Philippine Markets Newsletter

This conglomerate is showing that infra has business growth potential, achieving Uniform ROA 3x its as reported

July 5, 2023

Like Aboitiz Equity Ventures (AEV:PHL), this diversified conglomerate is also pivoting towards infrastructure, participating in the North Luzon Airport Consortium to improve the travel experience in Northern and Central Luzon.

However, regardless of the company’s drive for infrastructure growth, as-reported data shows meager results. In reality, Uniform Accounting reveals a potential for future 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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Profitable conglomerates owe much of their success to their ability to quickly employ a risk-reduction strategy called diversification. This allows them the flexibility to enter high-return industries and divest any underperforming businesses.

The Philippines has around 18 known major conglomerates—including JG Summit Holdings (JGS:PHL), Ayala Corporation (AC:PHL), and Filinvest Development Corporation (FDC:PHL).

Founded in 1955, Filinvest Development has become one of the most well-diversified corporations in the Philippines, operating in real estate development (Filinvest Land, Inc.), banking (East West Banking Corporation), and sugar businesses (Pacific Sugar Holdings Corporation). It also owns and manages hotels, resorts, and private membership clubs (Filinvest Hospitality Corporation).

Previously, we highlighted how some of these segments refocused their strategies on strengthening their competitive advantage through digital innovations and growth initiatives:

  • Banking and Financial Services – Project Carbon Training
  • Real Estate – aggressive digital marketing
  • Power – partnership with Filinvest Land Inc. for new renewable energy projects

Now, the company is focusing on adding infrastructure to its portfolio.

Last week, we highlighted the recent news that the Manila International Airport Consortium (MIAC) submitted an unsolicited proposal to the Transportation department. This aims to rehabilitate the Ninoy Aquino International Airport (“NAIA”) over a 25-year concession period.

This week, we’ll be focusing on events surrounding the Clark International Airport (“CRK”).

Filinvest Development made its first investment in infrastructure by participating in the North Luzon Airport Consortium (“NLAC”), winning the bid to operate and maintain the said airport.

The company currently owns a 43% stake in NLAC’s special purpose vehicle and newly incorporated Luzon International Premier Airport Development Corporation (“LIPAD”). It is primarily in charge of property development, completing significant developments in Clark International Airport Passenger Terminal Building in 2022. Now the terminal can accommodate eight million passengers annually.

Other shareholders are JG Summit Holdings, Changi Airports Philippines (“CAP”), and Philippine Airport Ground Support Solutions (“PAGSS”), with a 33%, 15%, and 10% stake in the entity, respectively.

Currently, CRK serves three domestic and seven international destinations through 14 airlines, boarding only around 800,000 passengers because of the recent pandemic. It is expected to grow in 2023 as travel demand is beginning to come back and more destinations are added to the airport’s services.

With that, LIPAD continues to improve the new terminal through the following technological features: automated self-bagging drops, self-checking kiosks, and e-gates at the immigration areas.

Also, LIPAD has signed a facilities and energy efficiency management contract with Professional Operations and Maintenance Experts Incorporated (“PROMEI”) and Philippine DCS Development Corporation (“PDDC”)—both joint ventures between ENGIE Services Philippines and Filinvest Development.

With all of these developments in the infrastructure segment, it looks like Filinvest Development has more opportunities to generate profits. However, looking at its as-reported data, that seems to not be the case.

In reality, the company’s Uniform ROA was actually better at 3%, triple its as-reported ROA of 1%.

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

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

For example, in 2021, Filinvest Development recognized an interest expense of PHP 4.5 billion. When we add the PHP 4.5 billion back to earnings, because it is not an operating expense, net income increases. This adjustment alone represents a 70% jump in Uniform earning power.

Filinvest Development’s profitability is much more robust 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 Filinvest Development’s profitability has been a lot weaker than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated over the past sixteen years. For example, as-reported ROA was 1% in 2022, but its Uniform ROA was 3x higher at 3%.

Filinvest Development’s turns are stronger than you think

For more than two decades, as-reported metrics have overstated Filinvest Development’s asset turns, a key driver of profitability.

Moreover, as-reported margins have only eclipsed at 0.1x for the past sixteen years, when in reality, Uniform turns have actually reached double that number in the same timeframe. This makes the company appear to be a less efficient business than real economic metrics highlight.

SUMMARY and Filinvest Development Corporation Tearsheet

As our Uniform Accounting tearsheet for Filinvest Development Corporation (FDC:PHL) highlights, the company trades at a Uniform P/E of 28.9x, above the global corporate average of 18.4x, but around its historical P/E of 29.6x.

High P/Es require high EPS growth to sustain them. In the case of Filinvest Development, the company has recently shown a 35% 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, Filinvest Development’s sell-side analyst-driven forecast is to see Uniform earnings growth of 48% and a 2% shrinkage in 2023 and 2024, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Filinvest Development’s PHP 5.43 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 12% annually over the next three years. What sell-side analysts expect for Filinvest Development’s earnings growth is above what the current stock market valuation requires in 2023, but below its requirement in 2024.

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, Filinvest Development’s Uniform earnings growth is above peer averages, and also currently trades 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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