Philippine Markets Newsletter

Uniform Accounting shows that this company remains spirited even amidst the pandemic by developing double its as-reported returns

September 8, 2021

As we’ve seen in last week’s article on Shakey’s, business expansion is one of the strategies companies can use to gain a larger share of the market. However, it can also be a hedge against company-specific headwinds, as is the case with today’s featured company.

As one of the largest death care businesses in the Philippines, this company decided to expand its operations by selling and developing housing projects.

Although its as-reported metrics show that the company had been modest and stagnant, the company has actually been more spirited based on its 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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Benjamin Franklin once said that nothing in this world is certain, except for death and taxes.

For most people, death remains a difficult topic to talk about despite its certainty, which is even more highlighted during the pandemic. Some would even say that to talk about death is like inviting it to happen to yourself. 

For Golden MV Holdings, Inc.(HVN:PHL), declining revenues for its death care operations indicate the declining demand for its luxurious memorial lots, partially due to the strict quarantine restrictions and limited social gatherings.

Fortunately, the company was able to diversify its operations by acquiring Bria Homes for about PHP 3 billion in 2017.

Diversifying operations is a strategy that companies execute to mitigate unforeseen risk factors, similar to the current pandemic, and discover new growth avenues at the same time.

Through its Bria Homes acquisition, Golden MV was able to expand its target market by developing affordable house-and-lots throughout the country. 

As it correlates to the number of deaths, the sustainability of demand for the deathcare business is more challenging. This is why the Bria Homes acquisition provides better flexibility into the holding company’s real estate operations. In addition, the holding company opens up growth opportunities without foregoing its death care business.

With notable locations in Luzon, Visayas, and Mindanao, Golden MV is positioned to capitalize on housing demand outside urban cities such as Metro Manila.

Based on its first-quarter performance, residential development segment revenue declined by 10%, a lower hit compared to its deathcare operations revenue, which fell by 42%.

Given that residential development revenues tend to improve on a quarterly basis, the revenue trend is encouraging as it nears pre-pandemic levels. 

Looking at the as-reported metrics, Golden MV seems to have generally stable trends before declining to a low in 2020 amidst the pandemic.

In reality, the firm’s profitability has been more robust, developing better performance since 2014. Moreover, Uniform ROA had always doubled compared to its as-reported ROA since 2018, substantially distorting the market’s perception of the firm’s recent profitability.

One major contributing factor that has led to the misstatement of as-reported metrics is the failure to consider current liabilities in the profitability calculation.

Traditional ROA calculations for measuring a firm’s earning power only include current and long-term assets as part of the cost of investment.

However, a company’s ability to receive goods and services in advance of payments—the current operating liabilities—ought to be factored in as well.

Current liabilities (excluding short-term debt) are necessary for operations. Items such as accounts payable, accrued expenses, and others are used to maintain the firm’s current capital position. On the other hand, long-term liabilities are mostly just used to finance the business.

If a company has a ton of cash to service its current liabilities and we only factor in its cash, it would make the company look inefficient. In reality, the company is just being responsible for building liquid assets to meet short-term obligations.

As such, net working capital (current assets – current liabilities) is used for the firm’s ROA calculation. This shows a company’s real cash management ability and thereby, its true earning power.

When current liabilities are subtracted from Golden MV’s assets, along with the many other necessary adjustments made, this leads to a 7% Uniform ROA in 2020.

Golden MV’s 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 that Golden MV’s profitability is lower than what real economic metrics highlight in most years.

In reality, Golden MV’s true profitability has generally been higher than its as-reported ROA since 2005.

After remaining at 6% to 8% levels in 2014-2019, as-reported ROA fell to a low of 3% in 2020.

Meanwhile, Uniform ROA improved from 8% in 2014 to 18% in 2015, before declining to 9% levels in 2016-2017. Then, after its Bria Homes acquisition in 2017, Uniform ROA expanded to 15% to 16% levels in 2018-2019 and compressed to 7% in 2020.

Golden MV is a more efficient business than it portrays

Trends in Uniform ROA have largely been driven by similar trends in Uniform asset turns, suggesting that the firm has relied more on efficient asset utilization for earnings growth.

From 2014 to 2015, Uniform asset turns improved from 0.4x to an all-time high of 0.8x, before declining back to 0.4x in 2016. Uniform turns then reached 0.6x levels in 2018, before deteriorating to 0.3x in 2020.

In every year, as-reported metrics have understated the company’s true asset turns, making the company appear to be less efficient in the use of assets than real economic metrics highlight.

SUMMARY and Golden MV Holdings, Inc. Tearsheet

As our Uniform Accounting tearsheet for Golden MV Holdings, Inc. (HVN:PHL) highlights, the company trades at a Uniform P/E of 218.7x, well above the global corporate average of 21.9x and its historical P/E of 174.2x.

High P/Es require high EPS growth to sustain them. In the case of Golden MV, the company has recently shown a 54% 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, Golden MV’s sell-side analyst-driven forecast is to see Uniform earnings immaterially shrink through 2022.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Golden MV’s  PHP 478.00 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 62% annually over the next three years. What sell-side analysts expect for Golden MV’s earnings growth is well below what the current stock market valuation requires through 2022.

Furthermore, the company’s earning power is above the long-run corporate average. In addition, cash flows and cash on hand are exceeding total obligations—including debt maturities, capex maintenance, and dividends. Also, intrinsic credit risk is 20bps above the risk free rate. Together, this signals a low dividend and credit risk.

To conclude, Golden MV’s Uniform earnings growth is below its peer averages, and 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!


Angelica Lim
Research Director
Philippine Markets Newsletter
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