Philippine Markets Daily

This PERA UITF from the country’s largest bank has performed in line with the PSEi, with an earning power almost 2x more than as-reported metrics show

October 16, 2020

This unit investment trust fund (UITF) from the country’s largest bank has recorded a similar performance with its benchmark, the Philippine Stock Exchange Index (PSEi), this year. Both the fund and the PSEi have recorded losses of 24% year to date.

However, as-reported metrics would leave investors confused with the fund’s stock picks. 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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BDO Unibank, Inc., a subsidiary of the SM Group founded by Henry Sy, is the largest bank and unit investment trust fund (UITF) provider in the Philippines.

We’ve written about four of BDO’s UITFs before: BDO Equity FundBDO ESG Equity FundBDO Focused Equity Fund, and BDO Institutional Equity Fund. This week, we’ll focus on one of BDO’s Personal Equity and Retirement Account (PERA) funds.

On August 22, 2008, the PERA Act of 2008 was signed into law. PERA provides Filipinos a tax exempt facility, and is similar to retirement savings vehicles in developed countries. To be able to offer this product, an institution must be a PERA administrator.

A PERA administrator is an entity accredited by the Bureau of Internal Revenue who shall be responsible for administering, overseeing, and maintaining the records of each individual PERA. Only an administrator with a trust license may perform the functions of an investment manager.

Moreover, there are pre-qualification requirements before becoming an administrator, such as maintaining a net worth of at least PHP 100 million, personnel training, and complying with a Manual of Corporate Governance approved by the concerned Regulatory Authority.

BDO Unibank, Inc. is among the few accredited PERA administrators, along with ATRAM Trust Corporation and BPI Asset Management and Trust Corporation. One of the PERA products BDO offers is BDO Pera Equity Index Fund.

BDO Pera Equity Index Fund was launched on December 22, 2016. The objective of this PERA UITF is to generate returns that track its benchmark, the Philippine Stock Exchange Index (PSEi), by investing in exchange-listed stocks.

BDO Pera Equity Index Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its 2016 inception. The fund’s NAVPU steadily rose to PHP 132.25 in January 2018, an increase of 32%. Meanwhile, the PSEi outperformed the fund during this period with an increase of 38%.

The fund’s NAVPU then dropped to a low of PHP 98.94 in November 2018 due to uncertainties regarding Brexit and the U.S.-China trade war. The fund and its benchmark recorded losses of 25% and 24%, respectively.

In July 2019, the fund’s performance rebounded, showing a NAVPU of PHP 120.57 or an increase of 22% from its low. The PSEi also recorded a 22% gain over the same period.

In March 2020, the fund dropped to its lowest point of PHP 67.30, a 44% loss, due to the coronavirus-induced market downturn. The PSEi performed comparably with a loss of 45%.

As the local stock market recovered, the fund’s NAVPU climbed to PHP 94.30 in June 2020, a 40% gain from its March lows. Meanwhile, the PSEi recorded a gain of 41% over the same time span.

As of October 12, 2020, BDO Pera Equity Index Fund recorded a NAVPU of PHP 85.31. The fund and its benchmark have performed similarly year to date, both recording losses of 24%.

Looking at BDO Pera Equity Index Fund’s investments using as-reported metrics, it is not apparent that the fund invests in stable and established 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 BDO Pera Equity Index 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 the BDO Pera Equity Index Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. In 2019, the fund generated an as-reported average ROA of 5%, slightly below 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 averages and 1.5x global corporate averages. These companies have strong returns, with Uniform ROA above the 6% global average returns, except for PLDT Inc. (TEL:PHL).

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, Inc. (AEV:PHL), JG Summit Holdings Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) all having distortions of more than a hundred percent.

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

Likewise, 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. Moreover, over the past decade, AEV has never seen its Uniform ROA dip below 10%.

By focusing on as-reported metrics alone, BDO 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 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 Pera Equity Index Fund’s major holdings are forecast to underperform with a 6% projected Uniform earnings shrinkage in the next two years, while the market is seeing a 2% Uniform EPS shrinkage.

Among these companies, only TEL and AEV have positive Uniform earnings growth dislocations.

The market is pricing TEL’s Uniform Earnings to grow by only 5% in the next two years. However, sell-side analysts are projecting the company’s earnings to accelerate by 46% moving forward.

Furthermore, the market is expecting AEV’s Uniform Earnings to decline by 7%, while analysts are projecting an immaterial 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 companies are high quality with intact business models that should drive economic profitability moving forward.

SUMMARY and Ayala Land Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the BDO Pera Equity Index Fund—Ayala Land Inc. (ALI:PHL).

As the Uniform Accounting tearsheet for ALI highlights, it trades at a Uniform P/E of 23.7x, around global corporate averages, but below its historical averages.

Moderate P/Es require moderate EPS growth to sustain them. In the case of ALI, the company has recently shown a 1% 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, ALI’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 71% in 2020, but grow by 160% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 29.75 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 3% over the next three years and still justify current price levels. What sell-side analysts expect for ALI’s earnings growth is below what the current stock market valuation requires in 2020, but above what the market requires in 2021.

The company has an earning power around 2x the long-run corporate averages. However, ALI’s cash flows and cash on hand fall short of obligations within five years and the company has an intrinsic credit risk 130bps above the risk-free rate. This indicates that ALI has a moderate credit and dividend risk.

To conclude, ALI’s Uniform earnings growth is well below peer averages, but the company is trading well above 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 Pera Equity Index 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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