Philippine Markets Newsletter

This conglomerate is pulling ahead with some of the UN’s sustainable development goals, achieving a Uniform ROA of 10%

July 20, 2022

This conglomerate continued to focus on educating and housing more Filipinos amid the pandemic. However, its as-reported data is showing that this isn’t enough to generate sustainable profitability. 

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 2015, the United Nations approved and adopted the 17 Sustainable Development Goals (SDGs) in order to develop a more sustainable future for our world. Some of these goals involve quality education and sustainable cities and development. 

One Philippine company—PHINMA Corporation (PHN:PHL)—is said to align most of its programs and initiatives with the UN’s SDGs through strengthening its core businesses, particularly education and housing. 

Education is included in the top evolving needs of the underprivileged youth in the Philippines. PHINMA Education, the company’s education arm, adapts to this by providing quality learning through its schools located in key cities in the country.

Its schools include PHINMA Araullo University, PHINMA St. Jude College, and PHINMA Rizal College of Laguna. Its most recent project is PHINMA Union College, which it acquired in May 2021 to further strengthen its education segment in Laguna.

Besides the Philippines, this segment also has a footprint in Indonesia through Horizon Karawang in West Java. This specializes in Nursing and Information Technology programs, possessing an 80%-100% passing rate in licensure examinations.

By the end of 2021, PHINMA Education has garnered a total of 95,503 students, which is a 33% increase from the previous year’s 71,659 students. Due to this, the segment’s consolidated revenues increased by 76% from PHP 2.10 billion in 2020 to PHP 3.69 billion in 2021.

Now, for its housing segment, the goal of PHINMA Property Holdings (PPHC) is to create sustainable communities and townships through the use of green architecture. 

During its inception in 1987, PPHC took part in building the nation by being the driving force behind the Medium Rise Buildings (MRB) for the low-income market within the Metro.

The segment has since continued its progress by becoming a major player in this highly competitive market, with its properties being sold out at Arezzo Place in Pasig and Hacienda Balai in Quezon City. PPHC further improved its business by investing in the development of Uniplace at SWU Village in Cebu City.

Despite the pandemic, PPHC was still able to weather the storm, selling approximately 688 residential units by the end of 2021.

Overall, PHINMA Corporation’s goals for its education and property development segments look promising in the long run. However, looking at its as-reported metrics, it seems that this may not be the case, with ROAs only reaching a peak of 5% in 2021.

In reality, the company’s goal of improving the Filipinos’ lives is actually working for PHINMA Corporation, with Uniform ROAs achieving a high of 10%.

Historically, one of the largest distortions for PHINMA Corporation comes from the treatment of minority expenses or the income attributable to the non-controlling interests of a company’s subsidiaries.

The Philippine Financial Reporting Standards (PFRS) allows minority interest expense to be recognized under operating cash flow, misleading people to think that it is essential to the firm’s core operations.

In reality, it should always be classified as a financing cash flow. Minority shareholders provide capital to the subsidiary in exchange for a piece of the company’s profits. As a result, minority interest expense should not be subtracted from revenue when calculating a company’s real core earnings.

In 2021, PHINMA Corporation recognized PHP 751 million in minority interest expense, resulting in a PHP 1.1 billion net profit and a 5% as-reported ROA. Adding this back alongside the many other adjustments Valens makes, the company should actually be recognizing PHP 1.9 billion in Uniform earnings and a 10% Uniform ROA.

PHINMA 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 PHINMA Corporation’s profitability has been weaker than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been mostly understated over the past decade. For example, as-reported ROA was 5% in 2021, but its Uniform ROA was actually higher at 10%. 

PHINMA Corporation’s earnings margins are weaker than you think

Trends in Uniform ROA have been driven by trends in Uniform earnings margin. Since 2006, as-reported metrics have significantly overstated PHINMA Corporation’s margins, a key driver of profitability.

Moreover, as-reported margins have reached 18%. In comparison, Uniform margins have yet to exceed 12% over the same time period, making PHINMA Corporation appear to be a more cost-efficient business than real economic metrics highlight.

SUMMARY and PHINMA Corporation Tearsheet

As our Uniform Accounting tearsheet for PHINMA Corporation (PHN:PHL) highlights, the company trades at a Uniform P/E of 9.1x, below the global corporate average of 19.7x, but around its historical P/E of 9.2x.

Low P/Es require low EPS growth to sustain them. In the case of PHINMA Corporation, the company has recently shown a 1,126% Uniform EPS decline.

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, PHINMA Corporation’s sell-side analyst-driven forecast is to see Uniform earnings growth of 11% in 2022 and a decline of 10% in 2023.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify PHINMA Corporation’s PHP 19.36 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 15% annually over the next three years. What sell-side analysts expect for PHINMA Corporation’s earnings growth is above what the current stock market valuation requires through 2023.

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

Lastly, PHINMA Corporation’s Uniform earnings growth is well above its peer averages, and is trading above 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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