Philippine Markets Daily

This UITF from one of the banks leading in innovation outperformed the PSEi, with holdings such as SMPH showing an avg Uniform ROA of 2x as-reported

February 5, 2021

This unit investment trust fund (UITF) has outperformed its benchmark, the Philippine Stock Exchange Composite Index (PSEi) after bouncing back from the sell-off in the early part of the coronavirus pandemic. Moreover, its holdings show an average Uniform ROA 2x more than as-reported metrics.

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 the market.

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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Previously known as Union Savings and Mortgage Bank, UnionBank is a universal bank offering a broad range of services. This bank has been recognized by Asiamoney as a leader in technological innovation thanks to its digital banking efforts. It also plans on securing a digital banking license from the Bangko Sentral ng Pilipinas (BSP).

UnionBank’s offerings include short, intermediate, and medium-term fixed income funds, tax exempt fund, balance fund, capital accumulation global fund of funds, and an index tracker fund. This week we’ll update one of its UITFs we’ve written about in the past, UnionBank PHP Equity Fund.

UnionBank PHP Equity Fund was launched on March 1, 2005. The fund’s strategy is to approximate the Philippine Stock Exchange Composite Index (PSEi) returns, while adding value through its active stock picking. The fund also considers alternative weighting schemes depending on the investment manager’s research-driven stock market’s outlook on valuation.

UnionBank PHP Equity Fund started with a net asset value per unit (NAVPU) of PHP 99.28 at its 2005 inception. Its NAVPU rose in the following years until it reached a high of PHP 221.83 in October 2007. The fund’s 123% growth outperformed that of PSEi’s 85%.

The following year, the fund dropped to a record low of PHP 104.95 due to the global financial crisis in October 2008. The fund and the PSEi recorded losses of 53% and 56%, respectively, with the fund outperforming its benchmark. Years later, the fund’s NAVPU reached a record high of PHP 817.87 in May 2013, representing a 679% growth. This growth well outperformed the PSEi’s 331% return over the same time span.

Due to the oil price crash in January 2016, the fund’s NAVPU fell to PHP 510.34, a 38% loss. On the other hand, its benchmark experienced a loss of just 18%. Even as the fund’s NAVPU recovered to PHP 646.83 in July 2016, representing a 27% growth, it still underperformed the benchmark’s 33% increase.

By January 2018, the fund’s NAVPU had risen to PHP 709.87, showing a 10% gain that slightly underperformed its benchmark’s 12% gain. However, the fund’s NAVPU fell to PHP 538.42 in November 2018 due to uncertainties brought about by Brexit and the U.S.-China trade war. During this period, both the UITF and its benchmark saw a 24% loss.

The fund’s NAVPU dropped to PHP 369.81 in March 2020 due to the coronavirus pandemic. The NAVPU’s 31% loss slightly outperformed that of its benchmark’s 32% drop. The fund has since rebounded, with a NAVPU of PHP 535.28 as of January 29, 2021. The fund slightly outperformed its benchmark, with gains of 45% and 43%, respectively.

Since its inception, UnionBank PHP Equity Fund’s 203% gain has outperformed the PSEi’s 151% gain.

As-reported metrics would have investors believe the fund’s portfolio consists of companies that barely generate any 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 UnionBank PHP Equity Fund along with its Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

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

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered stronger earnings with an average Uniform ROA of 10%, 2x the as-reported ROA average. These companies have strong returns with all companies having Uniform ROAs greater than 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 45% 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 metrics understate 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 9% over the past decade.

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

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.

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, UnionBank PHP Equity Fund’s major holdings are forecast to underperform with a 14% projected Uniform earnings shrinkage in the next two years, while the market is seeing a 1% Uniform earnings shrinkage.

Among these companies, only Aboitiz Equity Ventures, Inc. and International Container Terminal Services, Inc. (ICT:PHL) have a positive Uniform earnings growth spread.

The market is pricing Aboitiz’s Uniform Earnings to shrink by 8% in the next two years. However, sell-side analysts are projecting the company’s earnings to be immaterial.

International Container Terminal Services is priced by the market to shrink by 2% in the next two years, while sell-side analysts project the company’s earnings to grow by 4%.

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 SM Prime Holdings

Today, we’re highlighting one of the largest individual stock holdings in the UnionBank PHP Equity Fund—SM Prime Holdings (SMPH:PHL).

As the Uniform Accounting tearsheet for SM Prime Holdings highlights, it trades at a Uniform P/E of 37.2x, above the global corporate average of 25.2x, but below its historical average of 38.6x.

High P/Es require high EPS growth to sustain them. In the case of SM Prime Holdings, the company has recently shown a 23% 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, SM Prime Holdings’ sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 55% in 2020 and grow by 62% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 35.30 per share. These are often referred to as market embedded expectations.

The company needs to have Uniform earnings grow by 8% over the next three years to justify current price levels. What sell-side analysts expect for SM Prime Holdings’ earnings growth is below what the current stock market valuation requires in 2020, but above that requirement in 2021.

The company has an earning power around long-run corporate averages. SM Prime Holdings’ cash flows and cash on hand are below obligations in the next five years. Based on operating risk and refinancing capability, it has an intrinsic credit risk of 100bps above the risk free rate. This indicates that SM Prime Holdings has a high dividend risk and moderate credit risk.

To conclude, SM Prime Holdings’ Uniform earnings growth is below peer averages, and is trading well 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 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 UnionBank PHP 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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