Philippine Markets Newsletter

Uniform Accounting reveals this company holds more powered up returns than it appears, generating a Uniform ROA of 6%, not 4%

June 15, 2022

This holding company was able to manage profit declines and continue finding means to raise capital to expand its various businesses amid the pandemic. Although its as-reported metrics showed little to no added shareholder value, this conglomerate’s diversity allowed it to generate a more profitable Uniform return on assets (ROA).

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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In 1961, Don Eugenio Lopez, along with a group of Filipino entrepreneurs, purchased an electric power distribution company from General Public Utilities, an American company.

Through the years, this company added new power plants to boost its volume output, thereafter becoming First Philippine Holdings (FPH:PHL).

Now, FPH holds one of the largest independent power producers in the country through First Gen Corporation (FGEN:PHL). In addition, FPH holds major interests in multiple industries such as real estate development with Rockwell Land Corporation (ROCK:PHL), manufacturing in First Philippine Electric Corporation, and construction through First Balfour Incorporated.

Going forward, FPH looks to expand its businesses in the power and property sector, along with its newer businesses in healthcare and education, as the company looks to spend PHP 51 billion worth of capital expenditures.

Similar to Aboitiz Equity Ventures (AEV:PHL) and its power initiatives, FPH looks to take advantage of the rising demand in the Philippines with 56% reportedly allocated to the power sector. Upon completion of its growth initiatives like its LNG terminal in Batangas City, FPH believes that it will unlock strategic value for the company as it will become a cleaner and more reliable alternative compared to coal-produced energy.

With the company’s diversity in multiple industries, large companies like FPH have the ability to capitalize on growth opportunities that are not limited to one industry.

With that said, total revenues increased by 17% in 2021 with the sale of real estate and merchandise leading the way with 24% and 38% growth, respectively. This revenue upswing was mainly driven by higher sales bookings and construction completion of development projects as well as an increase in sales volume across its manufacturing business.

Moreover, the relaxation of quarantine restrictions throughout the country implies the return of overall demand in commercial and industrial locations.

However, this diversification strategy also exposed the company to an increase in costs and expenses, resulting in the continued decline in net income for 2021.

Amounting to 57% of total revenues in 2021, electricity costs mainly resulted from a higher combined generation of power plants, liquid fuel usage, and replacement power costs due to unplanned outages in 2021.

Looking at as-reported metrics, it appears that First Philippine Holdings is generating little to no shareholder value, with return on assets (ROAs) reaching below cost of capital levels since 2018.

In reality, the company’s diversity and initiatives actually did better than presented, with Uniform ROAs reaching just above cost-of-capital levels at 6%.

Historically, one of the largest distortions for First Philippine Holdings comes from the treatment of minority expenses or the income attributable to the non-controlling interests of a company’s subsidiaries.

The Philippine Financial Reporting Standards (PFRS) allows minority interest expense to be recognized under operating cash flow, misleading people to think that it is essential to the firm’s core operations.

In reality, it should always be classified as a financing cash flow. Minority shareholders provide capital to the subsidiary in exchange for a piece of the company’s profits. As a result, minority interest expense should not be subtracted from revenue when calculating a company’s real core earnings.

In 2021, First Philippine Holdings recognized PHP 9.9 million in minority interest expense, resulting in a PHP 10 million net profit and a 4% as-reported ROA. Adding this back alongside the many other adjustments Valens makes, the company should actually be recognizing PHP 16.4 million in Uniform earnings and a 6% Uniform ROA.

First Philippine 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 First Philippine Holdings’ profitability has been stronger 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 4% in 2021, but its Uniform ROA was actually higher at 6%.

First Philippine Holdings’ asset turns are more efficient than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. Since 2006, as-reported metrics have significantly understated First Philippine Holdings’ asset utilization, a key driver of profitability.

Moreover, Uniform asset turns have reached up to 1.0x. In comparison, as-reported asset turnover has yet to peak beyond 0.4x in the same time period, making First Philippine Holdings appear to be a less efficient business than real economic metrics highlight.

SUMMARY and First Philippine Holdings Corporation Tearsheet

As our Uniform Accounting tearsheet for First Philippine Holdings Corporation (FPH:PHL) highlights, the company trades at a Uniform P/E of 10.0x, below the global corporate average of 20.6x, but around its historical P/E of 10.5x.

Low P/Es require low EPS growth to sustain them. In the case of First Philippine Holdings, the company has recently shown a 59% 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, First Philippine Holdings’ sell-side analyst-driven forecast is to see Uniform earnings growth of 393% and 2% 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 First Philippine Holdings’ PHP 68.50 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 10% annually over the next three years. What sell-side analysts expect for First Philippine Holdings’ earnings growth is above what the current stock market valuation requires through 2023.

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

Lastly, First Philippine Holdings’ Uniform earnings growth is well above its peer averages, but is trading below 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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