Philippine Markets Daily

Despite its inception right before the pandemic, this UITF managed to perform similarly with the PSEi 1.5 years after…also, AEV tearsheet

July 16, 2021

This unit investment trust fund (UITF) hasn’t been able to generate returns above its value at inception, having launched just a few months before the pandemic. However, it has managed to track its benchmark, the Philippine Stock Exchange Composite Index (PSEi). Moreover, the average Uniform ROA for its holdings is 7%, higher than global corporate average returns and its as-reported average of 5%.

Although as-reported metrics would leave investors confused with the fund’s stock picks, Uniform Accounting helps make sense of the fund’s investments.

In addition to examining the fund’s portfolio, we are including the fundamental analysis of one of the fund’s largest holdings, providing you with the current Uniform Accounting Performance and Valuation Tearsheet for that company.

Philippine Markets Daily:
Friday Uniform Portfolio Analytics
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Rizal Commercial Banking Corporation (RCBC) was established in 1960 as a development bank. RCBC is majority-owned by the Yuchengco Group of Companies, one of the largest conglomerates in Southeast Asia. Today, RCBC is one of the largest private domestic banks in the Philippines, with over 418 branches and 1,375 ATMs.

RCBC offers financial services to its customers through its retail and investment bank, microfinance unit, foreign exchange brokerage house, leasing company, and overseas remittance tie-ups.

We’ve analyzed some of RCBC’s UITFs before:

This week, we’ll be revisiting the RCBC R25 Dividend Equity Fund.

The RCBC R25 Dividend Equity Fund, established on November 8, 2019, uses an algorithm to invest in the stocks of the 25 most actively traded companies on the PSE with high historical dividend yields. The fund aims to surpass its benchmark, the Philippine Stock Exchange Index (PSEi).

The fund is suitable for investors with aggressive risk appetites who seek considerably high returns on capital. It is currently invested in at least 99% of selected shares of stock while the remaining is in cash.

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At its inception in November 2019, the RCBC R25 Dividend Equity Fund’s net asset value per unit (NAVPU) was at PHP 1.00. The fund’s NAVPU dropped to PHP 0.94 by the end of 2019, recording a loss of 6% and slightly underperforming its benchmark’s 3% loss over the same period.

By March 2020, the fund fell to a record low of PHP 0.58, due to the coronavirus-induced market selloff. The fund outperformed the PSEi during this period, reporting a 38% loss against the PSEi’s 41% loss.

The fund was able to recover through two small spikes during April and June that year, rising back to PHP 0.88 by January 2021. However, the fund underperformed the PSEi during this period, reporting a 51% gain against the PSEi’s 58% gain.

As of July 12, 2021, the fund recorded a NAVPU of PHP 0.85, a 3% gain that slightly underperformed its benchmark’s 5% gain.

Since its inception, the RCBC R25 Dividend Equity Fund has had a cumulative 15% loss, versus its benchmark’s cumulative 14% loss in the same period.

As-reported metrics would have investors believe that the fund’s portfolio consists of companies that do not generate economic profit. However, Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top eight core non-financial holdings of the RCBC R25 Dividend Equity Fund along with its Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

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Most of the companies in the RCBC R25 Dividend Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 5%—lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered better returns with an average Uniform ROA of 7%. These companies have strong returns, with most of the companies having Uniform ROAs at or above global average returns.

The Uniform Accounting framework addresses financial statement inconsistencies attributable to the flaws present in the Philippine Financial Reporting Standards (PFRS). This enables investors to determine the true underlying performance of companies and avoid distorted financial analysis and valuation.

As such, it should not be surprising that when analyzing the non-financial holdings of the RCBC R25 Dividend Equity Fund, the figures that easily stand out are the large discrepancies between Uniform ROA and as-reported ROA for these companies.

While at a glance, the difference between as-reported ROA and Uniform ROA may not seem that great, the distortion in percentage ranges from -36% to 149%, with Aboitiz Equity Ventures, Inc. (AEV:PHL), SM Investments Corporation (SM:PHL), and International Container Terminal Services, Inc. (ICT:PHL) having the highest distortions.

As-reported metrics understate the profitability of Aboitiz Equity Ventures, Inc., suggesting a below-average firm with an as-reported ROA of 3% when in fact, it is a high quality firm with an 8% Uniform ROA. It has consistently generated returns of at least 7% over the past decade.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of 3% when in fact, it is an average firm with a 6% Uniform ROA. It has consistently generated returns of at least 6% since 2005.

Likewise, as-reported metrics understate the profitability of International Container Terminal Services, Inc., suggesting an above-average firm with an as-reported ROA of 7%. In reality, this is a high-quality firm with a 13% Uniform ROA, almost double its as-reported ROA. It has consistently generated returns of at least 6% since 2005.

