Philippine Markets Newsletter

This ice cream maker’s growth isn’t frozen in time as it pushes global export strategies and Uniform ROAs double of as-reported metrics

March 3, 2021

The rise of hallyu has brought a massive demand for everything related to South Korea, from entertainment, fashion, to even food. This Korean ice cream company is taking advantage of this by expanding its reach globally and diversifying its offerings in the international market.

However, as-reported metrics do not seem to show the success of the company in this strategy. Uniform Accounting reveals that the business has a better Uniform return on assets (ROA) than what as-reported metrics show.

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

Philippine Markets Daily:
Wednesday Uniform Earnings Tearsheets – Asia-listed Focus
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In our previous reports on Asia-listed focused PMDs, we have talked about how hallyu fever has affected consumers’ behavior to patronize Korean products such as instant noodlesbeauty products, and K-dramas.

The continuous rise of hallyu fever opened an opportunity for South Korea to export and market their goods internationally.

This is evident by South Korea’s total exports of USD 512.8 billion in 2020. Because of the pandemic, this is 5.4% lower than the amount of USD 542.2 billion in 2019. However, it still represents a 38% increase from USD 371.5 billion in 2007, at the start of the new Korean wave.

This Korean dairy product company, Binggrae Co., Ltd., is taking advantage of the growing international demand from the hallyu trend.

Binggrae, established in 1967, grew by introducing Korean treats that are now considered classics. Their iconic products, Banana Flavored Milk and Melona, have propelled them to become one of the snack titans in the Korean market with a market share of 26.7%.

The international popularity of these ice creams is evident in the company’s 2019 overseas sales which increased by 25%, from KRW 29.8 billion to KRW 37.3 billion. 54% of this revenue is attributable to Melona.

Moreover, among all the Korean confectionery firms, Binggrae exports the most ice cream products. In fact, according to the Korea Agro-Fisheries & Food Trade Corporation, 70% of ice cream products exported to the U.S. in 2019 are from Binggrae.

In order to continue its global expansion, Binggrae needed more ice cream options to suit the international market’s taste. In 2020, the company acquired Haitai Icecream, which had a 14% local market share. Together, this puts them in prime position to become the top confectionery firm in South Korea and overtake their biggest local competitor, Lotte.

With the growing influence of Korean culture all over the world, the global demand for South Korean products is likely to remain strong over the next few years, benefiting companies like Binggrae.

However, as-reported metrics does not seem to take into account the growth potential and success of Binggrae’s global exporting and product diversification strategies. As-reported ROAs, although increasing, has been below cost of capital in the last six years, and is just at 4% in 2019.

Uniform Accounting, on the other hand, paints a better picture, with Uniform returns that have been more robust than what the market thinks. In 2019, Uniform ROA was actually at 8%, which is double the as-reported numbers.

What as-reported metrics fail to do is to consider the company’s excess cash on the balance sheet. While most companies inherently need some level of cash to operate, the portion of that balance that is earning limited or no return—or excess cash—ends up diluting as-reported ROAs.

When excess cash remains included in the company’s asset base in computing its performance metrics, the company’s profitability and capital efficiency may appear weaker than it actually is. Removing excess cash allows investors to see through the distortions that come from management carrying much more cash on the balance sheet than what is operationally required.

From 2008 to 2019, Binggrae has had a significant amount of excess cash sitting idly in its balance sheet, ranging from 15% to 36% of its as-reported total assets.

After excess cash and other significant adjustments are made, we can see that Binggrae’s returns are actually a lot stronger than what as-reported metrics show. Without these adjustments, it appears that the company hasn’t been benefiting from its global exports and product diversification strategies, leading to poorer valuations.

Binggrae’s profitability is more robust than you think

As-reported metrics are distorting the market’s perception of the firm’s 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 reveal.

Binggrae’s Uniform ROA has been higher than its as-reported ROA in fifteen of the past sixteen years. For example, when Uniform ROA peaked at 15% in 2009, as-reported ROA was only 10%.

The company’s Uniform ROA for the past sixteen years has ranged from 3% to 15%, while as-reported ROA has ranged only from 3% to 11% in the same timeframe.

Specifically, Uniform ROA fell from 14% in 2004 to 9% in 2006, before rising to a peak of 15% in 2009. It then gradually declined to 3% in 2017, before rebounding to 8% in 2019.

Binggrae’s Uniform earnings margins are generally weaker than you think, but its Uniform asset turns make up for it

Volatility in Uniform ROA has been driven by trends in Uniform earnings margins, with peaks and troughs lining up historically with that of Uniform ROA.

From 6% in 2004, Uniform margins fell to 5% in 2006, before peaking to 8% in 2009. It then gradually fell to 2% in 2017 before rebounding to 4% in 2019.

Meanwhile, Uniform turns have been consistent, ranging at 1.6x to 1.9x levels in the past sixteen years, except in 2004, when it peaked at 2.3x.

SUMMARY and Binggrae Co., Ltd. Tearsheet

As the Uniform Accounting tearsheet for Binggrae Co., Ltd. (005180:KOR) highlights, the Uniform P/E trades at 7.8x, which is below the global corporate average of 25.2x and its own historical average of 10.3x.

Low P/Es require low EPS growth to sustain them. That said, in the case of Binggrae, the company has recently shown a 43% 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 Korean International Financial Reporting Standards (K-IFRS) earnings and convert them to Uniform earnings forecasts. When we do this, Binggrae’s sell-side analyst-driven forecast is a 10% decline in 2020 and 1% earnings growth in 2021.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Binggrae’s KRW 58,200 stock price. These are often referred to as market embedded expectations.

Binggrae is currently being valued as if Uniform earnings were to shrink 19% annually over the next three years. What sell-side analysts expect for Binggrae’s earnings growth is above what the current stock market valuation requires in 2020 and 2021.

Furthermore, the company’s earning power is slightly above the long-run corporate average. Also, cash flows and cash on hand are 7x its total obligations—including debt maturities, capex maintenance, and dividends. All in all, this signals a low credit and dividend risk.

To conclude, Binggrae’s Uniform earnings growth is below its peer averages, and the company is also trading below its average peer valuations.

About the Philippine Market Daily
“Wednesday Uniform Earnings Tearsheets – Asia-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 UAFRS, 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 company listed in Asia that’s relevant to the Philippines and 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 Earning Tearsheet on an Asian company interesting and insightful.

Stay tuned for next week’s Asia company highlight!


Angelica Lim
Research Director
Philippine Markets Daily
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