Philippine Markets Daily

This fund from the country’s largest bank has outperformed the PSEi since inception, and has a Uniform earning power almost 2x as-reported values

January 8, 2021

This unit investment trust fund (UITF) from the country’s largest bank has outperformed the Philippine Stock Exchange Composite Index (PSEi) since inception. The fund and the PSEi recorded gains of 297% and 286%, respectively.

Although as-reported metrics would leave investors confused with the fund’s stock picks, Uniform Accounting helps make sense of the fund’s investments and how it continues to outperform its benchmark.

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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BDO Unibank, Inc., the country’s largest bank, offers multiple trust and investment products such as Peso-Denominated Unit Investment Trust Funds (UITFs), Dollar-Denominated UITFs, Easy Investment Plan, and Personal Equity and Retirement Accounts (PERA).

We’ve written about BDO’s different funds before: BDO ESG Equity FundBDO Focused Equity FundBDO Institutional Equity FundBDO PERA Equity Index Fund, and BDO Sustainable Dividend Fund.

This week, we’ll revisit the performance of another BDO UITF, BDO Equity Fund.

BDO Equity Fund was launched on May 3, 2005. The fund aims to achieve capital appreciation in the medium- to long-term by investing primarily in securities listed in the Philippine Stock Exchange (PSE). The Philippine Stock Exchange Composite Index (PSEi) serves as the fund’s benchmark.

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BDO Equity Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its 2005 inception.

The fund’s NAVPU steadily rose to PHP 209.48 in October 2007, a high at the time. This reflected gains of 109% from its inception, similar to the 108% gain of the PSEi. However, the fund’s NAVPU bottomed at PHP 98.51 in October 2008 due to the global financial crisis, a loss of 53%. Meanwhile, its benchmark recorded a loss of 56% over the same time span.

Afterward, the UITF’s NAVPU rose to a record high of PHP 515.05 in January 2018. Its 423% gain was slightly outperformed by the PSEi’s 428% gain. The NAVPU then dropped to PHP 395.45 in November 2018 due to uncertainties regarding Brexit and the US-China trade war. The fund and the PSEi recorded losses of 23% and 24%, respectively.

Thereafter, the NAVPU fell to PHP 277.44 in March 2020 due to the coronavirus-induced market downturn. However, it has since recovered with a NAVPU of PHP 396.95 as of January 4, 2021. During this time span, the fund’s 46% gain underperformed the PSEi’s 56% gain.

Since its inception, BDO Equity Fund has outperformed the PSEi, with gains of 297% and 286%, respectively.

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 core non-financial holdings of the BDO 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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Most of the companies in BDO Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. The fund generated an as-reported average ROA of 5%, slightly below the 6% global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, almost 2x the as-reported ROA average. These companies have strong returns with most companies having an average Uniform ROA 1.5x 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 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), JG Summit Holdings, Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) having distortions of more than a hundred percent.

As-reported metrics are understating the profitability of Ayala Corporation, suggesting a below-average company with an as-reported ROA of 4% when in fact, it is a high-quality firm with an 11% Uniform ROA. It has consistently generated returns of at least around 10% over the past decade.

Likewise, JG Summit Holdings is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with an 8% Uniform ROA. Moreover, it has consistently generated returns of at least around 7% over the past five years.

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 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 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 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. Meanwhile, BDO Equity Fund’s major holdings are forecasted to underperform with a 6% projected Uniform earnings shrinkage within the next two years, while the market is seeing a 1% Uniform earnings growth.

Among these companies, only PLDT Inc. (TEL:PHL) and International Container Terminal Services (ICT:PHL) have positive Uniform earnings growth dislocations.

The market is pricing PLDT’s Uniform Earnings to grow by 5% in the next two years. However, sell-side analysts are projecting the company’s earnings to grow by 54%.

Additionally, the market is expecting International Container Terminal Services’ Uniform earnings to decrease by 2%, while analysts are projecting a 13% Uniform earnings growth over 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 mature, low growth, but high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and PLDT Inc. Tearsheet

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

As the Uniform Accounting tearsheet for PLDT highlights, it trades at a Uniform P/E of 19.9x, below global corporate averages and its historical averages.

Low P/Es require low EPS growth to sustain them. In the case of PLDT, 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 Philippine Financial Reporting Standards (PFRS) earnings as a starting point for our Uniform earnings forecasts. When we do this, PLDT’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 141% in 2020 and shrink by 2% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 1,340.00 per share. These are often referred to as market embedded expectations.

The company needs Uniform earnings to grow by 5% over the next three years to justify current price levels. What sell-side analysts expect for PLDT’s earnings growth is well above what the current stock market valuation requires in 2020, but below that requirement in 2021.

The company has an earning power below long-run corporate averages. Moreover, PLDT’s cash flows and cash on hand fall short of obligations within five years, and its intrinsic credit risk is 130bps above the risk free rate. These indicate that PLDT has a high dividend risk and moderate credit risk.

To conclude, PLDT’s Uniform earnings growth is well above peer averages, but 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 BDO 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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