Philippine Markets Newsletter

This snacking company isn’t about to run out of luck just because of bad press, not with its 10% ROA

August 2, 2022

This company made headlines in early July this year because some variants of its famous instant noodles were found to have traces of pesticide. Its stock price fell by 7% that day, but less than a month later, it recovered.

Bad press aside, this snacking company owes its success to its ability to capitalize on its research and development strategy to develop several best-selling products.

However, its as-reported data show that the company wasn’t able to satisfy its consumers’ healthy snacking needs.

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 years, research and development has been at the forefront of Monde Nissin’s (MONDE:PHL) strategy, focusing on new product innovations that will align with the company’s mission to provide accessible and affordable food products for its consumers.

That is why it was able to make a name for itself by breaking into the instant noodle business with the launch of its famous Lucky Me! brand in 1990.

Since then, the company has improved and expanded its product portfolio, developing some of the best-selling products we know today—Lucky Me! Pancit Canton, SkyFlakes, and Fita.

This growth paved the way for Monde Nissin to eventually dominate the Philippine snacking industry, with its instant noodle and yogurt business accounting for 70% and 83% of the segments’ market shares, respectively.

However, the company isn’t only focused on accessibility and affordability, it is also interested in nutrition. Given that Monde Nissin has already penetrated the snacking market, the company has the advantage of convincing consumer behavior to shift to healthier lifestyles.

We’ve previously talked about how big the snacking industry has grown in our previous articles on Hershey Chocolate Company (HSY) and Mondelez International, Inc. (MDLZ). It’s even expected to globally reach $152.5 billion by 2030.

For Monde Nissin, the company capitalized on this opportunity by launching its “better-for-you” portfolio starting with its new Lucky Me! Milky Me product, which is a nutritious and creamy instant noodle soup made with Vitamin A, Iron, and less sodium.

Monde Nissin also invested in its latest innovation—its high-speed airflow (HSAF) technology—to reduce oil content by 70%. Through this development, the company was able to make its non-fried Lucky Me! Noodles, which was successful in North Central Luzon and the Greater Manila Area.

As we discussed a year ago, the company also entered the fake meat business through its acquisition of British alternative meat brand Quorn in 2015. In 2021, Quorn alone accounts for 22% of Monde Nissin’s total revenue with strong sales in both the UK and the US.

All in all, the company’s continued focus on its product innovations helped Monde Nissin keep it top of mind for customers looking for convenient yet healthy alternatives. However, as-reported data doesn’t seem to think so, with returns only showing ROAs of 7%-10%.

In reality, the company’s product development initiatives actually proved that the company did much better than expected, with Uniform ROAs reaching a peak of 22%.

The distortion between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of goodwill on Monde Nissin’s balance sheet.

In recent years, goodwill sits at about PHP 35.6 billion, which is about 36% of the company’s total assets, arising from acquisitions made to expand its market reach.

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 Monde Nissin’s 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 robust returns that have been nearly 2x greater.

Monde Nissin’s 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 Monde Nissin’s profitability has been weaker than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been mostly understated over the past seven years. For example, as-reported ROA was 7% in 2021, but its Uniform ROA was actually higher at 10%.

Monde Nissin’s earnings margin is much weaker than you think, but its Uniform asset turns make up for it

Trends in Uniform ROA have been driven by trends in Uniform earnings margin. Since 2016, as-reported metrics have overstated this metric, which is also a key driver of profitability.

Moreover, as-reported margins expanded from 18% in 2018 to 22% highs in 2019-2020, before fading to 17% in 2021. In reality, Uniform margins have only improved from 10% in 2018 to 13% in 2019, before falling to 7% in 2021, making Monde Nissin appear to be a more profitable business than real economic metrics highlight.

SUMMARY and Monde Nissin Corporation Corporation Tearsheet

As the Uniform Accounting tearsheet for Monde Nissin Corporation (MONDE:PHL) highlights, the company trades at a Uniform P/E of 34.2x, above the global corporate average of 19.3x and its historical P/E of 20.9x.

High P/Es require high EPS growth to sustain them. In the case of Monde Nissin’s, the company has recently shown a 52% Uniform EPS decline.

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, Monde Nissin’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 78% and 23% 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 Monde Nissin’s PHP 14.50 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 24% annually over the next three years. What sell-side analysts expect for Monde Nissin’s earnings growth is above what the current stock market valuation requires in 2022, but below this requirement in 2023.

Furthermore, the company’s earning power is 2x the long-run corporate average. Additionally, cash flows and cash on hand are above their total obligations—including debt maturities and capex maintenance. Together, this signals a low credit risk.

Lastly, Monde Nissin’s Uniform earnings growth above its peer averages, and also trades above 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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