Despite inflationary pressures, the construction industry persevered in 2022. Alongside the growth of this sector, suppliers of construction materials also benefited from this development.

However, for this materials supplier, as-reported metrics indicate business as usual, when in fact, Uniform returns show that 2022 is its most profitable year to date.

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 case you missed it, we recently published a report about taxes and why it is a better barometer of economic growth than gross domestic product.

In that report, we tracked the sectors that the Philippine government prioritizes when allocating the national budget. One of these sectors was infrastructure.

For 2022, the government spent a total of PHP 1.02 trillion on infra, mostly for major transport and road projects. This highlights the long-term commitment of the government on driving economic growth through these projects.

Additionally, private construction also grew in 2022. The Philippine Statistics Authority noted that the number of building permits approved for the year grew 23% for Q3 year-on-year. In terms of value, the sector grew 19% to PHP 119 billion.

On the back of public and private spending, the construction industry grew despite facing inflationary pressures. This development also trickled down to suppliers of construction materials. One of these is Wilcon Depot, Inc. (WLCON:PHL).

Wilcon Depot opened an additional 10 new stores for 2022, nine of which were depot-format stores. Revenues from these store formats increased 22% from PHP 26.8 billion in 2021 to PHP 32.6 billion. Newly-opened stores contributed about 36% of the net sales for this store format.

The firm cited higher transactions, which mainly came from Metro Manila, as the catalyst for its growth. Of course, higher demand for construction materials also helped, as also pointed out by its management.

This resulted in its net income towering at 50% from PHP 2.5 billion in 2021 to PHP 3.8 billion in 2022.

Aiming to continue this trend, Wilcon Depot is allotting around PHP 8 billion for its capital expenditure in 2023. The firm targets to open an additional 10 to 14 new stores this year, along with expanding its warehouses and renovating stores.

In the long run, we can expect the continued growth of the construction industry through public and private demand. Coupled with growth strategies to ensure a steady flow of construction materials, we can expect Wilcon Depot to build its business alongside the country’s growth.

Wilcon Depot’s earning power is stronger than you think

Despite the growing demand for construction materials, Wilcon Depot’s earning power seems slightly muted compared to previous years, with ROAs only reaching 10% for 2022.

In reality, Wilcon Depot managed to ride the wave and improve its profitability levels, reaching a Uniform ROA of 19%, its highest to date.

What as-reported metrics fail to consider is how current liabilities are factored into the ROA 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 by 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.

In the case of Wilcon Depot, as-reported metrics’ asset base for ROA calculation is at PHP 35.6 billion in 2022, leading to a 10% as-reported ROA.

However, when subtracting accounts payable of PHP 4.3 billion and applying other needed adjustments, we arrive at Wilcon Depot’s PHP 21 billion Uniform assets, resulting in a 19% Uniform ROA.

Wilcon Depot has a more efficient business than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. The firm’s asset utilization, a critical factor in profitability, is also greatly distorted. As-reported asset turnover has been consistently lower than Uniform asset turnover for the past decade, giving the organization a lower asset efficiency score than actual economic measures indicate.

Moreover, in the past decade, as-reported asset turnover has reached a peak of 1.9x. In comparison, Uniform turns have reached a high of 3.6x over the same time period, making Wilcon Depot appear to be a less efficient business than real economic metrics highlight.

SUMMARY and Wilcon Depot, Inc. Tearsheet

As our Uniform Accounting tearsheet for Wilcon Depot, Inc. (WLCON:PHL) highlights, the company trades at a Uniform P/E of 24.9x, above the global corporate average of 18.4x but below its historical P/E of 28.8x.

High P/Es require high EPS growth to sustain them. In the case of Wilcon Depot, the company has recently shown a 51% Uniform EPS growth.

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, Wilcon Depot’s sell-side analyst-driven forecast is to see a Uniform earnings decline of 11% and growth of 31% in 2023 and 2024, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Wilcon Depot’s PHP 20.00 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 6% annually over the next three years. What sell-side analysts expect for Wilcon Depot’s earnings growth is below what the current stock market valuation requires in 2023 and above the requirement for 2024.

Moreover, the company’s earning power is 3x the long-run corporate average. Additionally, cash flows and cash on hand are 2.3x above its total obligations. Moreover, intrinsic credit risk is 260bps above the risk-free rate. Together, this signals a moderate credit risk and a low dividend risk.

Lastly, Wilcon Depot’s Uniform earnings growth is in line with its peer averages, while its Uniform forward P/E is 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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