROA) as the company strives to remain relevant through the century.

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 1834, partners Domingo Roxas and Antonio de Ayala founded Casa Roxas, with the majority of its assets initially invested in a distillery. As years passed, the company pursued growth outside the distillery business. 

A trailblazer for Filipinos, Casa Roxas established the first bank in the Philippines through the Bank of the Philippine Islands (BPI:PHL), pioneered the country’s first public mass transportation system with Tramcars, and drafted the Ayala Master Plan that soon become the current Business District in Makati City.

Thereafter, the company was formally incorporated in 1968 as the Ayala Corporation (AC:PHL), before publicly listing in 1976.

As of 2022, Ayala Corporation is now known as one of the oldest, largest, and most diversified conglomerates in the country. 

The company’s interests can be divided into numerous sectors such as real estate development, financial services, telecommunications, water distribution, industrial technologies, power, infrastructure, healthcare, education, and technology ventures.

Some of its notable subsidiaries and investments that are publicly listed today include Ayala Land, Inc. (ALI:PHL), BPI, Globe Telecom (GLO:PHL), Manila Water Company, Inc. (MWC:PHL), and AC Energy (ACEN:PHL).

Furthermore, Ayala Corporation continues to expand by investing in countries like Myanmar.  With a total of $237.5 million, the conglomerate acquired minority stakes in Yoma Strategic Holdings Inc. (Z59:SGP) and First Myanmar Investment Public Co. Ltd.

However, despite the massive diversification that helped magnify the growth opportunities of Ayala Corporation, the company is still prone to downside risks.

Similar to other conglomerates, the strict quarantine restrictions due to the pandemic impacted the profitability of the company as it compressed net income during 2020.

With a total of 48% of conglomerate’s revenues from its real estate (43%) and financial services (5%) businesses, almost half of the Ayala Corporation’s revenues come from sectors that are normally subject to cyclical risks.

Because of the pandemic’s effects, these business performances were unfavorably affected by the economic recession. As a result, the total revenues of Ayala Corporation declined by 26% in 2020.

Looking at the as-reported metrics, the company continued to produce returns near cost-of-capital levels, implying that Ayala Corporation has generated little economic value for its stockholders since 2005.

In reality, the company’s real economic profitability has actually been more than twice the as-reported metrics.

The distortion between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of non-operating long-term investments on Ayala Corporation’s balance sheet.

These long-term investments are intangible assets that 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 capturing the strength of Ayala Corporation’s earning power. Adjusting for non-operating long-term investments, we can see that the company isn’t actually displaying weak performance. In fact, it is the opposite, with returns that are 2x greater.

Ayala Corporation’s profitability is much more robust than you think 

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 reveal.

For example, Uniform ROA for Ayala Corporation was 5% in 2020, substantially higher than the as-reported ROA of 2%, making the company appear to be a much weaker business than real economic metrics highlight for the past twelve years. 

Moreover, since 2005, Uniform ROA has reached a peak of 25%, while as-reported ROA has not eclipsed past 8% in the same time frame, substantially distorting the market’s perception of the firm’s ceiling.

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

Declines in Uniform ROA have been driven primarily by declining Uniform asset turns, and to a lesser extent, fading Uniform earnings margin.

After falling from a peak of 29% in 2005 to a low of 16% in 2008, Uniform margins rebounded to 22% levels in 2014-2015, and declined to 17% in 2018.

Then, Uniform margins improved to 23% in 2019, and compressed back to 16% in 2020.

Meanwhile, Uniform turns rose from 0.8x in 2005 to 1.0x in 2006, before fading to a trough of 0.3x in 2020.

SUMMARY and Ayala Corporation Tearsheet

As our Uniform Accounting tearsheet for Ayala Corporation (AC:PHL) highlights, the company trades at a Uniform P/E of 30.0x, above the global corporate average of 24.0x, and its historical P/E of 20.9x.

High P/Es require high EPS growth to sustain them. In the case of Ayala Corporation, the company has recently shown a 105% 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, Ayala Corporation’s sell-side analyst-driven forecast is to see Uniform earnings shrink by 881% in 2021, but a growth of 49% in 2022.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Ayala Corporation’s PHP 831.00 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 6% annually over the next three years. What sell-side analysts expect for Ayala Corporation’s earnings growth is below what the current stock market valuation requires in 2021, but above the requirement in 2022.

However, the company’s earning power is below the long-run corporate average. Moreover, 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, Ayala Corporation’s Uniform earnings growth is well below peer averages, and currently trades below 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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