As one of the most popular food manufacturers in the Philippines, this company executed its growth strategy by building its portfolio one brand at a time.

Despite becoming a successful household name, its as-reported metrics show meager performance. In reality, its Uniform return on assets (ROA) reveals the company is doing far better than expected.

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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Shelf-stable sardines have been considered as one of the top consumer staple products in the Philippines given their accessibility to protein and calcium sources.

That is why leading canned good brands, like Century Pacific Food, Inc. (CNPF:PHL), have been producing a diverse selection to meet the growing demand in this category.

From its main brands Century Tuna, Argentina, and 555, the company ventured into refrigerated food in 2021 with the acquisition of Pacific Meat Company for PHP 650 million.

The company also acquired competitor Ligo—a brand that is also known for its high-quality sardines and other marine products. Under this agreement, Century Pacific will be purchasing Ligo’s assets and intellectual property (IP).

Besides sardines and other marine products, the company has interests in other food categories such as coconut and dairy.

For its coconut business, the company has its own line of branded coconut products called Coco Mama, a brand that has been growing dramatically since its launch in 2019.

Given the success of this segment, Century Pacific was able to successfully commission its 5.2MW solar power plant for its tuna and coconut manufacturing facilities in 2021.

Right now, the company is planning to further expand its capacity by 50% through the completion of its PHP 700-million coconut OEM facility in Mindanao.

This move was due to the fact that long-term contracts with Linaco and Vita Coco, two of Century Pacific’s major partners, have been revisited and extended.

As for dairy, it has also been a key segment for the company, especially with milk being an important part of a person’s nutritional health. For one, its flagship brand Birch Tree Fortified focuses on affordable and immunity-boosting components while its recently-launched “Choco Hero” focuses more on energy-boosting ingredients.

All in all, successfully expanding its portfolio and facilities has proven that Century Pacific can execute and sustain its growth strategy. However, looking at as-reported metrics, it seems that the company’s ability to do so remains overlooked, showing returns only reaching 9% in 2021.

In reality, the company’s knack for portfolio expansion and innovative developments actually gave Century Pacific a stronger position in the market, with Uniform ROAs sustaining an upward trend for the past three 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 16% Uniform ROA in 2021.

Century Pacific’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 the company is a weaker business than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been mostly understated in the past eight years. For example, as-reported ROA was 9% in 2021, but its Uniform ROA is nearly double that at 16%.

Century Pacific’s asset turns is much stronger than you think

As-reported metrics significantly understate Century Pacific’s asset utilization. For example, as-reported asset turnover for the company was 1.3x in 2021, lower than Uniform asset turns of 1.9x, making the firm appear to be a less cost-efficient business than is accurate.

Moreover, as-reported asset turnover has never gone beyond 1.8x, distorting the market’s perception of the company’s asset utilization over the past eight years. Asset turns based on Uniform Accounting have actually reached a peak of 2.2x in the same time period.

SUMMARY and Century Pacific Food, Inc. Corporation Tearsheet

As our Uniform Accounting tearsheet for Century Pacific Food, Inc. (CNPF:PHL) highlights, the company trades at a Uniform P/E of 17.4x, below the global corporate average of 24.0x but above its historical P/E of 17.7x.

Low P/Es require low EPS growth to sustain them. In the case of Century Pacific, the company has recently shown an 18% 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 9% and 19% in 2022 and 2023, 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 22.60 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 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 2022 and 2023.

Furthermore, the company’s earning power is 3x the long-run corporate average. Moreover, cash flows and cash on hand are above its total obligations—including debt maturities, capex maintenance, and dividends. Also, intrinsic credit risk is 180bps above the risk free rate. Together, this signals a low dividend risk.

To conclude, Century Pacific’s Uniform earnings growth is above its peer averages, but currently trades in line with 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!

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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