Philippine Markets Daily

This UITF from the largest bank in the country underperformed the PSEi year-to-date, as-reported metrics understated its earning power

December 4, 2020

This unit investment trust fund (UITF) from the largest bank in the country underperformed its benchmark, the Philippine Stock Exchange Index (PSEi), year-to-date.

Although as-reported metrics would leave investors confused with the fund’s stock picks, Uniform Accounting helps 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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Before becoming the giant it is now, BDO Unibank was opened in 1968 and was then called Acme Savings Bank. It was a thrift bank with only two branches in Metro Manila. However, the Sy Group acquired the bank in 1976 and changed its name to Banco de Oro Savings and Mortgage Bank.

It then became a commercial bank in 1994 and was renamed Banco de Oro Commercial Bank. A couple of years later in 1996, it became a universal bank and was once again renamed Banco de Oro Universal Bank (BDO Unibank, Inc.).

Today, BDO Unibank, Inc. is the largest bank in the Philippines with over 1,400 branches and offices and 4,400 ATMs nationwide.

We’ve written about five of BDO’s UITFs before: BDO Equity FundBDO ESG Equity FundBDO Focused Equity FundBDO Institutional Equity Fund, and BDO PERA Equity Index Fund. This week, we’ll focus on BDO Sustainable Dividend Fund.

BDO Sustainable Dividend Fund was launched on October 18, 2013. The fund’s strategy is to achieve capital appreciation by investing in stocks listed in the Philippine Stock Exchange (PSE) with sustainable dividend yields. The fund’s benchmark is the Philippine Stock Exchange Composite Index (PSEi).

BDO Sustainable Dividend Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its 2013 inception. Almost two years later, it rose to PHP 130.13 in April 2015. The fund’s NAVPU then fell to PHP 89.84 in January 2016 due to the oil price crash. The fund and the PSEi recorded losses of 31% and 14%, respectively during this period.

The fund’s NAVPU then climbed to its historical peak of PHP 136.18 in September 2017, before falling to PHP 93.78 in November 2018 due to uncertainties regarding Brexit and the US-China trade war. During this period, the UITF’s 31% loss underperformed compared to its benchmark 14% loss.

The fund ended 2019 with a NAVPU of PHP 104.07, then dropped to its historical low of PHP 63.97 in March 2020 due to the downturn caused by the COVID-19 pandemic. However, the fund has since rebounded with a NAVPU of PHP 89.09 as of November 27, 2020. Year to date, the fund’s 14% loss performed comparably with its benchmark’s 13% loss.

Moreover, since the fund’s inception, its 11% underperformed the PSEi’s 3% gain over the same period.

Looking at BDO Sustainable Dividend 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 BDO Sustainable Dividend Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most of the companies in BDO Sustainable Dividend Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. The fund generated an as-reported average ROA of 5%, slightly below the 6% 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. These companies have strong returns with most companies having an average Uniform ROA 1.5x 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 -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 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 around 10% over the past decade.

Likewise, JG Summit Holdings is not just a 4% ROA firm like what as-reported numbers suggest. It is an above-average company with an 8% Uniform ROA. Moreover, it has consistently generated returns of at least around 7% over the past 5 years.

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, BDO Sustainable Dividend Fund’s major holdings are forecast to underperform with a 5% projected Uniform earnings shrinkage within the next two years, while the market is seeing 1% Uniform earnings growth.

Among these companies, only PLDT Inc. (TEL:PHL) and International Container Terminal Services, Inc. (ICT:PHL) have positive Uniform earnings growth dislocations.

The market is expecting PLDT’s Uniform Earnings to increase by 5%, while analysts are projecting 45% Uniform earnings growth over the next two years.

Furthermore, the market is pricing International Container Terminal Services’ Uniform Earnings to shrink by 2% in the next two years. However, sell-side analysts are projecting the company’s earnings to grow by 14%.

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 Universal Robina Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the BDO Sustainable Dividend Fund—Universal Robina Corporation (URC:PHL).

As the Uniform Accounting tearsheet for Universal Robina Corporation highlights, it trades at a Uniform P/E of 31.5x, above global corporate averages but below URC’s historical P/E of 33.9x.

High P/Es require high EPS growth to sustain them. In the case of Universal Robina, 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, Universal Robina’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 8% in 2020 and grow by 16% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 142.00 per share. These are often referred to as market embedded expectations.84 stock price. These are often referred to as market embedded expectations.

The company needs Uniform earnings to grow by 10% over the next three years to justify current price levels. What sell-side analysts expect for Universal Robina’s 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 slightly above long-run corporate averages, and has consistently been above global long-run corporate averages. Moreover, Universal Robina’s cash flows and cash on hand exceed obligations within five years. These indicate that Universal Robina has a low credit and dividend risk.

To conclude, Universal Robina’s Uniform earnings growth is below peer averages and is trading well above 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 Sustainable Dividend 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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