Philippine Markets Daily

This UITF from the region’s oldest bank does not deviate from the PSEi, but shows Uniform returns 2x higher than as-reported metrics

January 15, 2021

This UITF from Southeast Asia’s oldest bank shows returns 2x higher than its as-reported ROA average. The fund’s portfolio is composed of high return companies with high potential to bounce back from the coronavirus pandemic-induced losses moving forward.

However, as-reported metrics would leave investors confused as to why these stocks are in the index when they 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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The Bank of the Philippine Islands (BPI), the region’s oldest bank, was established in 1851. Its subsidiary, BPI Asset Management and Trust Corporation (BPI AMTC), is the largest standalone trust corporation in the country. Today, BPI offers investment funds and Odyssey funds, which include Philippine Peso-Denominated Funds as well as Global Funds.

In the past, we’ve written about various BPI funds: BPI Consumer Equity Index Fund, BPI Equity Value Fund, BPI Invest Philippine High Dividend Equity Fund, BPI Philippine Infrastructure Equity Index Fund, Odyssey Philippine High Conviction Equity Fund, and Odyssey Philippine Equity Fund.

This week, we’ll look into the performance of another BPI Investment Fund, BPI Invest Philippine Equity Index Fund.

Launched on May 20, 2013, BPI Invest Philippine Equity Index Fund aims to generate returns by investing in a diversified stock portfolio that tracks the performance of the Philippine Stock Exchange Composite Index (PSEi), which also serves as its benchmark.

BPI Invest Philippine Equity Index Fund started with a net asset value per unit (NAVPU) of PHP 100.00 at its 2013 inception.

Within a month from inception, the fund’s NAVPU dropped to PHP 78.73 in June 2013 as Philippine stocks slid into a bear market due to a surge in foreign outflows, amid a turbulent global market and heightened risk aversion amid China’s liquidity crisis. This resulted in a loss of about 21% since its launch, slightly underperforming the 20% loss of the PSEi in that time span.

In the following years, the fund’s NAVPU rose to PHP 109.23 in April 2015, a gain of 39% while the PSEi recorded a gain of 40%. However, this was upturned in January 2016 as the fund’s NAVPU plummeted to PHP 81.65 due to the oil price crash. The fund and its benchmark both recorded losses of 25%.

The UITF’s NAVPU then rose to a record high of PHP 120.82 in January 2018. The fund’s 48% gain slightly underperformed the PSEi’s 49% gain. Afterward, the NAVPU dropped to PHP 91.69 in November 2018 due to uncertainties brought about by Brexit and the US-China trade war. The fund and the PSEi recorded losses of 24% during this period.

Thereafter, the NAVPU took a nosedive to PHP 64.43 in March 2020 due to the COVID-19 pandemic. Since then, the fund has recovered with a NAVPU of PHP 98.95 as of January 8, 2021. The fund and its benchmark performed similarly, recording gains of 54%.

Since its inception, BPI Invest Philippine Equity Index Fund has successfully tracked the PSEi, with the fund recording a 1% loss and PSEi recording an immaterial gain.

Looking at BPI Invest Philippine Equity Index Fund’s investments using as-reported metrics, it is not apparent that the PSEi is composed of profitable companies.

The table below shows the core non-financial holdings of the BPI Invest Philippine Equity Index 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 BPI Invest Philippine Equity Index 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 has actually delivered stronger earnings with an average Uniform ROA of 10%, 2x the as-reported ROA average. These companies have strong returns, with most of them having an average Uniform ROA around 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 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) having distortions of more than a hundred percent.

As-reported metrics are understating 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. Furthermore, it has consistently generated returns of at least around 10% over the past decade.

Likewise, Aboitiz Equity Ventures 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, it has consistently generated returns of at least 10% over the past five 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 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, BPI Invest Philippine Equity Index Fund’s major holdings are forecasted to underperform with a projected 14% Uniform earnings shrinkage within the next two years, while the market is seeing immaterial Uniform earnings growth.

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

The market is pricing International Container Terminal Services’ Uniform earnings to shrink by 1% in the next two years. However, sell-side analysts are projecting the company’s earnings to grow by 9%.

Additionally, the market is expecting Aboitiz Equity Ventures’ Uniform earnings to shrink by 6%, 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 SM Investments Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in BPI Invest Philippine Equity Index Fund—SM Investments Corporation (SM:PHL).

As the Uniform Accounting tearsheet for SM Investments Corporation highlights, it trades at a Uniform P/E of 26.2x, above global corporate averages and its historical averages.

High P/Es require high EPS growth to sustain them. In the case of SM Investments Corporation, the company has recently shown an immaterial Uniform EPS shrinkage.

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 Investments Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 71% in 2020 and grow by 130% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 1,050.00 per share. These are often referred to as market embedded expectations.

The company can have Uniform earnings shrink by 9% over the next three years and still justify current price levels. What sell-side analysts expect for SM Investments Corporation’s earnings growth is below what the current stock market valuation requires in 2020, but above that requirement in 2021.

SM Investments Corporation has an earning power 2x the long-run corporate averages, and which has consistently been well above global long-run corporate averages. Moreover, the company’s intrinsic credit risk is just 70bps above the risk free rate, but its cash flows and cash on hand fall short of obligations within five years. These indicate that SM Investments Corporation has a low credit risk and a high dividend risk.

To conclude, SM Investments Corporation’s Uniform earnings growth is below peer averages, but 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 BPI Invest Philippine Equity Index 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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