Philippine Markets Daily

This UITF from the country’s largest bank has an earning power that is 1.5x more under Uniform Accounting than its as-reported counterpart suggests

September 11, 2020

This unit investment trust fund (UITF) of the country’s largest bank has historically been underperforming its benchmark, the Philippine Stock Exchange Index (PSEi).

Year-to-date though, the fund and its benchmark have performed similarly with losses of 25% and 24%, respectively.

As-reported metrics would leave investors confused with the fund’s stock picks. However, Uniform Accounting financial metrics help make sense of the fund’s investments.

In addition to examining this 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., or Banco de Oro, is the largest bank and UITF provider in the Philippines.

We’ve written about three of BDO’s UITFs before: BDO Equity FundBDO ESG Equity Fund, and BDO Institutional Equity Fund. This week, we’ll focus on another one of their funds, BDO Focused Equity Fund.

BDO Focused Equity Fund was launched on October 18, 2013. Its strategy is to invest in exchange-listed stocks to generate long-term capital growth, with the PSEi serving as its benchmark.

BDO Focused Equity Fund rose from a net asset value per unit (NAVPU) of PHP 100.00 in its 2013 inception to PHP 121.10 in March 2015, delivering a 21% return. However, it dropped all the way down to a low of PHP 81.52 in January 2016, a loss of 33%, due to the oil price crash. In comparison, its benchmark recorded a 22% loss over the same period.

The UITF then recovered and reached a peak PHP 121.92 in September 2017, a 50% return from the fund’s 2016 low. However, uncertainties regarding Brexit and the U.S.-China trade war caused the fund’s NAVPU fall to PHP 82.76 in November 2018. The PSEi outperformed the fund during this period, reporting a 15% loss versus the fund’s 32% loss.

The fund ended 2019 with a NAVPU of PHP 92.37, before falling once more to as low as PHP 54.79 in March 2020, due to the coronavirus-induced market downturn. It has since rebounded to PHP 68.89 as of September 7, 2020. The fund and its benchmark performed similarly year-to-date with losses of 25% and 24%, respectively.

Looking at BDO Focused Equity Fund’s investments using as-reported metrics, it is not apparent that the fund invests in high-growth companies.

As-reported metrics would have investors believe that this portfolio consists of companies that do not generate an 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 Focused Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most companies in the BDO Focused Equity Fund show as-reported ROAs that range around and below global cost-of-capital levels, suggesting that they are not generating an economic profit. In 2019, the fund generated an average as-reported ROA of 6%, in line with global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, 1.5x cost-of-capital and as-reported levels. 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), 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%. In reality, this leading conglomerate is a high-quality firm with an 11% Uniform ROA, almost thrice the as-reported number. Over the past 15 years, AC has never seen its Uniform ROA dip below 6%.

Similarly, JGS is not just a 4% ROA firm like what as-reported numbers suggest. It is, in fact, an above-average company with 8% Uniform ROA, consistently generating returns above 7% over the past five years.

By focusing on as-reported metrics alone, BDO would never pick most of these companies because they look nothing like 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 2-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 Focused Equity Fund’s major holdings are forecasted to underperform with a 6% projected Uniform earnings decline in the next two years, while the market is seeing a 2% Uniform EPS decline.

Among these companies, only TEL, SM, and Globe Telecom, Inc. (GLO:PHL) have positive Uniform earnings growth dislocations.

The market is pricing TEL’s Uniform Earnings to grow by only 6% in the next two years. However, sell-side analysts are projecting the company’s earnings to accelerate by 41% moving forward.

Meanwhile, the market is expecting SM’s Uniform earnings to plummet by 12%, while analysts are projecting a lower 8% earnings shrinkage for the company in 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 would drive economic profitability moving forward.

SUMMARY and Globe Telecom, Inc. Tearsheet

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

As the Uniform Accounting tearsheet for GLO highlights, it trades at a Uniform P/E of 16.9x, below the global corporate averages but around its historical averages.

Low P/Es require low, and even negative, EPS growth to sustain them. In the case of GLO, the company has recently shown a 20% 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 PFRS earnings as a starting point for our Uniform earnings forecasts. When we do this, GLO’s sell-side analyst-driven forecast shows that Uniform earnings is expected to shrink by 9% in 2020 and 2% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 2,040.00 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 6% over the next three years and still justify current price levels. What sell-side analysts expect for GLO’s earnings growth is below what the current stock market valuation requires in 2020, but above what the market requires in 2021.

Furthermore, the company has an earning power that has been consistently well above global long-run corporate averages—based on its Uniform ROA calculation.

However, since cash flows and cash on hand are below total obligations and intrinsic credit risk is 120bps above the risk free rate, GLO has a moderate credit and dividend risk.

To conclude, GLO’s Uniform earnings growth is well below peer averages. Therefore, as is warranted, the company is also trading 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 BDO Focused 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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