Philippine Markets Newsletter

Working at home led to growth opportunities for this home improvement retailer building a 9% return, not 7%

March 8, 2023

This home improvement retailer took advantage of the hybrid work setup that businesses adopted during the pandemic, as consumers spent more to improve their work setup at their homes. 

However, as-reported metrics seem to distort its true earning power with Uniform ROA of 9%, not 7%.

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 pandemic helped a lot of companies realize it’s possible to run some of their operations remotely, whether on a full-time or a hybrid basis. Employees also realized how beneficial working from home can be; some job hunters even specifically look for companies that offer this option. 

In fact, according to a recent Global Talent Survey conducted by JobStreet, by 2023, around 80% of Filipinos prefer either remote or hybrid jobs. With many workers spending more time indoors, this opened opportunities for home improvement.

Wilcon Depot, Inc. (WLCON:PHL) saw this as a chance to expand and cater to more consumers looking to improve their work-from-home setups. In 2021, the company even opened ten new branches including one smaller format store, Home Essentials.

This brought its total depot format stores to 73 with 18 in Metro Manila and 55 in key cities nationwide. The company is planning to open 100 stores nationwide by 2025.

Wilcon also developed its presence online as the company launched its own online store, offering its products in digital shopping platforms, with a focus on Home Essentials products.

Through this growth strategy, Wilcon was able to expand its business that enabled it to become one of the largest retailers in the country. With the growing interest in the company and its shares, it became part of the Philippine Stock Exchange index (PSEi) in late October 2021.

During the same year, net revenues increased by 22% which was driven by the increase in store transactions mainly in Luzon comprising of 12%. The remaining part was driven by the contribution of new stores. As a result, earnings grew by 70% driven by margin expansion partly offset by increasing operating expenses.

However, as-reported data seems to show that these weren’t enough to represent sustainable profitability, with ROAs only reaching 7% in 2021.

In reality, Wilcon Depot’s strong focus on store expansion and retail strategy actually proved that the company produced steady profitability, with Uniform ROAs achieving 9%.

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 32.3 billion in 2021, leading to a 7% as-reported ROA.

However, when subtracting accounts payable of PHP 6.1 billion and applying other needed adjustments, we arrive at Wilcon’s PHP 23.5 billion Uniform assets, resulting in a 9% Uniform ROA.

Wilcon’s earning power is actually more robust 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 Wilcon’s profitability is higher than what real economic metrics highlight in all years.

Through Uniform Accounting, we can see that the company’s true ROAs have been understated. For example, as-reported ROA was 7% in 2021, but its Uniform ROA was higher at 9%.

Wilcon’s earnings margin is much weaker than you think, but its Uniform asset turns make up for it

Trends in Uniform ROA have been driven by trends in Uniform earnings margin, coupled with declining Uniform asset turns.

Uniform margins expanded from 2% in 2013 to a high of 9% in 2019, before compressing to 8% in 2021. Meanwhile, after improving from 2.8x in 2013 to 3.6x in 2014, Uniform turns declined to 1.2x in 2021.

At current valuations, the market is pricing in expectations for both Uniform margins and Uniform turns to reach new peaks.

SUMMARY and Wilcon Depot, Inc. Tearsheet

As the Uniform Accounting tearsheet for Wilcon depot, Inc. (WLCON:PHL) highlights, the company trades at a Uniform P/E of 34.0x, which is below the global corporate average of 18.4x and its historical P/E of 38.7x.

High P/Es require high EPS growth to sustain them. In the case of Wilcon, the company has recently shown a 12% 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’s sell-side analyst-driven forecast calls for a 109% and 16% Uniform EPS growth 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 Wilcon’s PHP 32.95 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow by 34% annually over the next three years. What sell-side analysts expect for Wilcon’s earnings growth is above what the current stock market valuation requires through 2023.

Furthermore, the company’s earning power is 1x the long-run corporate average. Meanwhile, cash flows and cash on hand are at 341% of its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low dividend and credit risk.

Lastly, Wilcon’s Uniform earnings growth above peer averages in 2022, while the company is trading in line with its peer average 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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