Innovation has become such an integral part of a company’s business during the pandemic. Companies that were not able to adapt to the changes quickly found themselves unable to survive.

This “techglomerate” was already on its way to leading with innovation before the pandemic. However, as-reported metrics show its efforts are not paying off, only generating below cost-of-capital 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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The pandemic took almost everyone by surprise, especially in this day and age where technology has been at the forefront of development in the health care industry.

Businesses that could not quickly adapt to the sudden mobility restrictions had to shut down, temporarily or permanently. Businesses that either had a strong foundation of innovation or were able to adopt innovative practices were the ones that quickly got back on their feet. These companies include Far Eastern University (FEU:PHL) and Asian Terminals, Incorporated (ATI:PHL).

Besides these two, another company that was able to take advantage of pre-pandemic innovation was Aboitiz Equity Ventures, Inc. (AEV:PHL).

As the company embarks on its “Great Transformation” journey from being a conglomerate to a “techglomerate,” it had already begun investing in technological initiatives to jumpstart its digital transformation years ago.

Specifically, Unionbank—one of its business units—has invested in several technological innovations in 2019:

• The Portal – a business banking platform that holds its corporate clients’ cash management solutions
• Financial Supply Chain Platform – digitizes financial process and availing options without the need for manual involvement
• UBX – the bank’s innovation tech company that mainly revolves around the technological advancement of the business.

Most recently, one of its innovative milestones was the adoption of the Robotic Process Automation (RPA) in 2021, which collates real-time data on company customer records. This will help the company save time and strengthen customer relationships through a more systematic collection process.

Its focus on the continuous improvement of its digital strategy helped the company easily adapt while still remaining competitive in the developing business environment.

Another milestone for the company was the launch of Aboitiz Data Innovation (ADI) that same year, which will help businesses and governments through the use of innovative solutions from the Data Science and Artificial Intelligence (DSAI).

ADI’s primary responsibility is to turn data into business outcomes, utilize information to improve decision-making, and develop high-value solutions to provide new processes, products, and services.

On top of that, the company is also diversifying its data center business to meet the increasing data demand through a partnership with EdgeConnex by developing hyper-scale data centers across the Philippines that will accommodate cloud service providers.

Partly because of these factors, Aboitiz Equity Ventures was able to incur a net income of PHP 27.3 billion in 2021, a 77% increase from PHP 15.4 billion in 2020. It also exceeded its pre-pandemic net income of PHP 22.0 billion in 2019.

However, looking at as-reported metrics, it appears that Aboitiz Equity Ventures is barely breaking even, with return on assets (ROAs) of just 3% in 2021.

In reality, Uniform Accounting shows that the company’s focus on its digital initiatives has generated better returns, with Uniform ROAs exceeding cost of capital levels at 10%.

One of the said distortions stems from how Philippine Financial Reporting Standards (PFRS) classifies Aboitiz Equity Ventures’ non-operating long-term investments.

Composed mostly of long-term financial securities and non-controlling ownership interests, these are not considered to be core to the company’s operations since the firm has no management influence on either of these.

As such, removing non-operating long-term investments from the balance sheet and with the other adjustments Valens makes, Aboitiz Equity Ventures’ Uniform earning power has actually been more than 2x as-reported ROA since 2014.

Specifically, in 2021, Aboitiz Equity Ventures recorded non-operating long-term investments at PHP 161 billion. Removing non-operating long-term investments from the balance sheet, along with many other necessary adjustments made by Valens, leads to a PHP 293 billion Uniform Net Assets and an 10% Uniform ROA, more than 2x as-reported ROA since 2014.

Aboitiz Equity Ventures’ 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 Aboitiz Equity Ventures’ profitability has been weaker than real economic metrics have highlighted in the past eight years.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated. For example, as-reported ROA was 3% in 2021, but its Uniform ROA was higher at 10%.

Aboitiz Equity Ventures is a more efficient business than you think

For a decade, as-reported metrics have understated Aboitiz Equity Ventures’ asset turns, a key driver of profitability.

Moreover, since 2011, as-reported turns ranged from 0.2x-0.3x through 2021. Meanwhile, Uniform turns never went below 0.5x.

SUMMARY and Aboitiz Equity Ventures, Inc. Tearsheet

As the Uniform Accounting tearsheet for Aboitiz Equity Ventures, Inc. (AEV:PHL) highlights, the company trades at a Uniform P/E of 16.3x, below the global corporate average of 18.4x, but around its historical P/E of 16.9x.

Low P/Es require low EPS growth to sustain them. In the case of Aboitiz Equity Ventures, the company has recently shown a 542% 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, Aboitiz Equity Ventures’ sell-side analyst-driven forecast is to see Uniform earnings shrink by 108% and 788% 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 Aboitiz Equity Ventures’ PHP 56.25 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 5% annually over the next three years. What sell-side analysts expect for Aboitiz Equity Ventures’ earnings growth is below what the current stock market valuation requires through 2023.

Moreover, the company’s earning power is 2x the long-run corporate average. However, cash flows and cash on hand are below total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a high dividend risk.

To conclude, Aboitiz Equity Ventures’ Uniform earnings growth is well below peer averages, but currently 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!

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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