Adjusting for 'Constant Currency' Aspect 1
Quote:
Originally Posted by
Valuegrowth
The press release for the FY2018 results is out. Rather annoyingly, YUMC have chosen to release their results -only- in constant exchange rate terms. That means I will have to wait until the annual report before the actual results are put on paper. Yet with the RBD takeover offer closing in a month or so, and my need for a measuring stick for that, this means I can't afford to wait that long.
The issue here is that YUMC results are ultimately reported in US dollar terms. But the functional currency for the business is the Chinese Renminbi. The revenue is coming in all through the year. So it is appropriate to look at averaged exchange rates throughout the year. Using wiki, I got:
|
CY/FY2017 |
CY/FY2018 |
Average Exchange Rate |
USD1- = 6.7518Rmb. |
USD1- = 6.6174Rmb |
This means that, on average, comparing FY2017 and FY2018, that we shareholders shared in less "Rmb revenue per US dollar reported" in FY2018 compared to FY2017.
It also means that:
1/ IF we use a constant currency based on the averaged FY2017 exchange rate as a base rate, THEN
2/ The 'constant currency' FY2018 earnings results, based on this representative FY2017 exchange rate (but reported in USD), means the USD earnings reported in this way are less than actually occurred. AND
3/ To return these earnings to actual USD levels, we must multiply the earnings given in 'constant currency terms' by a factor of: 6.7518/6.6174 =1.020
Note: The above assumes that YUMC earnings translated back to a US reference currency were actually cross currency valued at that average exchange rate.
SNOOPY
PS I think my logic and maths is right. But as to whether the base constant currency figure used was 1USD = 6.7518Rmb, that is the bit I am not sure about.
Adjusting for 'Constant Currency' Aspect 2
Quote:
Originally Posted by
Snoopy
PS I think my logic and maths is right. But as to whether the base constant currency figure used was 1USD = 6.7518Rmb, that is the bit I am not sure about.
There is another way to produce constant currency earnings results. You could start with the exchange rate on the first day of the financial year and assume that remains constant throughout the year.
|
SOCY/SOFY2018 |
CY/FY2018 |
Average Exchange Rate |
|
USD1- = 6.6174Rmb |
Daily Exchange Rate |
USD1- = 6.488Rmb |
|
This would mean that, on average, comparing 'constant exchange rate earnings based on the opening day exchange rate' and 'actual earnings over all of FY2018', that we shareholders would have shared in more "Rmb revenue per US dollar reported" in FY2018 compared to the unadjusted case where earnings were translated at different exchange rates throughout the year.
It also would mean that:
1/ IF we use a constant currency based on the first day of FY2018 exchange rate as a base rate, THEN
2/ The 'constant currency' FY2018 earnings results, based on the representative opening day in FY2018 exchange rate (reported in USD), means the USD earnings reported in this way are more than actually occurred. AND
3/ To return these earnings to actual USD levels, we must multiply the earnings given in 'constant currency terms' by a factor of: 6.488/6.6174 =0.9804
Note: The above assumes that YUMC earnings translated back to a US reference currency were actually cross currency valued at that average exchange rate.
By changing the reference point, our adjustment has gone the other way! I don't know which of 'Aspect1' or 'Aspect 2' is the more correct way of making a constant exchange rate correction. But given we are looking at a 2% change from the quoted figures either way, I might just forget about doing any corrections and stick with the quoted figures that I know are wrong, but not by much.
SNOOPY
BT2/ Increasing 'eps' trend (2018 estimate perspective) [one setback allowed]
|
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018e |
Operating Profit (excluding Impairments (1)) |
$384m |
$354m |
$488m |
$640m |
$785m |
$941m |
subtract Insurance Payouts |
|
($25m) |
($5m) |
($3m) |
|
adjust Corp Jet Disposal |
|
|
$15m |
($2m) |
|
adjust Foreign Currency Adjustments |
|
$5m |
$4m |
$3m |
$0m |
$?m |
subtract Wuxi KFC equity revaluation |
|
|
|
|
|
($98m) |
add Duojia Intangible Write Off |
|
|
|
|
|
$12m |
add Interest Earned |
$5m |
$14m |
$8m |
$11m |
$25m |
$36m |
Equals Adjusted Normalised EBT |
$389m |
$348m |
$510m |
$649m |
$810m |
$891m |
subtract Tax at 27% (2) |
$105m |
$94m |
$137m |
$175m |
$219m |
($241m) |
subtract Foreign unrepatriated earnings Tax (3) |
|
|
|
|
|
($20m) |
Equals Adjusted Normalised NPAT {A} |
$284m |
$254m |
$372m |
$474m |
$591m |
$630m |
Shares on Issue EOFY {B} |
363.758m |
363.758m |
363.758m |
383.344m |
388.860m |
392m |
eps {A}/{B} {C} |
78.1c |
69.8c |
$1.02 |
$1.27 |
$1.52 |
$1.61 |
Share Price 31 March (following) {D} |
NA |
NA |
NA |
$27.20 |
$41.50 |
$40.52 (4) |
PE Ratio (D)/(C) |
NA |
NA |
NA |
21.4 |
27.3 |
25.2 |
Notes
1/ Significant impairment write offs for the 'Little Sheep' casual dining concept occurred in 2013 and 2014. YUMC own the intellectual property of the 'Little Sheep' brand. 'Little Sheep' had its foundation in Inner Mongolia, China. It specialises in 'Hot Pot' cooking popular in in China, especially in the winter months. 'Little Sheep' has more than 280 restaurants operating. A wholly-owned business that sells seasoning to retail customers is part of the 'Little Sheep' operation. But total turnover at 'Little Sheep' is less than 1.5% of the turnover of YUMC.
2/ The US corporate tax rate up to 31st December 2017, for the last few years, has been 35%. Looking at Note 17 on Income Tax in AR2017, the actual tax paid by YUMC on operations has been less than this. For the years 2017, 2016 the 'Statutory rate differential attributable to foreign operations' was 8.4% and 7.5%. I have rounded this off to 8%, subtracted the 8% from the 35% US statutory rate and come up with 27%. This is still above the 25% Chinese Corporate Income tax rate, and I cannot explain the difference.
3/ The 'deemed repatriation of accumulated and distributed foreign earnings' tax saw a provision of $164m made in the YUMC accounts for FY2017. But this tax bill is to be spread out over eight years. Because it is in integral part of the Trump tax reforms, I do not feel that it should be recorded as a one off. Therefore I am recording a $20m charge every year from 2018 to 2025 inclusive.
4/ Share price at 5th February 2019. 31st March date still in the future when table was compiled.
Conclusion: Pass Test
SNOOPY
BT3/ ROE > 15% for five years (2018e perspective) [one setback allowed]
|
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018e |
Adjusted Normalised NPAT {A} |
$284m |
$254m |
$372m |
$474m |
$591m |
$630m |
Shareholder Equity EOFY {B} |
$2,344m |
$1,945m |
$1.979m |
$2,443m |
$2,859m |
$2,873m |
ROE {A}/{B} |
12.1% |
13.1% |
18.8% |
19.4% |
20.7% |
21.9% |
Conclusion: Pass Test
SNOOPY