Philippine Markets Newsletter

This real estate behemoth remained committed on its ever-continuing growth plans, achieving a higher Uniform ROA of 5%, not 4%

January 11, 2023

This real estate behemoth in the VisMin regions is aggressively expanding in a post-pandemic world. 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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According to Colliers, Cebu and Davao still remain as the biggest residential markets in the Visayas and Mindanao (VisMin) regions in 2022 as offices continue to reopen and demand for residential real estate rises along with regional tourism.

Well-known local developers in the VisMin regions, such as Cebu Landmasters, Inc. (CLI:PHL), are positioned to capitalize on these opportunities.

Initially developing, selling, leasing, and managing a real estate portfolio of residential condominiums, subdivision homes and lots, and townhomes, Cebu Landmasters expanded to include office, hotel retail, retail establishments, and townships.

Since it was listed in 2017, the real estate firm’s net income has grown by a compound annual growth rate of 28%, translating to PHP 2.6 billion net income in 2021 and registered over 100 projects in 16 important VisMin cities.

In recent years, Cebu Landmasters completed and launched many projects, with the most recent being Mesatierra Garden Residences in 2022.

In 2021, it launched around 10 projects worth PHP 18 billion, which was a tad higher than last year’s eight PHP 11.5 billion projects. The company was also able to boost its reservation sales to PHP 16.5 billion, up 16% from PHP 14.3 billion. This was mainly thanks to Casa Mira, its economic housing brand, which accounted for 41% of the company’s overall sales.

In order to capitalize on that specific brand, it also announced its expansion to Eastern Visayas—the 11th Casa Mira development project with its mountain resort and villas in Balamban, Cebu.

To date, Cebu Landmasters is still working to meet the housing needs in the VisMin regions.

It’s also increasing its portfolio and exploring and discovering new real estate development markets, particularly through its acquisition of 14.3 hectares of Xavier University—Ateneo de Cagayan’s Manresa Property in uptown Cagayan de Oro (CDO). The purpose of this transaction is to expand Northern Mindanao’s education hub.

Yet, despite all the progress, looking at as-reported metrics, it appears Cebu Landmasters has not benefited from its growth initiatives. As-reported return on assets (ROAs) show the company has produced below cost-of-capital levels, only reaching 4% in 2021.

In reality, Uniform Accounting shows that Cebu Landmasters’ ability to remain strong with its expansion plans has generated better returns, with Uniform ROA reaching 5%.

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 Cebu Landmasters, as-reported metrics’ asset base for ROA calculation is at PHP 66.6 billion in 2021, leading to a 4% as-reported ROA.

However, when subtracting current operating liabilities and applying other needed adjustments, we arrive at Cebu Landmasters’ PHP 51.7 billion Uniform assets, resulting in a 5% Uniform ROA.

Cebu Landmasters’ earning power is declining, but still stronger than you think

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 Cebu Landmasters’ profitability has been weaker than real economic metrics have highlighted in the past eight years.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated. For example, as-reported ROA was 4% in 2021, but its Uniform ROA was higher at 5%.

Cebu Landmasters’ asset turns are slightly stronger than you think

For a decade, as-reported metrics have understated Cebu Landmasters’ asset turns, a key driver of profitability.

Moreover, after peaking at 0.5x in 2014, as-reported turns faded to 0.2x in 2021. Meanwhile, since 2014, Uniform turns have eroded from 0.7x to 0.2x.

SUMMARY and Cebu Landmasters, Inc. Tearsheet

As our Uniform Accounting tearsheet for Cebu Landmasters, Inc. (CLI:PHL) highlights, the company trades at a Uniform P/E of 17.2x, which is around the global corporate average of 18.4x and its historical P/E of 16.3x.

Moderate P/Es require moderate EPS growth to sustain them. In the case of Cebu Landmasters, the company has recently shown a 101% 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, Cebu Landmasters’ sell-side analyst-driven forecast calls for a 33% EPS shrinkage and an 11% Uniform EPS 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 Cebu Landmasters’ PHP 2.72 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 1% annually over the next three years. What sell-side analysts expect for Cebu Landmasters’ earnings growth is below what the current stock market valuation requires in 2022, but above its requirement in 2023.

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 in line with peer averages in 2022, and is also trading in line with 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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