Besides building its business through developing subsidiaries, this retail conglomerate has been successfully diversifying through its acquisitions and investments.

However, as-reported metrics seem to undercut its growth potential, showing returns significantly lower than its TRUE earning power.

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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For the past few months, we have been highlighting how some of the most successful conglomerates in the Philippines remained profitable despite the effects of the pandemic.

San Miguel Corporation (SMC:PHL) and Alliance Global Group, Inc. (AGI:PHL) spread their businesses across other sectors by developing and improving their separate subsidiaries, and they were successful in doing so.

Another company that was able to capitalize on this was Robinsons Retail Holdings, Inc. (RRHI:PHL).

Besides focusing on building subsidiaries, another way that helped the company maintain its market position would be through acquisitions. This allowed Robinsons Retail to enter new markets, gain more expertise, and absorb new product lines.

Throughout the years, Robinsons Retail has acquired companies that excelled in their respective industries:

• True Value in 2007 – hardware
• Beauty Skinnovations Retail. Inc. in 2014 – beauty
• TGP in 2016 – pharmaceutical

Nonetheless, the company’s biggest acquisition to date was purchasing Rustan Supercenters for $344 million in 2018. Robinsons Retail was able to extend its audience reach by absorbing Rustan’s 80-store network, which includes Marketplace by Rustan’s, Rustan’s Supermarket, and Shopwise Hypermarket.

Due to the successful integration of this acquisition, Rustan was able to recover from its negative earnings before income taxes (“EBIT”) in 2018 to a positive EBIT in 2019, which further helped Robinsons Retail achieve a 23% increase in overall net sales to PHP 163 billion in 2019.

Moving on to 2022, Robinsons Retail acquired a 40% stake in Ministop Japan, giving the company a dominant position for Ministop PH (now called Uncle John’s). This, in turn, sent the Convenience Store segment’s sales up 24% to PHP 6.1 billion—accounting for 3% of the company’s revenue in 2022.

Besides its acquisition strategy, the company also focused on significant investments in order to tap into other profitable markets. Some of these include:

• Toys R Us – becoming the exclusive licensee of the brand in Asia
• Daiso Japan – becoming the exclusive franchisee of the brand
• No Brand – becoming the exclusive franchisee of the brand

Robinsons Retail’s earning power is stronger than you think

While it sounds like the company’s acquisitions and investments have been accretive, as-reported returns paint a different picture, showing only 4%.

In reality, the company achieved higher Uniform returns of 10%, making 2022 one of its best years in the past decade.

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 22.6 billion, which is about 42% 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.

SUMMARY and Robinsons Retail Holdings, Inc. Tearsheet

As our Uniform Accounting tearsheet for Robinsons Retail Holdings, Inc. (RRHI:PHL) highlights, the company trades at a Uniform P/E of 19.0x, around the global corporate average of 18.4x and its historical P/E of 19.0x.

Average P/Es require average EPS growth to sustain them. In the case of Robinsons Retail, the company has recently shown a 181% 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, Robinsons Retail’s sell-side analyst-driven forecast is to see a Uniform earnings decline of 48% and a Uniform EPS growth of 12% 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 Robinsons Retail’s PHP 46.40 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 7% annually over the next three years. What sell-side analysts expect for Robinsons Retail’s earnings growth is below what the current stock market valuation requires in 2023, but above its requirement in 2024.

Moreover, the company’s earning power is 2x the long-run corporate averages. Furthermore, cash flows and cash on hand are over 2x its total obligations—including debt maturities, capex maintenance, and dividends. Intrinsic credit risk is 310bps above the risk-free rate. Together, this signals a low credit and dividend risk.

Lastly, Robinsons Retail’s Uniform earnings growth is below its peer averages, and its Uniform forward P/E is in line with 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
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