Philippine Markets Newsletter

This real estate behemoth of the VisMin region capitalized on its growth journey, achieving a higher Uniform ROA of 5%, not 4% in the pandemic

April 20, 2022

This real estate behemoth in the VisMin regions remained focused on its growth strategy even during the pandemic. However, as-reported metrics show that it is only generating meager 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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The Philippines’ Visayas and Mindanao (VisMin) regions have long been regarded as real estate hotspots due to a variety of factors.

For the Visayas region, its developing IT (Information Technology) and BPO (Business Process Outsourcing) businesses mean Cebu is considered the country’s second most significant metropolitan area.

On the other hand, for the Mindanao region, Davao is one of the trendiest real estate markets because of its economy, tourism attractions, and natural resources, making it a significant investment location in the country.

As such, well-known local developers in the VisMin regions are positioned to capitalize on these opportunities going forward, such as Cebu Landmasters, Inc. (CLI:PHL). Founded in 2003, Cebu Landmasters has built more than 100 projects in various stages of development in 15 major cities—including Cagayan de Oro, Bacolod, and Iloilo.

Cebu Landmasters expanded its product portfolio from a single residential project to include residential, office, hotel retail, and now estates. Like Vista Land (VLL:PHL), it also caters to the housing needs of the high-end, middle-class, low-income, and socialized housing segments.

One of the company’s notable projects is the Citadines in Cebu City—a 180-room condotel operated and managed by Ascott Limited. Opened in September 2019, this was Cebu Landmasters’ first hotel development.  

With the success of that collaboration, the company continued its partnership with Ascott to build more hotel projects in the VisMin regions given the increasing tourist arrivals and need for greater capacity.

With all of Cebu Landmasters’ upcoming and developed projects, as well as its dominant position in the VisMin regions, it seems that the company does not have anywhere to go but up—that was until the pandemic came.

In 2020, the pandemic changed the way how the world worked. Luckily, the company was still able to thrive through identifying strategic locations, monitoring market conditions, and sustaining its business expansion.

Due to these initiatives, Cebu Landmasters was able to proceed with the launch of its nine projects that are worth PHP 11.4 billion in key VisMin cities during the pandemic, adding a total of 4,300 additional homes to the company’s inventory.

By the end of 2020, the company sold around 5,300 units across the VisMin regions. It also achieved record reservation sales of PHP 14.3 billion in 2020, a 12.4% growth from the previous year’s PHP 12.7 billion. This amazing feat was brought about by the increased demand in the company’s mid-end and economic residential developments.

Overall, Cebu Landmasters is set for growth if it continues down this road. However, looking at as-reported metrics, it appears that the company is showing meager profitability, with return on assets (ROAs) declining since its peak of 15% in 2016.

In reality, Cebu Landmasters’ continued push for growth has actually proved that the company isn’t investing in low-return assets, with Uniform ROAs achieving a peak of 23% in the past seven years.

One of the differences between as-reported and Uniform accounting lies in how the minority interest or the non-controlling ownership of subsidiaries is treated.

As a form of equity, minority interest is recorded when companies other than the parent company own less than 50% ownership of a subsidiary, in exchange for capital. 

As such, any transaction that takes place related to non-controlling interest is a financing cash flow and is not part of the core operations of the business. Therefore, minority interest expense should be added back to earnings. 

In 2020, the company’s minority interest expense of PHP 230 million is equal to 12% of their as-reported net income of PHP 1.8 billion. Adding this back, along with the many other adjustments Valens makes, we arrive at the firm’s TRUE earnings of PHP 2.1 billion and Uniform earning power of 5%.

Cebu Landmasters’ earning power is declining, but still 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 weaker business than real economic metrics highlight.

Through Uniform Accounting, we can see that Cebu Landmasters’ true ROAs have been mostly understated in the past seven years. For example, in 2017, the year of the company’s IPO, Uniform ROA was 13% but the as-reported ROA was only 9% that year.

Looking at historical performance, we see that as-reported ROA improved from 10% in 2015 to 11% in 2016, before declining to 4% in 2020.

On the other hand, Uniform ROA gradually compressed from a high of 23% in 2014 to a low of 5% in 2020.

Cebu Landmasters’ asset turns are slightly stronger than you think


Strength in Cebu Landmasters’ Uniform ROA has been driven by strong Uniform asset turns. 

After peaking at 0.5x in 2014, as-reported turns faded to 0.2x in 2020. Meanwhile, since 2014, Uniform turns have eroded from 0.7x to 0.2x.

Looking at the firm’s turns alone, as-reported metrics are making the firm appear to be a less asset efficient business than is accurate.

SUMMARY and Cebu Landmasters, Inc. Tearsheet

As the Uniform Accounting tearsheet for Cebu Landmasters, Inc. (CLI:PHL) highlights, the company trades at a Uniform P/E of 21.3x, which is below the global corporate average of 24.0x, but above its historical P/E of 15.9x.

Low P/Es require low EPS growth to sustain them. In the case of Cebu Landmasters, the company has recently shown a 2% Uniform EPS decline.

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, Cebu Landmasters’ sell-side analyst-driven forecast calls for a 15% EPS shrinkage and a 7% Uniform EPS growth in 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 Cebu Landmasters’ PHP 3.00 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow by 1% annually over the next three years. What sell-side analysts expect for Cebu Landmasters’ earnings growth is above what the current stock market valuation requires in 2021, but below its requirement in 2022.

Furthermore, the company’s earning power is below the long-run corporate average. Also, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals high dividend and credit risk.

Lastly, Cebu Landmasters’ Uniform earnings growth is below peer averages in 2021, but the company is trading above its peer average 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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