Philippine Markets Newsletter

This diversified conglomerate has been branded as one of the leaders of its industry, achieving a Uniform ROA of 7%, not 4%

October 26, 2022

As a result of its continued resilience and focus on its brand strategy, one of the Philippines’ largest and oldest conglomerates has already surpassed its pre-pandemic quarterly earnings. Despite this, as-reported metrics fail to paint a clearer picture of the conglomerate’s true earnings potential.

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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San Miguel Corporation (SMC:PHL), formerly La Fabrica de Cerveza de San Miguel, was founded in 1890 as a single brewery in the Philippines. Initially, its business covered only the food and beverage and packaging industries.

Although brewing beer is the company’s heritage, San Miguel has since expanded its business portfolio to five key business groups, most of which are market leaders in their respective industries. This includes food and beverage, packaging, fuel and oil, energy, and infrastructure.

In addition, the company also has investments in other industries such as property development and leasing, cement, car distributorship, and banking services.

By branching out to different industries, San Miguel Corporation has become one of the largest and well-diversified conglomerates in the country, with revenue generation of approximately 4.9% of the Philippines’ GDP in 2021.

With continuous volume growth and higher selling prices across all businesses, the Group’s consolidated sales grew by 73% to P711.4 million in the first half of 2022 compared to the same period last year.

The Group’s Food and Beverage arm, San Miguel Food and Beverage, Inc. (FB:PHL), posted consolidated revenues of P172.1 million, a 17% increase over the same period last year, mainly driven by volume growth and better selling prices across the Beer and Non-Alcoholic Beverages (NAB), Spirits and Food divisions.

Furthermore, San Miguel’s continued thematic campaigns from its core brands—such as Pale Pilsen’s “Beer Call Muna Tayo,” Red Horse’s “Patak” and “Lakas” advertisements, and GSM Blue’s “Choose What’s True” campaign—further strengthened the company’s leadership in the beverages division.

In spite of a very challenging environment, San Miguel’s Food segment also posted a strong performance during the first half of 2022, with consolidated revenues of P83.9 million, an increase of 16%. This improvement was thanks to the company’s continued focus on its product innovation strategy:

  • Protein – product growth strategy through the expansion of its ready-to-eat business
  • Dairy, Spreads, and Coffee – product premiumization strategy

In the Packaging division, consolidated sales grew 10% during the first half of the year, reaching P16.1 million. The company’s metal crowns, cans, plastics, logistics services, and beverage filling operations performed better because of the sustained volumes from food and beverage companies, as well as high packaging demands from Malaysia, Australia, and New Zealand markets.

In the Group’s Energy business, SMC Global Power’s (SMCGP) consolidated sales grew 70% to P102.6 million, from P60.3 million in the previous year. This was mainly brought about by the increase in average bilateral rates attributable to higher fuel prices driven by rising coal prices.

On the other hand, this segment has been taking its diversification strategy seriously by leaning into high-growth and low-emission technologies, particularly through its 1,000 MWh Battery Energy Storage System (BESS) project. This will reach its completion by the end of 2023. It also canceled its planned coal power projects with a capacity of around 1,500 MW to finally shift its focus to cleaner power generation.

Overall, it seems that San Miguel has been overcoming all the obstacles it has been facing during this pandemic with all of its planned-out strategies. However, as reported data states otherwise.

In reality, the company’s financial performance did better than expected, with Uniform ROAs performing above cost-of-capital levels at 7%.

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

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

As a firm that made a lot of investments through debt, San Miguel’s recognized interest expense from its debt.

Specifically, in 2021, it recorded a PHP 45.5 billion interest cost. Adding back this expense because it is not an operating expense, with many other necessary adjustments made by Valens, leads to a PHP 71.2 billion net income and 7% Uniform ROA, higher than the PHP 13.9 billion as-reported net income and 4% as-reported ROA.

San Miguel’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 San Miguel’s profitability has been recently weaker than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated over the past decade. For example, as-reported ROA was 4% in 2021, but its Uniform ROA was actually higher at 7%.

San Miguel’s earnings margins are less profitable than you think

Trends in Uniform ROA have been driven by trends in Uniform earnings margins. For more than two decades, as-reported metrics have overstated San Miguel’s earnings margin, a key driver of profitability.

Moreover, as-reported EBITDA margin has reached 19%. In comparison, Uniform margins have yet to eclipse 8% over the same time period, making San Miguel appear to be a more profitable business than real economic metrics highlight.

SUMMARY and San Miguel Corporation Tearsheet

As the Uniform Accounting tearsheet for San Miguel Corporation (SMC:PHL) highlights, the company trades at a Uniform P/E of 18.8x, around the global corporate average of 17.8x, but below its historical P/E of 21.6x.

Low P/Es require low EPS growth to sustain them. In the case of San Miguel, the company has recently shown a 70% 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, San Miguel’s sell-side analyst-driven forecast is to see Uniform earnings shrinkage of 49% in 2022 and a 54% growth in 2023.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify San Miguel’s PHP 97.50 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink by 4% annually over the next three years. What sell-side analysts expect for San Miguel’s earnings growth is below the current stock market valuation in 2022, but above its requirement in 2023.

Moreover, the company’s earning power is above the long-run corporate average. However, cash flows and cash on hand are below total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals high dividend and credit risk.

To conclude, San Miguel’s Uniform earnings growth is below its peer averages, but 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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