This real estate developer is building its brand quickly, reaching a Uniform ROA of 5%, not 4%
This real estate developer does not seem to have issues with demand despite macroeconomic pressures.
However, its growth and expansion projects seem to be understated when looking at as-reported returns, not taking into account its TRUE profitability.
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
Powered by Valens Research
Cebu Landmasters, Inc. (CLI:PHL) has come a long way from its humble beginnings in 2003. The company only completed three affordable housing projects in Cebu during its first six years.
The 2010s was a different story, however, as one successful project after another spurred the company to expand its portfolio in the Visayas and Mindanao (VisMin) regions.
Fast forward to the present day, Cebu Landmasters has become the leading real estate developer in the VisMin region with over 100 projects under its belt.
After storming through an industry-wide slowdown in 2020 and 2021 due to the pandemic, the company pushed through with multiple expansion projects. This proved to be a success as the company took advantage of the resurgence in construction activity following the reopening of the economy in 2022.
Despite macroeconomic challenges such as higher interest rates, COO Jose Franco Soberano noted that demand was still strong for the projects that were launched during the year.
Compared to the previous year, the company saw a 40% increase in the real estate sales revenue in 2022. Also worth mentioning are the company’s leasing portfolio and hotels segments, which were successful as well during the year, netting a 7% and 71% year-on-year growth, respectively.
A total of 16 residential projects were launched in 2022, most of which were sold out in just a matter of days. Casa Mira, one of Cebu Landmasters’ affordable housing brands, led the way with 47% of the company’s real estate revenues for the year.
As Cebu Landmasters’ portfolio continues to dominate the VisMin region with projects in 16 different cities, the company aims to extend its market even further, with plans to bring its housing brands to Luzon within the next few years.
It has also been reported that capital expenditures for the following year will be focused on land acquisitions and project development. With this, the company’s expansion initiatives will continue to revolve around strategic placement, as well as building its brand image by catering to multiple income brackets.
Overall, Cebu Landmasters remains poised to build on its product offerings as it has in the past year through its aggressive and strategic expansion plans. However, the success brought by the company’s initiatives in a challenging situation seem to be understated by its as-reported returns.
Cebu Landmasters’ earning power is stronger than you think
Despite selling out majority of its projects and having a strong demand in the cities it has operated in, Cebu Landmasters seems to generate below cost-of-capital returns, with ROAs only reaching 4%.
In reality, the company achieved higher Uniform returns of 5% in 2022, a step higher than its as-reported returns.
What as-reported financials have gotten wrong is the depreciation of the company’s fixed assets.
Depreciation expense is a non-cash expense, meaning it does not represent an actual outlay of cash. Also, it can be easily manipulated by changing the asset’s life. As such, depreciation expense should be removed from earnings.
However, the company does spend cash on maintenance capital expenditures to ready the same assets for use in the following years. That said, this expense barely shows up in its entirety on the balance sheet.
To arrive at an estimate of the firm’s maintenance capex, what is done instead is smoothing as-reported depreciation expense over a few years, adjusting for inflation and asset impairments.
In Cebu Landmasters’ case, PHP 821 million of depreciation expense was charged in 2022. As a result, along with the many other adjustments made, we arrive at a PHP 3.05 billion in Adjusted earnings and a 5% Uniform earning power for the company in 2022.
Cebu Landmasters has a more efficient business than you think
Trends in Uniform ROA have been driven by trends in Uniform asset turns. Since 2014, as-reported metrics have understated Cebu Landmasters’ asset efficiency, a key driver of profitability.
Moreover, as-reported asset turnover has remained at 0.2x levels from 2019 to 2022. In comparison, Uniform turns have improved from 0.2x to 0.3x over the same time period, making Cebu Landmasters appear to be a less efficient business than real economic metrics highlight.
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 25.6x, above the global corporate average of 18.4x and its historical P/E of 19.7x.
High P/Es require average EPS growth to sustain them. In the case of Cebu Landmasters, the company has recently shown a 33% 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, Cebu Landmasters’ sell-side analyst-driven forecast is to see a Uniform earnings shrinkage of 27% and 24% in 2023 and 2024, 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 2.62 stock price. These are often referred to as market-embedded expectations.
The company is currently being valued as if Uniform earnings were to grow immaterially 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 through 2024.
Moreover, the company’s earning power is below the long-run corporate averages. Additionally, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends. Intrinsic credit risk is 1475bps above the risk-free rate. Together, this signals a high credit risk.
Lastly, Cebu Landmasters’ Uniform earnings growth is below its peer averages and its Uniform forward P/E is above 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!
Regards,
Angelica Lim
Research Director
Philippine Markets Newsletter
Powered by Valens Research
www.valens-research.com
