Philippine Markets Newsletter

This semiconductor company’s ability to take advantage of opportunities has set itself up for a bright future, reaching a Uniform ROA of 6%, not 2%

November 23, 2022

Rising costs, rapid digitalization, and semiconductor headwinds may have paved the way for this company’s growth and expansion in the long run. However, as-reported data seems to show otherwise.

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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The ongoing war in Ukraine disrupted the global supply of fuel and coal, resulting in shortages and soaring prices. Some industries suffered more heavily during this time. 

For example, numerous manufacturing facilities were shut down in the Chinese semiconductor industry. 3,470 Chinese semiconductor companies deregistered from January to August in 2022, exceeding the 3,420 of such firms that closed in 2021. This, in turn, puts a constraint on global supply that could result in a price increase of 3.6% in 2022.

But one country’s loss could be another country’s gain.

The Philippine industry may benefit from these global headwinds and grow at 10% thanks to a constant demand for semiconductors, medical electronics, telcos, and industrial products. We’re already seeing a 2% growth in electronic exports, from $25.99 billion in July 2021 to $26.51 billion in July 2022. Note that almost 70% of total Philippine electronic exports come from semiconductor components.

Cirtek Holdings Philippine Corporation (TECH:PHL), a tech company providing electronic products, can capitalize on the rising prices of electronics by becoming a major exporting firm.   

However, the firm will need to balance the rising manufacturing costs to make taking advantage of this semiconductor shortage worthwhile. Regardless, the future is bright for Cirtek Holdings whose customers mostly come from the U.S., such as Analog Devices and Texas Instruments.

In 2017, Cirtek Holdings, through its telecommunication subsidiary, acquired Quintel—a leading innovator of spectrum and space-efficient base station antennas for wireless networks. Currently, the company is continuing its expansion overseas, signing new contracts with AT&T and Verizon. 

Quintel also entered the Hawaiian market. It launched the new fifth-generation (5G) NR (New Radio), which enhances energy savings per device, wireless area capacity, and speed.

Finally, Cirtek Holdings developed new projects with its two business units—Cirtek Electronics Corp. (CEC) and Cirtek Advanced Technologies and Solutions Inc. Philippine Branch (Catsi)—which were recently approved by the Philippine Economic Zone Authority (PEZA):

  • CEC – registration of the manufacturing process of plastic and ceramic leadless chip carrier package
  • Catsi – the assembly of Quintel Multi-port Antennas for 5G and the manufacturing of Analog Device Inc.’s (ADI) RF Load Boards and other ADI products

With these developments, Cirtek Holdings is in a good position to increase its market share and sales growth through innovation and expansion to new markets.  

Looking at as-reported metrics, however, it appears the company’s returns continue to decline and produce below cost-of-capital levels, with return on assets (ROAs) reaching only 2% in 2021.

In reality, the company’s financial performance is actually above cost-of-capital levels, with Uniform ROAs achieving 6%.

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 2021, Cirtek Holdings recognized an interest expense of PHP 5.5 billion, a third of as-reported net income of PHP 8.1 billion. When we add the PHP 5.5 billion back to earnings, because it is not an operating expense, net income increases. This adjustment alone shows that the company actually earned a 6% Uniform earning power.

Cirtek 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 Cirtek 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 2% in 2021, but its Uniform ROA was 3x higher at 6%. 

Cirtek Holdings’ Uniform turns are stronger than you think

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

Moreover, Uniform turns have already reached 0.8x. In comparison, as-reported turns have yet to eclipse beyond 0.6x over the same time period, making the company appear to be a less efficient business than real economic metrics highlight.

SUMMARY and Cirtek Holdings Philippines Corporation Tearsheet

As our Uniform Accounting tearsheet for Cirtek Holdings Philippines Corporation (TECH:PHL) highlights, the company trades at a Uniform P/E of 4.1x, below the global corporate average of 18.4x, and its historical P/E of 9.2x.

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 is to see Uniform earnings growth of 17% in 2022, and an 8% decline in 2023.

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 2.51 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 28% annually over the next three years. What sell-side analysts expect for Cirtek Holdings’ earnings growth is below what the current stock market valuation requires through 2023.

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

To conclude, Cirtek Holdings’ Uniform earnings growth is in line with its peer averages, and is also 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!


Angelica Lim

Research Director
Philippine Markets Newsletter
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