Philippine Markets Daily

This UITF from the 2nd largest bank in PH has approximated the PSEi, and its holdings show an average Uniform ROA 2x as-reported…also, ALI tearsheet

February 19, 2021

This unit investment trust fund (UITF) from the second largest bank in the Philippines has well approximated its benchmark, the Philippine Stock Exchange Composite Index (PSEi).

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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Metropolitan Bank & Trust Company (Metrobank) was started in 1962 and is currently the second largest bank in the Philippines in terms of assets.

Metrobank offers investment services such as fixed income and wealth management services like short, intermediate, and medium-term fixed income funds, tax exempt fund, balance fund, and capital accumulation global fund of funds.

We have already discussed some of those funds, including First Metro Philippine Equity ETFFirst Metro Save and Learn Equity FundMetro Equity Fund and Metro High Dividend Yield Fund. This week, we’ll look into the performance of another one of its UITFs, Metro Philippine Equity Index Tracker Fund.

Metro Philippine Equity Index Tracker Fund was launched on October 10, 2014. The fund’s strategy is to closely approximate its benchmark, the Philippine Stock Exchange Composite Index (PSEi), investing in the same stocks using approximately the same weights. The fund also considers short-term fixed income securities for liquidity requirements.

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Metro Philippine Equity Index Tracker Fund started with a net asset value per unit (NAVPU) of PHP 1.00 at its inception in 2014. Its NAVPU rose to PHP 1.14 in April 2015, its 14% growth slightly outperforming that of PSEi’s 13%.

In January 2016, the fund’s NAVPU dropped to PHP 0.85 due to the oil price crash. Both the fund and the PSEi recorded losses of 25%. The fund’s NAVPU reached its highest level so far at PHP 1.27 in January 2018, recording a growth of 49% which was similar to the PSEi’s.

Months after, the fund’s NAVPU reached a low of PHP 0.96 in November 2018, a 24% decline due to issues surrounding Brexit and the US-China Trade War. This loss matched the PSEi’s 24% dip over the same time span. The fund recovered the following year to a NAVPU of PHP 1.18 in July 2019, growing 23% as against the PSEi’s 22% growth.

When the coronavirus outbreak became a pandemic in March 2020, the fund’s NAVPU dropped to PHP 0.66 from the massive market sell-off. The fund’s NAVPU declined by 44%, slightly outperforming its benchmark, which dropped by 45%.

Today, the fund’s performance has rebounded along with the Philippine stock market and as the economy slowly opens up again. As of February 5, 2021, the fund’s NAVPU is back to PHP 1.00, matching its benchmark’s 52% gain from their 2020 lows.

Since inception, the Metro Philippine Equity Index Tracker Fund’s 9% gain has outperformed the PSEi’s 6% gain.

Looking at Metro Philippine Equity Index Tracker Fund’s investments using as-reported metrics, it is not apparent that the PSEi is composed of stable and established companies.

As-reported metrics would have investors believe the fund’s portfolio consists of companies that do not generate economic profit. Howeverv, Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the core non-financial holdings of the Metro Philippine Equity Index Tracker Fund along with its 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 the Metro Philippine Equity Index Tracker Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that 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%, double 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 a 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, the Metro Philippine Equity Index Tracker 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 an immaterial Uniform earnings growth.

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 7% 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 1% 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 Ayala Land, Inc.

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

As the Uniform Accounting tearsheet for Ayala Land highlights, it trades at a Uniform P/E of 27.4x, above the global corporate average of 25.2x, but below its historical average of 28.7x.

High P/Es require high EPS growth to sustain them. In the case of Ayala Land, 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, Ayala Land’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 79% in 2020 and grow by 221% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 40.35 per share. These are often referred to as market embedded expectations.

The company needs to have Uniform earnings grow by 2% over the next three years to justify current price levels. What sell-side analysts expect for Ayala Land’s earnings growth is below what the current stock market valuation requires in 2020, and above that requirement in 2021.

The company has an earning power of 2x long-run corporate averages. Ayala Land’s cash flows and cash on hand consistently exceeds obligations. Based on operating risk and refinancing capability, it has an intrinsic credit risk of 130bps, indicating that Ayala Land has a moderate dividend risk and moderate credit risk.

To conclude, Ayala Land’s Uniform earnings growth is below average, and is trading well below 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 Metro Philippine Equity Index 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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