Philippine Markets Daily

This UITF has delivered impressive returns by combining passive and active investing, Uniform Accounting affirms the stocks they invest in.

June 5, 2020

This bank employs a smart beta investing strategy in managing the unit investment trust fund (UITF) we are featuring today.

They follow the Philippine Stock Exchange Index (PSEi) while seeking to create additional value through stock picking.

As-reported metrics would leave investors puzzled with the fund’s stock picks. However, Uniform Accounting financial metrics help make sense of the companies the fund invests in and how they fit into the bank’s investment philosophy.

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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According to BlackRock, the world’s largest professional money manager, smart beta investing strategy is not new. It has been around for decades and has been used by investors to improve investment returns or reduce portfolio volatility.

There are various ways of developing a smart beta investing strategy, but all of them aim to take advantage of the benefits of passive investing while maximizing the advantages of a hands-on stock selection process to exploit profitable conditions.

UnionBank of the Philippines (UnionBank) developed its own smart investing strategy in managing its PHP Equity Fund.

This peso-denominated non-index equity fund focuses on the largest companies in the Philippines to approximate the returns of the PSEi, the country’s equity investment barometer. It also seeks to create additional value for its investors through active stock picking.

While UnionBank PHP Equity Fund attempts to track the PSEi, it also considers alternative weighting schemes depending on the investment manager’s research-driven stock market outlook and valuation.

The fund also identifies stock investment opportunities into non-index companies, such as initial public offerings (IPOs), to generate satisfactory returns.

More so, UnionBank emphasizes their in-depth stock market and individual company research, as it is central to their overall stock selection process.

This strategy has reaped benefits for UnionBank since the fund’s inception in March 2005.

UnionBank PHP Equity Fund outperformed the PSEi in its first two years, delivering 127% investment returns compared to PSEi’s 81% growth.

The fund also made a historic run after the 2008-2009 global economic downturn. The fund skyrocketed from PHP 105 net asset value per unit (NAVPU) in March 2009 to PHP 818 in May 2013. This translated to a whopping 680% investment growth, more than twice the PSEi’s 293% return over the same period.

Today, despite plunging to around PHP 458 NAVPU as of May 29, 2020 due to the coronavirus-induced market downturn, the fund still posted a massive cumulative investment returns of around 358%, almost double the PSEi’s 180% growth over the same time frame.

Looking at UnionBank PHP Equity Fund’s investments using as-reported metrics, it is not obvious the fund invests in either high-quality companies or growth opportunities.

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

The table below shows the top non-financial holdings of UnionBank PHP Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Several companies in this fund show as-reported ROAs that range around and below global cost-of-capital level, suggesting that they are not generating economic profit. However, Uniform Accounting reveals that 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 UnionBank PHP Equity Fund, the figures that easily stand out are the double-digit 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 2% 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 above 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 company with an 11% Uniform ROA, almost thrice the as-reported number.

Similarly, AEV is not a 5% ROA firm like the as-reported numbers show. It is, in fact, a high-quality company with a 13% Uniform ROA.

By focusing on as-reported metrics alone, UnionBank would never pick most of these companies because they 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.

UnionBank PHP Equity Fund is also invested in companies with unreasonably low earnings expectations.

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 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 top holdings are forecast to lag that with 5% projected Uniform earnings growth in the next two years.

The market, on the contrary, is seeing a decline in earnings for these companies with Uniform EPS shrinkage of 2% over the next two years.

Among these companies, AEV, TEL, and SM have the highest Uniform earnings growth dislocation.

The market is seeing AEV’s uniform earnings to plunge by 12%, but analysts are projecting a robust 17% earnings growth for the company in the next two years.

Similarly, the market is mispricing TEL’s Uniform Earnings to rise by 4% in the next two years. However, sell-side analysts are seeing the telco’s earnings to accelerate by 29% moving forward.

Overall, as-reported numbers would have investors incorrectly conclude that this portfolio consists of low-quality companies with negative earnings growth expectations. However, it is clear as day that UnionBank invests in quality companies with above-average profitability or undervalued earnings growth potential.

SUMMARY and PLDT Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in UnionBank PHP Equity Fund—PLDT Inc. (TEL:PHL).

As the Uniform Accounting tearsheet for TEL highlights, it trades at a Uniform P/E of 22.5x, around global corporate averages but below historical averages.

Moderate P/Es require moderate EPS growth to sustain them. In the case of TEL, the company has recently shown a massive 21% growth in its Uniform EPS.

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, TEL’s sell-side analyst-driven forecast shows that Uniform earnings will grow by 85% in 2020, before dropping by 10% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 1,275.00 per share. These are often referred to as market embedded expectations.

The company would have to see Uniform earnings expand by 4% each year over the next three years to meet current market valuation levels. Sell-side analysts’ expected 10% earnings shrinkage for TEL is below what the current stock market valuation requires.

The company has an earning power below global corporate averages—based on its Uniform ROA calculation. Additionally, since the combination of the company’s cash flows and cash on hand falls below its obligations over the coming years beginning 2021, TEL has a high dividend risk.

To conclude, TEL’s Uniform earnings growth is above peer averages. However, the company is trading above average peer valuations as well.

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 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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