Philippine Markets Newsletter

This semiconductor company secured the capacity to process its growth initiatives, achieving a Uniform ROA of 6%, not 2%

February 8, 2023

Despite the big chip shortage, this semiconductor company was able to maintain relatively stable profitability thanks to its expansion and product development strategies. However, as-reported metrics show that it is only generating weak returns.

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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We’ve heard about issues surrounding the global chip shortage in recent years, yet the semiconductor industry fared impressively well in 2021. According to electronics industry magazine EE Times, the sector is forecast to continue to rise at a compound annual growth rate of 7% in the next five years.

In the Philippines, the industry serves approximately 60% of all commodity exports. This makes it the largest contributor to the manufacturing output of the country, with a gross of over PHP 50 billion in 2021.

Cirtek Holdings Philippines Corporation (TECH:PHL) has greatly taken advantage of this demand in the country. Founded in 1984 by Chairman Jerry Li, the company recorded a compounded annual growth rate of 25% in volume over the past ten years.

Cirtek Holdings’ subsidiaries include Cirtek Electronics, Cirtek Advanced Technologies and Solutions Inc., and Quintel Solutions—specializing in automotive, medical, smart phones, 5G, video streaming, and M2M IOT. Globally, the company has partnered with known brands such as Texas Instruments, Analog Devices, and Renesas.

Besides its recent partnerships, Cirtek Holdings has also focused on its expansion and product development initiatives.

Specifically, the company started procuring additional equipment during the first quarter of 2021 through its unit, Cirtek Electronics, to meet its rising customer demands. This will increase capacity by 25%.

As a complement to this growth trajectory, Cirtek Holdings was able to secure three new customers from major telecommunication players in Europe.

The company has also further expanded into manufacturing 5G-supporting chipsets as growing trends in medical devices and wearables have shown high potential for Cirtek Holdings’ future.

Finally, through Quintel, the company was able to strengthen its telco presence in the U.S. by extending its master supply agreement with two telecommunication companies.

Overall, it seems that all of the company’s initiatives have become a potential for growth for Cirtek Holdings. However, looking at as-reported metrics, it appears that the company is not making a profit, with return on assets (ROAs) of just 2% in 2021.

In reality, Uniform Accounting shows that the company’s focus on its expansion and product development strategies has generated higher returns, with Uniform ROAs above cost-of-capital at 6%.

One of the 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 2021, Cirtek Holdings recognized an interest expense of PHP 6 million, which is 68% of as-reported net income of PHP 8 million. When we add the PHP 6 million back to earnings, because it is not an operating expense, net income increases. This adjustment alone results in a higher Uniform earning power at 6%.

Cirtek Holdings’ earning power is stronger than you think

As-reported metrics distort the market’s perception of the firm’s historical profitability. If you were to just look at as-reported ROA, you would think Cirtek Holdings’ profitability has been generating weak returns in the past seven years.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated. For example, as-reported ROA was 2% in 2021, but its Uniform ROA was higher at 6%.

Cirtek Holdings’ Uniform asset turns are stronger than you think

For the past seven years, as-reported metrics have understated Cirtek Holdings’ asset turns, a key driver of profitability.

Moreover, since 2015, as-reported turns ranged from 0.2x-0.6x through 2021. Meanwhile, Uniform turns was able to reach a high of 0.7x.

SUMMARY and Cirtek Holdings Philippine Corporation Tearsheet

As the Uniform Accounting tearsheet for Cirtek Holdings Philippine Corporation (TECH:PHL) highlights, the company trades at a Uniform P/E of 5.3x, which is below the global corporate average of 18.4x and its historical P/E of 9.5x.

Low P/Es require low EPS growth to sustain them. In the case of Cirtek Holdings, the company has recently shown a 30% 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, Cirtek Holdings’ sell-side analyst-driven forecast calls for a 17% Uniform EPS growth and an 8% Uniform EPS shrinkage in 2022 and 2023, 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 3.06 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 24% 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 2023.

Furthermore, the company’s earning power is 1x the long-run corporate average. However, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals average dividend and credit risk.

Lastly, Cirtek Holdings’ Uniform earnings growth is in line with peer averages in 2022, and the company is also trading in line with its peer average 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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