Philippine Markets Newsletter

This F&B company continues to brew success behind strong demand and various initiatives, achieving a Uniform ROA of 14%, not 10%

December 13, 2023

This food and beverage leader continues to look for ways to improve its operational strategies and grow its market reach. Despite a tough year in the macroenvironment, this company was still able to find multiple growth opportunities to provide consumers with its well-known brands.

Unfortunately, as-reported metrics fail to paint an accurate picture, with ROAs only reaching 10% this year.

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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The company behind household names such as San Miguel and Purefoods is continuing on its path to growth even amidst an economically challenging year. As a result, leading food and beverage company, San Miguel Food and Beverage, Inc. (FB:PHL) or SMFB, saw its revenues and net income increase in 2022.

These boosts to profitability weren’t easy to achieve. Despite the reopening of the economy, macroeconomic headwinds such as heightened geopolitical tensions, inflationary pressures, and supply chain issues were only a few of the challenges that SMFB had to find its way around.

To compensate, SMFB had to boost its distribution levels, execute aggressive promotional activities, launch new products, and utilize additional capacity from new facilities.

This resulted in revenues reaching PHP 358.9 billion, a growth of 16% compared to the previous year, driven mainly by strong performances in its beer, spirits, and food businesses.

SMFB was also focused on growing its brand overseas. This was achieved in the company’s beer business, San Miguel Brewery Inc. (SMB), which implemented cost efficiency initiatives and a suited brand mix to raise significant volume growth.

Meanwhile, the company’s spirits business saw an 11% increase in total sales for 2022 on the back of higher volume and selling prices. Expanding distribution channels was also a key initiative in order for the brands to increase their market presence.

Production capacity improvements were also prioritized by SMFB, as the company started the construction of 12 mega poultry plants around the country to be completed by 2024. This effort aims to ease the negative effects of any future supply chain issues, as the addition of production plants would help meet the consumers’ heavy demand for processed food and other meat products.

Aside from this, SMFB expects the whole supply chain for the 12 facilities to generate one million jobs in plantations, feed mills, and poultry processing plants.

All in all, these initiatives show SMFB’s growth, even as an established food and beverage company with multiple well-known brands. Its operational strategies and execution, along with its constant efficiency and capacity improvements, have helped boost its profitability more than what as-reported metrics show.

FB’s earning power is stronger than you think

However, looking at its as-reported metrics, it seems like SMFB hasn’t been generating robust returns, with ROAs just short of 10%.

In reality, SMFB has managed to greatly improve its profitability levels, reaching a Uniform ROA of 14%.

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 2022, SMFB recognized an interest expense of PHP 12.4 billion, 56% of as-reported net income of PHP 22.3 billion. When we add the PHP 12.4 billion back to earnings, because it is not an operating expense, net income increases. This adjustment, along with the other adjustments made, represents a 14% Uniform ROA.

FB has a more efficient business than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. The firm’s asset utilization, a critical factor in profitability, is also greatly distorted. As-reported asset turnover has been consistently lower than Uniform asset turnover for the past decade, giving the organization a lower asset efficiency score than actual economic measures indicate.

Moreover, in the past sixteen years, as-reported asset turnover has reached a peak of 1.9x. In comparison, Uniform turns have reached a high of 2.6x over the same time period, making SMFB appear to be a less efficient business than real economic metrics highlight.

SUMMARY and San Miguel Food and Beverage, Inc. Tearsheet

As our Uniform Accounting tearsheet for San Miguel Food and Beverage, Inc. (FB:PHL) highlights, the company trades at a Uniform P/E of 11.0x, below the global corporate average of 18.4x and its historical P/E of 13.8x.

Low P/Es require low EPS growth to sustain them. In the case of SMFB, the company has recently shown a 17% 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 Philippine Financial Reporting Standards (PFRS) earnings and convert them to Uniform earnings forecasts. When we do this, SMFB’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 8% and 15% 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 SMFB’s PHP 49.20 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 6% annually over the next three years. What sell-side analysts expect for SMFB’s earnings growth is above what the current stock market valuation requires through 2025.

Moreover, the company’s earning power is 2x the long-run corporate average. Additionally, cash flows and cash on hand are 1.7x above its total obligations. Moreover, intrinsic credit risk is 160bps above the risk-free rate. Together, this signals a moderate credit risk and a low dividend risk.

Lastly, SMFB’s Uniform earnings growth is in line with its peer averages, while its Uniform forward P/E is 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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