Philippine Markets Newsletter

This real estate company developed a solid position as it sustained shareholder value with a Uniform ROA of 8%, not 5%

October 5, 2022

This real estate company focused on a target market outside of the Metro. However, the as-reported metrics of the company do not seem to capture the company’s ability to create shareholder value.

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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Originating as a mining firm, this company was incorporated in 1966 as the Zipporah Mining and Industrial Corporation.

Then, in order to align with its main source of revenue in selling real estate properties, the company renamed to Zipporah Realty Holdings in 1996 with mining as its secondary purpose.

However, the company would be negatively affected by the Asian financial crisis, which compressed demand for real property and increased interest costs due to depreciated PHP against USD, as well as rising interest rates.

In 2007, Sta. Lucia Group of Companies eventually acquired the majority of the company, before changing it into what is currently known as Sta. Lucia Land, Inc.

Now, as the property development arm of the Sta. Lucia group, the company continues to develop real estate properties horizontally through residential lots in gated subdivisions and vertically through townhouses and condominiums.

In 2020, risks brought by the COVID-19 pandemic negatively affected the demand and revenue of most of the country’s economic sectors, including the real estate sector.

That said, the company’s effective cost-reduction efforts led to net income declining by only 2% in 2020. Its financial resiliency was tested once more in the following year as net income improved by 66%.

One main reason for the company’s stellar performance in 2021 is the shift of demand for property—from Metro Manila to nearby provinces outside of the country’s capital—as more people opted for the work-from-home arrangements away from the central business districts.

Sta. Lucia Land benefited from this because the majority of its project portfolio was focused on locations outside Metro Manila such as Rizal, Laguna, Batangas, and more.

Assuming this shift in demand outside the Metro persists amid the relaxation of quarantine restrictions in the central business districts, the company’s financial profitability may likely continue. It has even recorded a 36% net income growth in Q2 2022 from Q2 2021.

In Q2 2022, according to the Bangko Sentral ng Pilipinas (BSP), the Residential Real Estate Price Index (RREPI) rose by 2.6% compared with a year-on-year (YoY) basis. This was driven by the 2.2% and 6.3% growth of real estate prices in Areas Outside the NCR (AONCR) and National Capital Region (NCR), respectively.

Meanwhile, the availment of housing loans on a YoY basis improved by 6.5% due to the 17% increase in AONCR, despite the 7.7% shrinkage in NCR.

With the company’s property portfolio, it appears that Sta. Lucia Land’s as-reported metrics struggled to create shareholder value amid the pandemic, with return on assets (ROAs) reaching 5% in 2021.

In reality, the company’s financial performance did better than presented, with Uniform ROAs performing nearly above cost of capital levels at 8%.

One major contributing factor that has led to the misstatement of as-reported metrics is the failure to consider current liabilities in the profitability 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 for 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.

When current liabilities are subtracted from Sta. Lucia Land’s assets, along with the many other necessary adjustments made, this leads to an 8% Uniform ROA in 2021.

Sta. Lucia Land’s earning power 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 Sta. Lucia Land’s 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 past decade. For example, as-reported ROA was 5% in 2021, but its Uniform ROA was actually higher at 8%.

Sta. Lucia Land’s earnings margins are less profitable than you thinknk

Trends in Uniform ROA have been driven by trends in Uniform earnings margins. For more than two decades, as-reported metrics have overstated Sta. Lucia’s earnings margin, a key driver of profitability.

Moreover, as-reported EBITDA margin has reached 55%. In comparison, Uniform margins have yet to eclipse 42% over the same time period, making Sta. Lucia Land appears to be a less efficient business than real economic metrics highlight.

SUMMARY and Sta. Lucia Land, Inc. Tearsheet

As the Uniform Accounting tearsheet for Sta. Lucia Land, Inc. (SLI:PHL) highlights, the company trades at a Uniform P/E of 13.5x, below the global corporate average of 18.9x, but around its historical P/E of 13.8x.

Low P/Es require low EPS growth to sustain them. In the case of Sta. Lucia Land, the company has recently shown a 132% 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, Sta. Lucia Land’s sell-side analyst-driven forecast is to see Uniform earnings decline of 1% in 2022 and an immaterial growth in 2023.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Sta. Lucia Land’s PHP 3.04 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 6% annually over the next three years. What sell-side analysts expect for Sta. Lucia Land’s earnings growth is above what the current stock market valuation through 2023.

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

To conclude, Sta. Lucia Land’s 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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