Philippine Markets Daily

This tracker fund from one of the country’s largest banks has performed similarly with the PSEi, with real returns almost 2x as-reported metrics

November 6, 2020

This unit investment trust fund (UITF) from one of the country’s largest banks has successfully tracked the performance of its benchmark, the Philippine Stock Exchange Index (PSEi), both since inception and year to date.

However, as-reported metrics would leave investors confused as to why the fund would choose to track the index when the stocks in the index appear to have minimal profitability. 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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East West Banking Corporation, or EastWest Bank, is one of the Philippines’ largest banks. It is a subsidiary of the Filinvest Development Corporation (FDC:PHL), one of the country’s leading conglomerates founded by the late tycoon Andrew Gotianun.

Established in 1994, EastWest Bank was the first recipient of a commercial banking license after the central monetary authority liberalized banking in the mid-1990s. Since then, it has made its presence known in the banking industry through steady growth.

One of the products EastWest Bank offers is its unit investment trust funds (UITFs). This week, we’ll focus on the EastWest PSEi Tracker Fund.

The EastWest PSEi Tracker Fund was launched on December 1, 2015. The fund’s objective is to generate returns tracking the Philippine Stock Exchange Index (PSEi) by investing in stocks comprising the PSEi, in similar weights as the index.

The EastWest PSEi Tracker Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its 2015 inception. The fund’s NAVPU dropped to a low of PHP 85.66 in January 2016 due to the oil price crash, a loss of 14%. Similarly, the PSEi recorded a loss of 14% during this span.

After a volatile couple of months, the fund’s NAVPU rose to a peak of PHP 126.61 in January 2018, before dropping to PHP 96.33 in November 2018 due to uncertainties regarding Brexit and the U.S.-China trade war. The fund and the PSEi both recorded 24% losses over this period.

The fund ended 2019 with a NAVPU of PHP 111.10, then dropped to its lowest point of PHP 66.59 in March 2020 due to the downturn caused by the COVID-19 pandemic. Today, the fund has slightly rebounded, recording a NAVPU of PHP 89.25 as of October 29, 2020. The fund and its benchmark have performed comparably year to date, both recording losses of 20%.

Moreover, the EastWest PSEi Tracker Fund recorded a performance loss of 11% since the fund’s inception, which is also what the PSEi returned during the same period.

Looking at EastWest PSEi Tracker Fund’s investments using as-reported metrics, it is not apparent that the PSEi 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 these companies.

The table below shows the core non-financial holdings of the EastWest PSEi Tracker 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 EastWest PSEi Tracker 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 average and 1.5x global corporate averages. These companies have strong returns, with Uniform ROA above 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, 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, EastWest PSEi Tracker Fund’s major holdings are forecast to underperform with a 7% projected Uniform earnings shrinkage in the next two years, while the market is seeing a 1% Uniform earnings 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 45% moving forward.

Furthermore, the market is expecting AEV’s Uniform Earnings to decline by 7%, while analysts are projecting 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 mature, low growth, but high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and JG Summit Holdings, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the EastWest PSEi Tracker Fund—JG Summit Holdings, Inc. (JGS:PHL).

As the Uniform Accounting tearsheet for JGS highlights, it trades at a Uniform P/E of 30.9x, above global corporate averages and its historical averages.

High P/Es require high EPS growth to sustain them. In the case of JGS, the company has recently shown a 53% 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, JGS’ sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 111% in 2020 and 498% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 64.25 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 1% over the next three years and still justify current price levels. What sell-side analysts expect for JGS’s earnings growth is far below what the current stock market valuation requires in 2020 and 2021.

The company has an earning power around long-run corporate averages. Moreover, JGS’s cash flows and cash on hand exceed obligations within five years except in 2024, and the company has an intrinsic credit risk 120bps above the risk-free rate. This indicates that JGS has a moderate credit and dividend risk.

To conclude, JGS’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 EastWest PSEi Tracker 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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