Philippine Markets Newsletter

This mall operator built its growth on consumers’ post-pandemic lifestyle

January 30, 2024

As pandemic restrictions were fully lifted in 2022, consumers’ pent-up demand built this mall operator’s monumental returns.

However, distorted financials show a less impressive rebound from the pandemic despite Uniform returns being thrice its as-reported returns.

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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In 2022, the Philippines experienced a 7.6% expansion of its gross domestic product (“GDP”) as businesses fully reopened to the public. The National Economic and Development Authority (“NEDA”) noted that economic activity for the year increased because of pent-up demand.

The economic authority cited that, on top of improving labor market conditions, increased tourism and “revenge spending” fueled the growth of the economy for the year.

This was evident in the top-line growth of businesses’ financials, especially for mall operators such as SM Supermalls, Ayala Malls, and notably, Vistamalls, Inc. (STR:PHL).

For these establishments, revenues are earned through rental income from stores leasing in its properties, as well as parking fees collected from consumers going to its malls. As such, foot traffic is vital in its operations.

To increase traffic in its establishments, Vistamalls launched initiatives including Vistamalls Outdoor. This tackled mall goers’ safety concerns from COVID-19 being in enclosed spaces. Also, this showcased its outdoor spaces which it launched in Evia Lifestyle Center and Vista Mall Sta. Rosa.

As a result, Vistamalls’ operating revenue rose 31.6% from PHP 9.2 billion in 2021 to PHP 12.1 billion in 2022. This was on the back of increased rental revenues of 32.5% from PHP 8.8 billion to PHP 11.7 billion due to the increase in occupancy and rental rate for the year.

Furthermore, net income for the mall operator surged to PHP 8.4 billion in 2022 from PHP 4.4 billion in 2021. This represents a monumental 89.8% increase to its bottomline thanks to a heightened economic activity for the year.

Looking ahead, its parent company Vista Land & Lifescapes, Inc. (VLL:PHL), stated in its 2022 annual report that the recently listed VistaREIT, Inc. (VREIT:PHL) will be the primary funding vehicle for Vistamalls. This can be done through property selling of Vistamalls to VREIT or property-for-share swaps.

Additionally, with consumer spending still strong for 2023, we can continue to expect robust revenues. However, higher inflation for the year could offset this development as operating expenses increase and impede profit growth.

Vistamalls’ earning power is stronger than you think

As-reported metrics understate Vistamalls’ performance with ROAs only reaching 6% in 2022.

In reality, Vistamalls reached a higher Uniform ROA of 21%.

What as-reported metrics fail to consider is how current liabilities are factored into the ROA 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 by 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.

In the case of Vistamalls, as-reported metrics’ asset base for ROA calculation is at PHP 93.8 billion in 2022, leading to a 6% as-reported ROA.

However, when subtracting other current liabilities of PHP 35.4 billion and applying other needed adjustments, we arrive at Vistamalls’ PHP 35.5 billion Uniform assets, resulting in a 21% Uniform ROA.

Vistamalls has a more efficient business than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. The firm’s asset utilization, a critical factor in profitability, is also greatly distorted.

For Vistamalls, as-reported asset turnover has been almost consistently lower than Uniform asset turnover for the past decade, giving the company a lower asset efficiency score than actual economic measures indicate.

Moreover, during the past nine years, as-reported asset turnover never broke past 0.1x. In comparison, Uniform turns have reached a high of 0.4x over the same time period, making Vistamalls appear to be a less efficient business than real economic metrics highlight.

SUMMARY and Vistamalls, Inc. Tearsheet

As our Uniform Accounting tearsheet for Vistamalls, Inc. (STR:PHL) highlights, the company trades at a Uniform P/E of 2.2x, which is below the global corporate average of 22.4x and its historical P/E of 5.4x.

Low P/Es require low EPS growth to sustain them. In the case of Vistamalls, the company has recently shown a 120% 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, Vistamalls’ sell-side analyst-driven forecast is to see a Uniform earnings growth of 17% in 2023 and immaterially in 2024.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Vistamalls’ PHP 2.38 stock price. These are often referred to as market-embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink by 35% annually over the next three years. What sell-side analysts expect for Vistamalls’ earnings growth is above what the current stock market valuation requires through 2024.

Moreover, the company’s earning power is 3x the long-run corporate average. Cash flows and cash on hand are 2x its total obligations. Moreover, intrinsic credit risk is 480bps above the risk-free rate. Together, this signals a low credit and dividend risk.

Lastly, Vistamalls’ Uniform earnings growth is above its peer averages, while its Uniform forward P/E is 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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