Philippine Markets Newsletter

With a 15% Uniform earning power, this company’s fundamentals are near historical highs. Yet, investors are still cashing out.

March 24, 2020

“You’ve got to know when to hold ’em, know when to fold ’em… ” – Kenny Rogers, The Gambler

While more famous for his restaurant in the Philippines, the acclaimed singer’s signature song cites a poker saying applicable to life and to any activity, including investing.

Investors have credible arguments for either holding or folding on to this casino and resort stock. With the COVID-19 pandemic still ongoing, Uniform (UAFRS-based) metrics of the company have recently reflected fundamentals that are near historical highs.

So it’s not a matter of whether to hold or fold this company, but about when to hold and when to fold.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Daily:
Tuesday Uniform Earnings Tearsheets – Philippine-listed Focus
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Saying that 2020 has been a bad year for the gaming industry is a huge understatement.

Bloomberry Resorts Corporation (BLOOM:PHL), one of the largest casino operators in the country, has been a “sell” for many investors as the company’s stock price has been on a persistent decline since the start of the year.

With their flagship business, Solaire Resort & Casino, heavily reliant on Mainland Chinese tourists, the Philippine government’s Feb. 2 travel ban to and from China has negatively impacted a huge chunk of Bloomberry’s revenue stream.

Unfortunately, efforts to contain the COVID-19 virus inside China were unsuccessful, with the disease managing to transmit to the rest of the world.

A couple of weeks after the China travel ban, the Philippine government had to expand the policy by banning travel from other countries that had local transmissions of the novel coronavirus, essentially eliminating all of Bloomberry’s tourism revenue.

To make matters worse for the company, the government declared an enhanced community quarantine for Luzon.

The quarantine caused an inadvertent panic among citizens, which caused many to devote a significant portion of their budget more towards stockpiling staple goods and less towards non-essential expenses.

To top it all off, the Philippine Amusement and Gaming Corp (PAGCOR), the government agency in charge of regulating casinos, ordered the suspension of all casino operations until the community quarantine has been lifted, including Solaire.

However, if one were to look beyond 2020, then a case can be made for Bloomberry having stock upside.

Recent Uniform metrics indicate that the company is near its healthiest level, posting a robust 15% Uniform earning power in 2019, suggesting that the company’s fundamentals are strong and that bankruptcy or any severe credit issue is more of a fantasy for Bloomberry.

The 15% Uniform earning power has yet to factor in further growth from the construction of another Solaire casino due 2022, leading the company to reach new heights in terms of earning power.

As such, Bloomberry is poised to survive through the coronavirus pandemic, which will likely result in a recontinuation of earnings growth and, in turn, a stock rally.

Yet, as-reported ROA of 8% is understating the company’s earning power by almost half, leading investors to believe that the company is struggling to generate economic value with a similar 8% WACC.

Adding back interest expense of PHP5.6 billion and correcting many other rules that fog the company’s economic performance, we arrive at Bloomberry’s TRUE 15% Uniform earning power.

Bloomberry’s earning power is stronger than you think

As-reported metrics significantly understate Bloomberry’s profitability.

For example, Uniform ROA for Bloomberry was 15% in 2019, which is almost double its as-reported ROA of 8%, making Bloomberry appear to be a much weaker business than real economic metrics highlight.

Moreover, Uniform ROA has maintained above cost-of-capital levels in the past three years, while as-reported ROA has been below cost-of-capital in the same timeframe, directionally distorting the market’s perception of the firm’s historical profitability trends.

Historically, Bloomberry has seen volatile profitability. After falling to a low of -32% in 2012, Uniform ROA shifted positively to 10% in 2014. Thereafter, Uniform ROA contracted to 3% in 2015, before rebounding to all-time highs of 16% in 2017.

As Bloomberry acquired two parcels of land in 2018 for its Solaire expansion, Uniform ROA slightly dipped to 11% in 2018. It then recovered to near historical levels again at 15% in 2019, driven by the strength in Bloomberry’s mass gaming segments.

Bloomberry’s earnings margin is trending differently than you think

Volatility in Uniform ROA has been driven by trends in Uniform earnings margin, where Bloomberry is substantially improving as they continue to attract high-margin VIP customers.

Ignoring outlier shrinkage in 2011, Uniform earnings margin inflected positively from -28% in 2013 to 15% in 2014. Meanwhile, Uniform earnings margin contracted to 5% in 2015, before rebounding to historical highs of 31% in 2019.

However, as-reported earnings margin has not reflected Bloomberry’s significant improvements, implying that the company has stagnated around 37%-39% levels in 2016-2018, before seeing only a slight improvement to 42% in 2019.

SUMMARY and Bloomberry Resorts Corporation Tearsheet

As our Uniform Accounting tearsheet for Bloomberry highlights, Uniform P/E trades at 7.6x, which is below market average and its historical average levels.

Low P/Es require low EPS growth to sustain them. In the case of Bloomberry, the company has recently shown a robust 69% 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, Bloomberry’s sell-side analyst-driven forecast is for Uniform earnings shrinkage of 25% in 2020, before a strong growth of 27% in 2021.

Based on current stock market valuations, we can back into the required earnings growth rate that would justify PHP 8.00 per share. These are often referred to as market embedded expectations.

To meet the current market valuation levels of Bloomberry, the company would need to shrink its Uniform earnings by 21% each year over the next three years.

What sell-side analysts expect for Blooberry’s earnings growth is below the current stock market valuation requires in 2020.

The company’s earning power is 3x the corporate average, and the company has low dividend risk, signaling that their cash flow risk to the company’s operations and credit profile in the future is low.

To conclude, Bloomberry’s Uniform earnings growth is below peer averages in 2019, and the company is trading above peer valuations.

About the Philippine Market Daily
“Tuesday 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 UAFRS, 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 Tuesday, 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 & Joel Litman
Research Director & Chief Investment Strategist
Philippine Markets Daily
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