Philippine Markets Newsletter

Various expansion initiatives and increasing its product reach has enabled this food and beverage company to achieve a Uniform ROA of 9%, not 5%

August 2, 2023

This food and beverage company continues to grow and break through macroeconomic headwinds thanks to partnerships and continuous product expansion.

Despite the company’s efforts to grow its product reach and revenue, as-reported metrics do not reflect the effectiveness of these strategies, with only meager returns to show for it.

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 food and beverage industry faced a tough year in 2022 due to inflationary pressures and other macroeconomic headwinds. 

Even the producer of local favorites such as Lucky Me! and SkyFlakes was not exempted from this. Monde Nissin Corporation (MONDE:PHL), one of the largest food and beverage companies in the country, experienced operational challenges and dampened profit due to the increase in raw material prices and supply-chain issues. 

Despite this, Monde Nissin still saw a 7% revenue increase in 2022, driven by volume growth in its biscuits, beverages, and culinary products.

Monde Nissin’s longtime strategy of improving its distribution channels has helped the company’s growth. This encompasses wholesale distributors, smaller retailers and sari-sari stores, sub-distributors, supermarkets, convenience stores, and groceries, which enables consumers to easily access their products.

In line with growing its product reach, one of the strategies made clear by Monde Nissin’s management was to continue looking for mergers and acquisitions. 

Early this year, the company announced that it was acquiring a 15% stake in Figaro Coffee Group, Inc. for around PHP 820.3 million. This partnership gave Monde Nissin an opportunity to expand its portfolio and grow its product reach.

The food giant is also focusing on increasing its production capacity, recently starting construction work on its PHP 1.2 billion plant in Davao. The expanded capacity will support the increased demand and growth in its bakery and biscuit business. This should also help shorten the company’s inventory cycles and improve product shelf visibility in Visayas and Mindanao.

With macroeconomic variables forecasted to improve in 2023, Monde Nissin is actively looking for cheaper sources of raw materials to improve its margins, as well as different solutions to cut down on manufacturing and logistical costs.

Even with positive results and a track record of overcoming challenges, as-reported metrics seem to understate and distort the true reflection of Monde Nissin’s profitability.

In reality, the company’s product expansion initiatives actually resulted in the company doing much better than expected, with Uniform ROAs reaching 9%.

One of the distortions between Uniform and as-reported ROAs comes from as-reported metrics failing to consider the amount of goodwill on Monde Nissin’s balance sheet. The company’s goodwill sits at about PHP 14.5 billion in 2022, which was approximately 18% of its total assets, stemming from the acquisitions over the course of its operations.

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. Specifically, if we remove goodwill along with the other necessary adjustments in Uniform Accounting in 2022, the company should be recognizing PHP 29 billion less in assets and a 9% Uniform ROA.

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 the company is a weaker business than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated each year since the company was publicly listed. For example, as-reported ROA was 5% in 2022, but its Uniform ROA was actually higher at 9%. 

SUMMARY and Monde Nissin Corporation Tearsheet

As our Uniform Accounting tearsheet for Monde Nissin Corporation (MONDE:PHL) highlights, the company trades at a Uniform P/E of 21.7x, above the global corporate average of 18.4x, but below its historical P/E of 26.7x.

High P/Es require high EPS growth to sustain them. In the case of Monde Nissin, the company has recently shown a 23% 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, Monde Nissin’s sell-side analyst-driven forecast is to see a Uniform earnings growth of 31% through 2024.

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 8.70 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 47% 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 through 2024.

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

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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