Philippine Markets Newsletter

This marine ports operator found its way to the shore despite the pandemic, achieving a Uniform ROA of 15%, not 8%

September 28, 2022

Supply chain disruptions and other pandemic-induced problems have proven a great challenge for this marine ports operator. It seems as-reported metrics are too focused on these issues that it’s not taking into account the company’s ability to successfully navigate through 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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According to the Global Trade Update report published by the United Nations Conference on Trade and Development (UNCTAD), global trade reached a record high of $28.5 trillion in 2021, up by 13% relative to pre-pandemic levels.

Most of this growth was recorded during H1 2021 with the momentum slowing down by Q3 2021. It picked up again in Q4 2021, achieving $5.8 trillion trade in goods.

In their 2021 World Trade Report, the World Trade Organization (WTO) noted the characteristics that make the global economy susceptible to crises—interdependence, openness, and networked technologies—also make it adaptable, innovative, and able to withstand crises when they hit. This, according to the WTO, highlights a paradox.

In the Philippines, one of the leading providers of the operation and management of port terminals that allows local and international trade of goods is Asian Terminals, Inc. (PSE:ATI).

Like most companies, Asian Terminals suffered lower revenues and subsequently lower net income during the pandemic with revenues for 2020 declining by 17.8% and net income declining by 20.4%.

By 2021, Asian Terminals was able to slowly recover, with revenues going up by 1.8% from PHP 11.0 million in 2020 to PHP 11.2 million on the back of higher container volumes.

On top of that, the company said it had handled 1.3 million TEUs (twenty-foot equivalent units) in 2021, a 3.7% increase versus 2020.

Asian Terminals said that it plans to sustain this momentum by investing PHP 5.4 billion in the acquisition of more modern and eco-friendly cargo handling equipment, as well as the development of ports and logistics infrastructures across its properties.

As part of this investment, Asian Terminals will also continue with the yard and berth facilities expansion in Manila South Harbor in order to handle the increasing container volumes and larger ships that are being deployed by freight carriers. This, in turn, will warrant a quicker and safer terminal turn-around time for port users, as well as help the company achieve 2.0 million TEUs by 2024.

With those initiatives, investors might think Asian Terminals is on the right track to recovery. However, as-reported metrics still paint the company as one that is struggling to adapt and boost growth even in 2021. 

In reality, the company’s continued facilities improvements despite ongoing global issues showed that Asian Terminals did better than expected, with Uniform ROAs performing way above cost-of-capital levels at 15%.

The distortion between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of goodwill on Asian Terminals’ balance sheet.

In recent years, goodwill sits at about PHP 20.6 billion, which is about 65% of the company’s total assets, arising from acquisitions made to expand its market reach.

Goodwill is an intangible asset that is purely accounting-based and unrepresentative of the company’s actual operating performance. When as-reported accounting includes this in a company’s balance sheet, it creates an artificially inflated asset base.

As a result, as-reported ROAs are not capturing the strength of Asian Terminals’ earning power. Adjusting for goodwill, we can see that the company isn’t producing paltry returns. In fact, it has been the opposite, with the company earning robust returns that have been nearly 2x greater.

Asian Terminals’ profitability 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 Asian Terminals’ profitability has been recently weaker than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated over the two decades. For example, as-reported ROA was 8% in 2021, but its Uniform ROA was actually higher at 15%.

Asian Terminals’ Uniform earnings margin is weaker than you think

Trends in Uniform ROA have been driven by trends in Uniform earnings margin. For a decade, as-reported metrics have understated Asian Terminals’ earnings margin, a key driver of profitability.

Moreover, as-reported margins have reached up to 58%. In comparison, Uniform margins have yet to eclipse 40% over the same time period, making Asian Terminals appear to be a more profitable business than real economic metrics highlight.

SUMMARY and Asian Terminals, Inc. Tearsheet

As our Uniform Accounting tearsheet for Asian Terminals, Inc. (ATI:PHL) highlights, the company trades at a Uniform P/E of 8.4x, below the global corporate average of 19.3x, but around its historical P/E of 8.9x.

Low P/Es require low EPS growth to sustain them. In the case of Asian Terminals, the company has recently shown an 8% 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, Asian Terminals’ sell-side analyst-driven forecast is to see Uniform earnings decline of 1% and 2% 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 Asian Terminals’ PHP 13.50 stock price. These are often referred to as market embedded expectations.

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

Moreover, the company’s earning power is 3x the long-run corporate average. Moreover, cash flows and cash on hand are 3x total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low credit and dividend risk.

To conclude, Asian Terminals’ Uniform earnings growth is in line with its peer averages, but below 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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