This semiconductor company continues to set itself up for the future, achieving a Uniform ROA of 8%, not 3%
This semiconductor company continued to evolve over the years through its expansion initiatives. However, its as-reported data doesn’t seem to see this as a profitable opportunity.
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 global semiconductor sector continued to experience prolonged shortages. However, this period of adversity led to significant shifts and opportunities in the industry.
Businesses worldwide were compelled to diversify their supplier networks, and the Philippines emerged as a key player poised for a more substantial role in the semiconductor sector.
Cirtek Holdings Philippines Corporation (TECH:PHL), a notable semiconductor manufacturer, navigated the supply shortage effectively by employing a strategy rooted in diversification and forward-thinking, ultimately achieving record-breaking profits.
Since then, the company has evolved over the years, expanding its portfolio of subsidiaries, including Cirtek Electronics Corporation, Cirtek Electronics International Corporation, and Cirtek Advanced Technologies and Solutions, Inc.
The company’s strategy centers on diversification and seizing opportunities in emerging industry segments, such as the electrification of traditional infrastructures.
This approach, led by CEO Brian Liu, allowed Cirtek to capitalize on market opportunities even during challenging periods like the pandemic. This strategic positioning, especially in high-demand areas like chipsets, played a pivotal role in achieving high profits and sustaining healthy sales figures.
One notable illustration of this strategy’s success is the acquisition of Quintel in 2017, which has further strengthened Cirtek’s presence in the industry.
The company was able to absorb Quintel’s research and development, as well as its product capabilities—which would benefit its growing portfolio in wireless communication.
In 2022, the company achieved consolidated revenues of $84.8 million, marking a significant 21% increase from the previous year. This remarkable performance can be attributed to strategic initiatives in key areas, including the Quintel business, the semiconductor sector, and antenna manufacturing.
Through Quintel, the company serves prominent clients such as Verizon, AT&T, and T-Mobile, contributing to nearly 48% of total U.S. revenue for Cirtek Holdings. Overall, Cirtek Holdings is continuing its focus on its expansion strategies.
Cirtek Holdings’ earning power is stronger than you think
Despite having a strong initiative, Cirtek Holdings seems to generate underwhelming returns, with ROAs only reaching 3% in 2022.
In reality, the company achieved above cost-of-capital Uniform returns at 8%.
One of the said distortions stems from how Philippine Financial Reporting Standards (PFRS) classifies interest expense.
According to PFRS, interest expense is an operating cash flow. In reality, interest expense represents the cost of debt and is rightfully a financing cash flow. As such, in Uniform Accounting, interest expense is added back to earnings.
For example, in 2022, Cirtek Holdings recognized an interest expense of $4.7 billion, 42% of as-reported net income of $11.3 billion. When we add the $4.7 billion back to earnings, because it is not an operating expense, net income increases. This adjustment alone represents an 8% Uniform ROA.
Cirtek Holdings has a more efficient business than you think
The firm’s asset utilization, a critical factor in profitability, is also greatly distorted. As-reported asset turnover of 0.3x in 2022 was lower than Uniform asset turnover of 0.4x, giving the organization a lower asset efficiency score than actual economic measures indicate.
Additionally, for the past eight years, as-reported turns have consistently been less than Uniform turns, which has distorted the market’s assessment of the firm’s historical asset efficiency levels.
SUMMARY and Cirtek Holdings Philippines Tearsheet
As our Uniform Accounting tearsheet for Cirtek Holdings Philippines (TECH:PHL) highlights, the company trades at a Uniform P/E of 3.4x, below the global corporate average of 18.4x and its historical P/E of 125.1x.
Low P/Es require low EPS growth to sustain them. In the case of Cirtek Holdings, the company has recently shown a 56% 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, Cirtek Holdings’ sell-side analyst-driven forecast is to see a Uniform earnings shrinkage of 11% and 7% 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 Cirtek Holdings’ PHP 1.80 stock price. These are often referred to as market-embedded expectations.
The company is currently being valued as if Uniform earnings were to decline by 32% annually over the next three years. What sell-side analysts expect for Cirtek Holdings’ earnings growth is above what the current stock market valuation requires through 2024.
Moreover, the company’s earning power is higher than the long-run corporate averages. Additionally, cash flows and cash on hand are 2x its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a high credit risk.
Lastly, Cirtek Holdings’ Uniform earnings growth is below its peer averages, while 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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