Philippine Markets Newsletter

This gin giant is still intoxicated with high demand even after the pandemic, reaching a Uniform ROA of 23%, not 19%

March 15, 2023

Alcohol consumption rapidly increased in the Philippines during the pandemic. This highly benefited the world’s biggest gin producer as it was able to expand its reach and execute its marketing initiatives successfully.

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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According to a 2018 global alcohol beverage report by the International Wine and Spirits Research (IWSR) group, the Philippines has a strong consumer market in the liquor industry, being one of the top five fastest-growing alcohol markets and having the most extensive gin market internationally.

Global alcohol consumption in 2018 shrank by 2% from the prior year, but gin grew the fastest among alcoholic beverages, with an 8% of total growth from the previous year.

Over the next five years, the alcohol markets in developing countries are expected to grow steadily. IWSR estimates that alcohol sales in Asia Pacific will grow by at least 2% by 2021. The Philippines is expected to increase volume by 7% in the same year.

As the world’s biggest gin producer based in terms of volume, Ginebra San Miguel, Inc. (GSMI:PHL) will benefit from the country’s position as the largest gin market. GSMI is the hard liquor subsidiary of San Miguel Corporation, which mainly produces beer.

In 2020, household spending on alcoholic beverages and tobacco quadrupled in the country.

Despite being abruptly disrupted by the COVID-19 pandemic and the imposition of liquor bans, the company continued to undertake marketing efforts and strategies to boost sales and volumes in 2021.

GSMI implemented a quick return-to-trade strategy and enhanced consumer accessibility toward its products by expanding the distribution coverage across the country.

The company also concentrated on implementing relevant and timely marketing strategies through creative and uplifting campaigns such as the “Bagong Tapang” and “Salamats, Pri” initiatives.

The broader market distribution of GSMI created more opportunities, reinforced its core brand, and boosted its recovery from the pandemic. Sales increased for the year with a 66% profit growth in the first half of 2021. Annual sales for the year surged by 17% year on year, from Php 36 billion to 42 billion while net income increased by 52% from PHP 2 billion to PHP 4 billion.

On top of that, the company takes the year’s lead in hard liquor with a 10% market share advantage over its competitors.

Overall, GSMI fared well in the past two years despite the pandemic. However, looking at the as-reported metrics, the company was shown to be less lucrative, only reaching 19% in 2021.

In reality, GSMI has managed to utilize its expansion and marketing initiatives, reaching a Uniform ROA of 23%.

What as-reported financials have gotten wrong is the depreciation of the company’s fixed assets.

Depreciation expense is a non-cash expense, meaning it does not represent an actual outlay of cash. Also, it can be easily manipulated by changing the asset’s life. As such, depreciation expense should be removed from earnings.

However, the company does spend cash on maintenance capital expenditures to ready the same assets for use in the following years. That said, this expense barely shows up in its entirety on the balance sheet.

To arrive at an estimate of the firm’s maintenance capex, what is done instead is smoothing as-reported depreciation expense over a few years, adjusting for inflation and asset impairments.

In GSMI’s case, PHP 217.4 million of depreciation expense was charged in 2021. As a result, along with the many other adjustments made, we arrive at a PHP 4.4 billion in Adjusted earnings and a 23% Uniform earning power for the company in 2021.

GSMI’s profitability is stronger than you think in the last two years

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 GSMI’s profitability has been weaker than what real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROA has been understated in the past two years. For example, as-reported ROA was 19% in 2021, but its Uniform ROA was higher at 23%.

SUMMARY and The Far Eastern University, Incorporated Tearsheet

As our Uniform Accounting tearsheet for Ginebra San Miguel, Inc. (GSMI:PHL) highlights, the company trades at a Uniform P/E of 8.2x, which is below the global corporate average of 18.4x, but above its historical P/E of 6.0x.

Low P/Es require low EPS growth to sustain them. In the case of GSMI, the company has recently shown a 68% 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, GSMI’s sell-side analyst-driven forecast is to see a 5% Uniform earnings shrinkage and immaterial Uniform earnings growth 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 GSMI’s PHP 123.00 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 15% over the next three years. What sell-side analysts expect for GSMI’s earnings growth is above what the current stock market valuation requires through 2023.

However, the company’s earning power is 4x the long-run corporate average. Moreover, cash flows and cash on hand are 9x its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a low dividend risk.

To conclude, GSMI’s Uniform earnings growth is in line with its peer averages and it also 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!


Angelica Lim

Research Director
Philippine Markets Newsletter
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