Philippine Markets Newsletter

This giant logistics company likes to efficiently move its returns, showing Uniform asset turns of 1.4x, not 0.9x

October 6, 2021

Despite its size and market position, this popular balikbayan courier service still felt the impact of the pandemic.

While as-reported metrics would have investors believe the company’s success lies in its margins, Uniform Accounting shows the logistics service provider’s quick delivery is what’s driving its returns, even when it encountered logistics issues during the pandemic.

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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One of the traditions that a lot of families with Overseas Filipino Workers (OFWs) look forward to during the Christmas season is the balikbayan boxes that will be delivered to their doorsteps.

For Filipinos, there’s a strong sentiment and cultural importance to these boxes filled with goods. These parcels are reminders of the senders’ thoughts and emotions of being with their loved ones despite being away from home.

For the past two decades, LBC Express Holdings, Inc. (LBC:PHL) has delivered more balikbayan boxes to its destinations in the Philippines than any of its peers, claiming to be the top importer of these boxes in terms of throughput. However, what used to take a maximum of 35 days to forward balikbayan boxes now takes much longer because of the various global health and logistics concerns during the pandemic.

Despite those challenges, LBC’s logistics business reported revenues that fell by only 5% in 2020 from 2019, mostly because of weakness in its corporate logistics segment. The company benefited from more consumers choosing online shopping and home deliveries to comply with physical distancing measures. 

Retail logistics revenue for LBC thrived from PHP 9.9 billion in 2019 to PHP 10.46 billion in 2020. This trend continued in their quarterly performance with PHP 6.45 billion in H1 2021 compared to PHP 4.07 billion in H1 2020.

The company’s corporate logistics revenue declined from PHP 4.27 billion in 2019 to just PHP 3.08 billion in 2020. 

While its logistics business did relatively well, LBC’s money transfer services suffered, with 2020 revenues falling to PHP 572 million, a 42% decline from 2019. Though just 8% of the business from 2017-2019, this drop greatly contributed to the company’s overall revenue decline of 7%.

Although its costs of services declined by 5.7% or PHP 613 million in 2020 with volume declines, the company credited its ability to execute well during the pandemic to its efficiency efforts and business continuity programs. 

Looking at the as-reported metrics, LBC seems to have had declining as-reported asset turnover levels since 2014.

However, Uniform Accounting tells us that this is a misrepresentation of LBC’s efficiency as the company’s Uniform asset turns have actually been recovering since 2016.

One major contributing factor that has 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—ought to 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 and we only factor in its cash, it 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.

Removing current liabilities along with the other necessary adjustments in Uniform Accounting, we arrive at LBC’s true PHP 9.9 billion Uniform asset base and a 1.4x Uniform asset turnover.

LBC’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 much weaker business than real economic metrics highlight.

LBC’s Uniform ROA has actually been higher than its as-reported ROA in two of the past three years. For example, as-reported ROA was 4% in 2020, but Uniform ROA is showing stronger profitability at 5%. Although minimal, the difference between as-reported ROA and Uniform ROA is the difference of a company’s profitability that is barely above the cost of capital.

As-reported ROA improved from 8% in 2015 to 13% in 2016, before contracting to 4% in 2020. Meanwhile, after rising from a low of 3% in 2014 to a peak of 16% in 2018, Uniform ROA fell to 5% in 2020 amidst pandemic headwinds.

LBC’s asset turns are more efficient than you think

Similarly, as-reported metrics significantly distort Puregold’s asset efficiency, a key driver of profitability.

Since 2014, as-reported asset turnover gradually declined from 1.4x to 0.9x levels. Meanwhile, after declining from 1.3x in 2014 to 1.1x levels in 2016, Uniform asset turns rebounded to a peak of 1.3x to 1.4x levels in 2018-2020.

Since 2017, as-reported metrics have understated the company’s true asset turns, making the company appear to be less efficient in the use of assets than real economic metrics highlight.

SUMMARY and LBC Express Holdings, Inc. Tearsheet

As our Uniform Accounting tearsheet for LBC Express Holdings, Inc. (LBC:PHL) highlights, the company trades at a Uniform P/E of 72.3x, above the global corporate average of 24.3x, and its historical P/E of 52.4x.

High P/Es require high EPS growth to sustain them. In the case of LBC, the company has recently shown a 76% 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, LBC’s sell-side analyst-driven forecast is to see Uniform earnings shrink by 84% and 144% by 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 LBC’s PHP 17.00 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 13% annually over the next three years. What sell-side analysts expect for LBC’s earnings growth is well below what the current stock market valuation requires through 2022.

Furthermore, the company’s earning power is below the long-run corporate average. Also, intrinsic credit risk is 100bps above the risk-free rate. Fortunately, cash flows and cash on hand are above total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a moderate credit with a low dividend risk.

To conclude, LBC’s Uniform earnings growth is below its peer averages, but currently trades well above its average peer valuations.

About the Philippine Market 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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