Philippine Markets Newsletter

This retail company’s continued shopping spree for growth helped it achieve a Uniform ROA of 6%, not 3%

October 12, 2022

This retail company focused on growing its portfolio by investing in e-commerce and digital initiatives. However, it seems its strategy hasn’t been translated into its profitability, with as-reported metrics showing returns less than the cost of capital.

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 Technavio, the Philippine market is expected to grow at an 11.68% CAGR post-COVID. Despite the various current headwinds in the economy, the retail industry sector is expected to bounce back for the rest of the year, as more and more people are seeing the light at the end of the tunnel. 

One of the major retail market vendors investing in innovation and technology advancement in the country is Robinsons Retail Holdings Inc. (RRHI). What started out as a small department store is now one of the largest multi-format retailers in the Philippines. 

Its business units vary from supermarkets, department stores, drugstores, and consumer electronics—to name a few. Among these business lines, the supermarkets contribute the most to revenue, coming in at 58% of Robinsons Retail’s total revenue.

As the market is slowly recovering from the effects of the pandemic, Robinsons Retail continues to emphasize its strategic plan to grow its network in the e-commerce space while also focusing on its inorganic growth through mergers and acquisitions. 

Robinsons Retail’s organic growth is evidenced by the recent openings of additional stores of its subsidiaries, such as TrueValue, Super50, and EasyMart. In 2021, the company opened around 135 new stores, complemented by the closure of some underperforming stores.

Robinsons Retail even launched BeautyMNL’s first offline stores, furthering its hold on the omnichannel market and expanding the company’s market reach.

On top of that, the company was able to foresee the importance of e-commerce and digital engagement by investing in Data Analytics Ventures, Inc (DAVI), a data analytics company that provides a solution to implement precise marketing and gain consumer insights, as early as 2018.

In 2021, Robinsons Retail added another brand to its digital portfolio as it invested in Edamama, a B2C e-commerce platform for childcare products and services. With 13.3% equity ownership, this investment allowed the company to explore potential collaborations with Robinsons Department Store and Toys-R-Us.

Robinsons Retail remains optimistic about maximizing its full potential and productivity as the company becomes more digital and sustainable. However, looking at its as-reported data, it seems that the company isn’t performing well enough with these strategies.

In reality, the company’s financial performance actually did better than presented, with Uniform ROAs performing above cost of capital levels at 6%.

One of the distortions between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of goodwill on Robinsons Retail Holdings’ balance sheet.

In recent years, goodwill sits at about PHP 22.7 billion, which is about 17% of the company’s total assets.

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 Robinsons Retail Holdings’ 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 2x greater returns.

Robinsons Retail Holdings’ 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 Robinsons Retail Holdings’ 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 3% in 2021, but its Uniform ROA was actually higher at 6%. 

Robinsons Retail Holdings’ earnings margins are less profitable than you think

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

Moreover, as-reported EBITDA margin has reached 8%. In comparison, Uniform margins have yet to eclipse 6% over the same time period, making Robinsons Retail Holdings appears to be a more profitable business than real economic metrics highlight.

SUMMARY and Robinsons Retail Holdings Tearsheet

As our Uniform Accounting tearsheet for Robinsons Retail Holdings Inc. (RRHI:PHL) highlights, the company trades at a Uniform P/E of 18.5x, around the global corporate average of 18.5x, but below its historical P/E of 27.9x.

Average P/Es require average EPS growth to sustain them. In the case of Robinsons Retail, the company has recently shown a 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, Robinsons Retail’s sell-side analyst-driven forecast is to see Uniform earnings growth of 35% in 2022 and 5% growth through 2023.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Robinsons Retail’s PHP 54.45 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 8% annually over the next three years. What sell-side analysts expect for Robinsons Retail’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. Also, cash flows and cash on hand are 2x total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low dividend and credit risk.

To conclude, Robinsons Retail’s Uniform earnings growth is in line with its peer averages and 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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