Philippine Markets Newsletter

This food company earned its long shelf life through its continued adaptability, reaching Uniform ROAs of 14%+

August 17, 2021

When it comes to household staples such as essential food items, this company’s brands are no strangers to our tables.

As one of the largest branded food companies in the Philippines, this tuna pioneer has showcased the leading products responsible for the growth of the local market and potentially, the plant-based meat industry.

Despite its evident success, its as-reported metrics falsely downplay its impressive performance. Its Uniform return on assets (ROA) reveal that the company is more than capable of combating pandemic-related headwinds and adapting to emerging consumer trends.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Daily:
Tuesday Uniform Earnings Tearsheets – Philippine-listed Focus
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As 21st century individuals, we have come to love all things portable—primarily due to the convenience they bring. Smartphones, ebooks, and laptops are a few of the things that are small in size but big in impact.

Convenience isn’t just about size, though. It’s also about getting results in the least amount of time and effort possible.

That’s the case for canned goods and packaged food. What was once made for soldiers as a means of sustenance during wartime has made its way to ordinary daily life as people want to spend less time preparing food.

Consumers can also store canned goods for much longer periods, reducing the number of times they have to visit their local grocery stores to shop for supplies.

So it’s not surprising that during a pandemic—a time when people prefer not to go out as much—the canned goods industry would continue to do well, if not even better.

However, to thrive in this industry, variety is of the essence, especially with consumers’ ever-changing tastes.

Leading canned good brands need a diverse selection to stand the test of time, and this is exactly why Century Pacific Food, Inc. (CNPF:PHL) has managed to grow and outperform its previous performance during the pandemic.

In 2020, Century Pacific’s remarkable and steadfast growth was a result of the surge in demand both in local and international markets.

This increase in demand is attributed to the nature of the company’s portfolio stemming from a variety of essential and staple food items. As we’ve noted in our previous article, Century Pacific’s brands such as Century Tuna, Argentina, and 555 are all household staples among Filipinos.

As numerous individuals are still cooped up in their homes, the need for long-lasting food supplies remains to be a top priority.

This heightened need for canned goods is reflected in Century Pacific’s 2021 first-quarter performance as the firm’s revenues exceeded initial expectations. Century Pacific acquired a net income of PHP 1.3 billion, which is a 24% growth from the previous year’s first quarter.

However, amid the seeming success of the company, individuals are starting to grow more cautious when it comes to nutrition and immunity.

Due to this, consumers are beginning to make the switch to healthier alternatives such as veganism. In order to address this emerging trend for plant-based diets, Century Pacific unveiled its new product line UnMeat earlier this year.

This plant-based meat alternative is said to account for 10% of the company’s portfolio in the coming years. It is predicted to grow 20% to 30% annually, based on the global demand for healthier and affordable food alternatives.

Century Pacific has emphasized UnMeat’s potential to dominate the plant-based meat industry as it is approximately 50% cheaper than international brands. Besides launching in the Philippines, it is also expected to launch in Australia and Singapore in the following months while the company prepares to enter into EU markets.

With Century Pacific’s resilience alongside its ability to adapt to emerging trends, it is no surprise that the company has performed better in the past two years. However, the company’s as-reported metrics undermine its perseverance and recent milestones, showing returns only reaching 10% in 2020.

In reality, these initiatives actually strengthened Century Pacific’s position in the market, with Uniform ROAs sustaining an upward trend for the past two years.

A contributing factor that led to the misstatement of as-reported metrics is the failure to consider current liabilities in the profitability calculation.

Traditional ROA calculations for measuring a firm’s earning power only include current and long-term assets as part of the cost of investment.

However, a company’s ability to receive goods and services in advance of payments–the current operating liabilities–should be factored in as well.

Current liabilities (excluding short-term debt) are necessary for operations. Items such as accounts payable, accrued expenses, and others are used to maintain the firm’s current capital position. On the other hand, long-term liabilities are mostly just used to finance the business.

If a company has a ton of cash to service its current liabilities, factoring just its cash would make the company look inefficient. In reality, the company is just being responsible for building liquid assets to meet short-term obligations.

As such, net working capital (current assets – current liabilities) is used for the firm’s ROA calculation. This shows a company’s real cash management ability and thereby, its true earning power.

When current liabilities are subtracted from Century Pacific’s assets, along with the many other necessary adjustments made, this leads to a 15% Uniform ROA in 2020.

Century Pacific’s earning power is stronger than you think

As-reported metrics distort the market’s perception of the firm’s historical profitability. If you were to just look at as-reported ROA, you would think that Century Pacific’s profitability is lower than what real economic metrics highlight in most years.

In reality, Century Pacific’s true profitability has consistently been higher than its as-reported ROA since 2014. For example, as-reported ROA was 9% in 2017, but Uniform ROA is displaying much stronger profitability at 17%.

Historically, as-reported ROA declined from a peak of 17% in 2014 to 8% lows in 2018-2019, before improving to 10% in 2020.

Meanwhile, Uniform ROA fell from 17% in 2014 to 14% in 2015, before recovering to a peak of 19% in 2016 and compressing back to 14% in 2019. Thereafter, Uniform ROA slightly improved to 15% in 2020.

Century Pacific’s earnings margin is much weaker than you think, but its Uniform asset turns make up for it

Trends in Uniform ROA have been driven by trends in Uniform asset turns, coupled with general stability in Uniform earnings margin.

Uniform turns declined from 2.2x in 2014 to 1.6x in 2015, before expanding to 2.1x in 2017 and contracting to 1.7x in 2019. Since then, Uniform turns have recovered to 1.8x in 2020.

Meanwhile, after improving from 8% in 2014 to 10% in 2016, Uniform margins compressed back to 8% levels through 2020.

At current valuations, the market is pricing in expectations for continued stability in Uniform margins and slight declines in Uniform turns near current levels.

SUMMARY and Century Pacific Food, Inc. Corporation Tearsheet

As the Uniform Accounting tearsheet for Century Pacific Food, Inc. (CNPF:PHL) highlights, the company trades at a Uniform P/E of 18.4x, below the global corporate average of 23.7x but above its historical P/E of 16.5x.

Low P/Es require low EPS growth to sustain them. In the case of Century Pacific, the company has recently shown a 25% 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, Century Pacific’s sell-side analyst-driven forecast is to see Uniform earnings growth of 19% and 12% in 2021 and 2022, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Century Pacific’s PHP 24.00 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 2% annually over the next three years. What sell-side analysts expect for Century Pacific’s earnings growth is above what the current stock market valuation requires in 2021 and 2022.

Furthermore, the company’s earning power is 3x the long-run corporate average. However, cash flows and cash on hand are below total obligations—including debt maturities, capex maintenance, and dividends. Also, intrinsic credit risk is 250bps above the risk free rate. Together, this signals a high dividend and credit risk.

To conclude, Century Pacific’s Uniform earnings growth is in line with its peer averages, and also currently trades in line with its average peer valuations.

About the Philippine Market Daily
“Tuesday 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 Tuesday, 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 Daily
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