Philippine Markets Daily

One of the oldest UITFs in the Philippines invests in companies that have Uniform ROAs almost twice as much as its as-reported metrics!

September 3, 2020

One of the oldest unit investment trust funds (UITFs) in the Philippines has historically been underperforming its benchmark, the Philippine Stock Exchange Index (PSEi).

However, this UITF’s performance year to date is comparable to the PSEi’s, with losses of 23% and 24% for the fund and its benchmark, respectively.

As-reported metrics would leave investors confused with the fund’s stock picks. However, Uniform Accounting financial metrics help make sense of the fund’s investments.

In addition to examining the fund’s portfolio, we are including 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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The Bank of the Philippine Islands (BPI) is one of the largest universal banks in the Philippines.

We’ve written about two of BPI’s UITFs before: BPI Equity Value Fund and the BPI Invest Philippine Consumer Equity Index Fund. This week, we’ll focus on one of BPI’s Odyssey funds—funds that BPI actively manages.

Odyssey Philippine Equity Fund—launched on May 5, 2003—has an investment strategy of generating long-term capital growth by investing in a concentrated portfolio of stocks listed in the Philippine Stock Exchange (PSE).

The Odyssey Philippine Equity Fund rose from a net asset value per unit (NAVPU) of PHP 100.00 in its 2003 inception to PHP 362.84 in July 2007. However, it dropped to nearly a third of its value to PHP 137.96 in October 2008 due to the ripple effect of the global financial crisis, recording a loss of 62% from its 2007 high. The PSEi, its benchmark, recorded a loss of 55% over the same period.

After reaching that October 2008 low, the fund recovered in succeeding years. In May 2013, its NAVPU skyrocketed to a record PHP 553.83, delivering a 301% growth. However, it dropped to PHP 382.58 in January 2016 due to the oil price crash, resulting in a loss of 31%. Meanwhile, the PSEi only incurred a loss of 16% in the same period.

The fund ended 2019 with a NAVPU of PHP 455.43, before falling once more to as low as PHP 318.50 in March 2020, due to the coronavirus-induced market downturn. It has since settled at PHP 349.69 as of August 27, 2020. Year to date, the fund and the PSEi are down by 23% and 24%, respectively.

Looking at Odyssey Philippine Equity Fund investments using as-reported metrics, it is not apparent that the fund invests in high-growth companies.

As-reported metrics would have investors believe that this 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 core non-financial holdings of the Odyssey Philippine Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

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All of the companies in Odyssey Philippine Equity Fund show as-reported ROAs that range around and below global cost-of-capital levels, suggesting that they are not generating economic profit. In 2019, the fund generated an average as-reported ROA of 5%, slightly below the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, 1.5x cost-of-capital levels and almost 2x as much as as-reported metrics.

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 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 -43% to 197%, with Ayala Corporation (AC:PHL), Aboitiz Equity Ventures (AEV:PHL), JG Summit Holdings, Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) all having distortions above a hundred percent.

As-reported ROA understates the profitability of AC, suggesting a below-average company with an as-reported ROA of 4%. In reality, this leading conglomerate is a high-quality firm with an 11% Uniform ROA, almost twice the as-reported number. Over the past fifteen years, AC has never seen its Uniform ROA dip below 6%.

Similarly, AEV is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with a 10% Uniform ROA. In fact, it has consistently generated returns of at least 10% over the past decade.

By focusing on as-reported metrics alone, BPI would never pick most of these companies because they 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 the 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 2-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 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 6% annual Uniform earnings growth over the next two years. However, Odyssey Philippine Equity Fund’s major holdings are forecast to underperform with a 5% projected Uniform earnings decline in the next two years, while the market is seeing a 3% Uniform EPS decline.

Among these companies, only PLDT, Inc. (TEL:PHL), AEV, and SM have positive Uniform earnings growth dislocation.

The market is pricing TEL’s Uniform Earnings to grow by only 6% in the next two years. However, sell-side analysts are projecting the company’s earnings to accelerate by 41% moving forward.

Meanwhile, the market is expecting AEV’s Uniform earnings to plummet by 6%, but analysts are projecting immaterial earnings growth for the company in the next two years.

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 companies are high quality with intact business models that would drive economic profitability moving forward.

SUMMARY and PLDT, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the Odyssey Philippine Equity Fund—PLDT, Inc. (TEL:PHL).

As the Uniform Accounting tearsheet for TEL highlights, it trades at a Uniform P/E of 22.4x, around the global corporate averages but below its own historical averages.

Moderate P/Es require moderate EPS growth to sustain them. In the case of TEL, the company has recently shown a 21% Uniform EPS growth.

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 PFRS earnings as a starting point for our Uniform earnings forecasts. When we do this, TEL’s sell-side analyst-driven forecast shows that Uniform earnings is expected to grow by 126% in 2020, before shrinking by 12% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 1,479.00 per share. These are often referred to as market embedded expectations.

The company would have to see Uniform earnings expand by 6% per year over the next three years to meet current market valuation levels. What sell-side analysts expect for TEL’s earnings growth is above what the current stock market valuation requires in 2020, but below what the market requires in 2021.

The company has an earning power below global long-run corporate averages—based on its Uniform ROA calculation. Moreover, since the combination of the company’s cash flows and cash on hand are below total obligations, TEL has a high credit and dividend risk.

To conclude, TEL’s Uniform earnings growth is above peer averages. However, the company is trading around peer average valuations.

About the Philippine Market Daily
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living oftentimes 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 Odyssey Philippine 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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