Philippine Markets Newsletter

This school is fighting its way back to the top, achieving a Uniform ROA of 13%, not 6%

December 6, 2023

Nothing could have prepared the academic institutions for what came during the pandemic, specifically the full shift towards online learning. However, this school was able to adjust and remain at the top of its game amidst several economic challenges. 

Unfortunately, as-reported metrics fail to paint an accurate picture, with ROAs only reaching 6% this year.

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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During the pandemic, The Far Eastern University, Inc. (FEU:PHL) focused on student welfare as the country was plagued by economic challenges, having to fully shift towards online learning.

FEU reduced fees and offered scholarships to accommodate students, and refocused investing towards online learning tools and systems to support the transition to online learning. 

Luckily, before the pandemic even happened, FEU was already prepared. It had begun the use of Canvas—a learning management system that trains faculty and students on digital literacy. This enabled the school to smoothly transition to distance learning when it became necessary.

Fast forward to the post-pandemic era, the company is now beginning to see campus activity return to pre-pandemic levels. 

FEU is currently focused on improving facilities and maintaining its brand, taking steps to improve the quality of education offered to its students, and projecting academic excellence to other stakeholders. The company also continued partnering with international educational institutions.

Specifically, FEU signed a partnership agreement with the University of Zagreb, making the company one of the first Philippine institutions to do so in Croatia.

On top of that, the company is also focusing on further developing the digitization of its services even after the pandemic. It is currently taking advantage of Microsoft’s Rapid Application Builder Platform, helping the school efficiently create new cost-effective applications.

As of today, FEU has the following app services for its students:

  • TamsGo – one-stop-shop for student services such as Tams Bookstore
  • FEU Events – event registration and ticketing services
  • University Health Services – Covid-19 vaccination registration

With all of these improvements, the company was able to grow enrollment figures by 15% this year to 51,000. FEU also saw a 20% improvement in revenue to PHP 5 billion, while net income grew 23% to PHP 1.9 billion.

All in all, these initiatives show FEU has been making its way back to the top by investing a portion of its efforts into enhancing its market share, room for growth, and brand image. 

FEU’s earning power is stronger than you think

However, looking at its as-reported metrics, it seems like FEU hasn’t been generating robust returns, with ROAs barely hitting cost of capital levels of 6%.

In reality, FEU has managed to greatly improve its profitability levels, reaching a Uniform ROA of 13%.

One of the main contributors to such discrepancy is its treatment of excess cash. While as-reported financials treat FEU’s entire cash balance as part of its asset base, Uniform Accounting removes the cash that’s not necessary to operate and fulfill obligations—cash above what one might view as “operating” cash.

The purpose of removing excess cash is to see the firm’s true operating assets. Removing excess cash allows investors to see through the distortions from management carrying much more cash on the balance sheet than what is operationally required. 

In 2023, FEU had PHP 3.5 billion worth of excess cash, making up 22% of the company’s as-reported assets.

Removing excess cash and applying other adjustments Valens makes, FEU’s 6% as-reported ROA and PHP 16.3 billion asset base are adjusted to reveal its TRUE Uniform ROA of 13%, by utilizing just PHP 12.0 billion of Uniform assets.

FEU has a more efficient business than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. The firm’s asset utilization, a critical factor in profitability, is also greatly distorted. As-reported asset turnover has been consistently lower than Uniform asset turnover for the past decade, giving the organization a lower asset efficiency score than actual economic measures indicate.

Moreover, in the past sixteen years, as-reported asset turnover has reached a peak of 0.5x. In comparison, Uniform turns have reached a high of 1.3x over the same time period, making FEU appear to be a less efficient business than real economic metrics highlight.

SUMMARY and The Far Eastern University, Incorporated Tearsheet

As our Uniform Accounting tearsheet for The Far Eastern University, Incorporated (FEU:PHL) highlights, the company trades at a Uniform P/E of 7.8x, below the global corporate average of 18.4x but around its historical P/E of 9.0x.

Low P/Es require low EPS growth to sustain them. In the case of FEU, the company has recently shown a 17% 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, FEU’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 4% and an immaterial shrinkage in 2024 and 2025, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify FEU’s PHP 572.00 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 16% annually over the next three years. What sell-side analysts expect for FEU’s earnings growth is above what the current stock market valuation requires through 2025.

Moreover, the company’s earning power is 2x the long-run corporate average. Additionally, cash flows and cash on hand are 4x above its total obligations. However, intrinsic credit risk is 530bps above the risk-free rate. Together, this signals a high credit risk.

Lastly, FEU’s Uniform earnings growth is above its peer averages, while its Uniform forward P/E is 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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