By focusing on as-reported metrics alone, these companies look like anything but profitable businesses.

That said, looking at profitability alone is insufficient to deliver superior investment returns. Investors should also identify if the market is significantly undervaluing a company’s earnings growth potential.

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This table shows the earnings growth expectations for the major non-financial holdings of the fund. It features three key data points:

  1. The two-year Uniform earnings per share (EPS) growth represents the Uniform earnings growth the company is likely to have for the next two years. The earnings number used is the value of when we convert consensus sell-side analyst estimates according to the Uniform Accounting framework.
  2. The market expected Uniform EPS growth represents what the market thinks Uniform earnings growth is going to be for the next two years. Here, we show by how much the company needs to grow Uniform earnings in the next two years to justify the current stock price of the company. This is the market’s embedded expectations for Uniform earnings growth.
  3. The Uniform EPS growth spread is the difference between the 2-year Uniform EPS growth and market expected Uniform EPS growth.

On average, Philippine companies are expected to have 5%-6% annual Uniform earnings growth over the next two years. Meanwhile, the RCBC R25 Dividend Equity Fund’s major holdings are forecasted to outperform that with a 24% projected Uniform earnings growth in the next two years, while the market is forecasting an underperformance with a 3% projected Uniform earnings growth.

All the companies in the RCBC R25 Dividend Equity Fund have a positive Uniform earnings growth spread except for PLDT Inc. (TEL:PHL) and Globe Telecom, Inc. (GLO:PHL). Among these companies, Ayala Land, Inc. (ALI:PHL), SM Investments Corporation, and International Container Terminal Services, Inc. have the highest positive Uniform earnings growth spread.

The market is pricing ALI’s Uniform earnings to grow by 13% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 103%.

Likewise, the market is pricing SM’s Uniform earnings to grow by 10% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 61%.

Similarly, the market is pricing ICT’s Uniform earnings to shrink by 7% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 16%.

Overall, as-reported numbers would have investors incorrectly conclude that this portfolio consists of low-quality companies.

While these firms suffer from the adverse effects of the coronavirus pandemic, dragging down their short-term earnings growth expectations, Uniform Accounting metrics show that these high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Aboitiz Equity Ventures, Inc. Tearsheet

Today, we’re highlighting one of the individual stock holdings in the RCBC R25 Dividend Equity Fund, Aboitiz Equity Ventures, Inc. (AEV:PHL).

As our Uniform Accounting tearsheet for Aboitiz Equity Ventures highlights, it trades at a Uniform P/E of 14.2x, below the global corporate average of 23.7x and its historical average of 16.6x.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of Aboitiz Equity Ventures, the company has shown a 126% Uniform EPS shrinkage in 2020.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp on near-term financial forecasts like revenue and earnings.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings as a starting point for our Uniform earnings forecasts. When we do this, Aboitiz Equity Ventures’ sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 477% in 2021, but grow by 108% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Aboitiz Equity Ventures’ PHP 41.50 stock price. These are often referred to as market embedded expectations.

Aboitiz Equity Ventures is currently being valued as if Uniform earnings were to shrink by 2% per year over the next three years. What sell-side analysts expect for Aboitiz Equity Ventures’ earnings growth is below what the current stock market valuation requires in 2021 but above what the current stock market valuation requires in 2022.

The company has an earning power above long-run corporate averages, but its cash flows and cash on hand fall short of obligations within five years. Moreover, the company has an intrinsic credit risk of 230bps. Together, these indicate that Aboitiz Equity Ventures has a moderate credit risk and a high dividend risk.

To conclude, Aboitiz Equity Ventures’ Uniform earnings growth is well below peer averages, and is trading below peer average valuations.

About the Philippine Markets Daily
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living often rely on professionals to manage their own investments within the scope of their investment policies.

With so many funds and managers out there, it can get confusing and difficult to decide which one best suits your needs as an investor.

Every Friday, we focus on one fund in the Philippines and take a deeper look into their current holdings. Using Uniform Accounting, we identify the high-quality stocks in their portfolio which may not be obvious using the as-reported numbers.

We also identify which holdings may be problematic for the fund’s returns that they would need to reconsider from a UAFRS perspective.

To wrap up the fund analysis, we highlight one of their largest holdings and focus on key metrics to watch out for, accessible in our tearsheets.

Hope you’ve found this week’s focus on RCBC R25 Dividend Equity Fund interesting and insightful.

Stay tuned for next week’s Friday Uniform Portfolio Analytics!

Regards,

Angelica Lim
Research Director
Philippine Markets Daily
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